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Do It Yourself · Q1

Q.Diwakar enterprises Ltd. issued 10,00,000, 6% debentures on April 1, 2016. Interest is paid on September 30, 2016 and March 31, 2017. Record necessary journal entries assuming that income tax is deducted @10% of the amount of interest.

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The annual interest of ₹60,000 falls due in two half-yearly instalments of ₹30,000 each (30 Sep 2016 and 31 Mar 2017). On each date income tax @10% (₹3,000) is deducted at source, so debentureholders receive ₹27,000 and ₹3,000 goes to the government; the full ₹60,000 interest is charged to the Statement of Profit and Loss at the year end.

Concept

Interest on debentures is a fixed charge against profit that must be paid whether or not the company earns a profit. When interest is paid, the company is required to deduct income tax at source (TDS) at the prescribed rate, credit the debentureholders with the net amount, and hold the tax deducted as a liability (Income Tax Payable) until it is deposited with the government. At the year end the total interest expense is transferred to the Statement of Profit and Loss.

Working Note

  • Annual interest = 6% of ₹10,00,000 = ₹60,000
  • Half-yearly interest = ₹60,000 ÷ 2 = ₹30,000
  • TDS @10% of ₹30,000 = ₹3,000
  • Net paid to debentureholders each half-year = ₹30,000 − ₹3,000 = ₹27,000

Solution

DateParticularsL.F.Debit (₹)Credit (₹)
2016 Sep 30Debenture Interest A/c Dr.30,000
To Debentureholders A/c27,000
To Income Tax Payable A/c3,000
(Interest due for the half-year and tax deducted at source @10%)
2016 Sep 30Debentureholders A/c Dr.27,000
To Bank A/c27,000
(Net interest paid to debentureholders)
2016 Sep 30Income Tax Payable A/c Dr.3,000
To Bank A/c3,000
(Tax deducted at source deposited with the government)
2017 Mar 31Debenture Interest A/c Dr.30,000
To Debentureholders A/c27,000
To Income Tax Payable A/c3,000
(Interest due for the half-year and tax deducted at source @10%)
2017 Mar 31Debentureholders A/c Dr.27,000
To Bank A/c27,000
(Net interest paid to debentureholders)
2017 Mar 31Income Tax Payable A/c Dr.3,000
To Bank A/c3,000
(Tax deducted at source deposited with the government)
2017 Mar 31Statement of Profit and Loss Dr.60,000
To Debenture Interest A/c60,000
(Total interest for the year transferred to Statement of Profit and Loss)
✓Final answer

Each half-year: Debenture Interest ₹30,000 (Dr.), Debentureholders ₹27,000 and Income Tax Payable ₹3,000 (Cr.); ₹27,000 paid to holders and ₹3,000 to the government. Total interest of ₹60,000 is transferred to the Statement of Profit and Loss at the year end.

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