Q.Arjun Plastics Limited redeemed 1,000, 15% debentures of ₹100 each by converting them into equity shares of ₹10 each at a premium of ₹2.50 per share. The company also redeemed 500 debentures by utilising ₹50,000 out of profit. Give the necessary journal entries.

Showing the 12 most recent of 30 on this concept.

1. CBSE 2026Set 67/3/11 markMCQ
   Q.Nigam Ltd. issued 40,000, 11% Debentures of ₹ 100 each at a certain rate of discount. The debentures were to be redeemed at 20% premium. Existing balance of Securities Premium before issue of these debentures was ₹ 13,00,000. After writing off 'Loss on issue of debentures', the balance in Securities Premium was ₹ 3,00,000. The above debentures were issued at a discount of : (A) 20% (B) 15% (C) 10% (D) 5%

   ›Reveal solutionSolution

   The debentures were issued at a discount of 5%.

   When debentures are issued at a discount and/or are redeemable at a premium, the company incurs a capital loss. This loss is termed 'Loss on Issue of Debentures'. This account is a fictitious asset (or deferred revenue expenditure) and represents the total cost associated with issuing debentures below par and/or redeeming them above par. It is typically written off over the tenure of the debentures, usually against the Securities Premium Reserve or, if that is insufficient, against the Statement of Profit & Loss.

   The 'Loss on Issue of Debentures' account comprises two main components:

   1. Discount on Issue of Debentures: This is the difference between the face value of the debentures and the issue price when debentures are issued below par.
   2. Premium on Redemption of Debentures: This is the additional amount payable over and above the face value when debentures are redeemed at a premium. This premium is a liability for the company and is recognised at the time of issue.

   According to Section 52 of the Companies Act, 2013, the Securities Premium Reserve can be used for specific purposes, one of which is to write off the discount allowed on the issue of shares or debentures, or the premium payable on the redemption of any redeemable preference shares or debentures.

   In this problem, we are given the opening and closing balances of the Securities Premium Reserve after writing off the 'Loss on Issue of Debentures'. This allows us to determine the total amount of 'Loss on Issue of Debentures' that was written off. Once we have this total loss and the premium on redemption, we can isolate the discount on issue and subsequently calculate the discount rate.

   Derivation of the Answer

   1. Calculate the total face value of debentures:

      Number of Debentures $\times$ Face Value per Debenture

      $40,000 \text{ debentures} \times ₹100/\text{debenture} = ₹40,00,000$

   2. Calculate the Premium on Redemption:

      The debentures are to be redeemed at a 20% premium. This premium is calculated on the face value.

      Premium on Redemption = $20\%$ of $₹40,00,000 = ₹8,00,000$

   3. Determine the 'Loss on Issue of Debentures' written off:

      The Securities Premium balance decreased from ₹13,00,000 to ₹3,00,000 after writing off the 'Loss on Issue of Debentures'. The difference represents the amount of loss written off.

      Loss on Issue of Debentures written off = Existing Securities Premium - Securities Premium after writing off loss

      Loss on Issue of Debentures written off = $₹13,00,000 - ₹3,00,000 = ₹10,00,000$

   4. Calculate the Discount on Issue of Debentures:

      As established, the 'Loss on Issue of Debentures' comprises both the discount on issue and the premium on redemption.

      Loss on Issue of Debentures = Discount on Issue + Premium on Redemption

      $₹10,00,000 = \text{Discount on Issue} + ₹8,00,000$

      Discount on Issue = $₹10,00,000 - ₹8,00,000 = ₹2,00,000$

   5. Calculate the Discount Rate:

      The discount rate is calculated as a percentage of the face value of the debentures.

      Discount Rate = $(\text{Discount on Issue} / \text{Total Face Value}) \times 100$

      Discount Rate = $(₹2,00,000 / ₹40,00,000) \times 100 = (1/20) \times 100 = 5\%$

   Working Notes

   1. Total Face Value of Debentures:

      $40,000 \text{ Debentures} \times ₹100/\text{Debenture} = ₹40,00,000$

   2. Premium on Redemption:

      $20\%$ of $₹40,00,000 = ₹8,00,000$

   3. Loss on Issue of Debentures Written Off:

      Existing Securities Premium Balance: ₹13,00,000

      Less: Securities Premium Balance after writing off loss: ₹3,00,000

      Loss on Issue of Debentures written off: $₹13,00,000 - ₹3,00,000 = ₹10,00,000$

   4. Discount on Issue of Debentures:

      Total Loss on Issue of Debentures (from W.N. 3): ₹10,00,000

      Less: Premium on Redemption (from W.N. 2): ₹8,00,000

      Discount on Issue of Debentures: $₹10,00,000 - ₹8,00,000 = ₹2,00,000$

   5. Discount Rate:

      $(\text{Discount on Issue} / \text{Total Face Value}) \times 100$

      $(₹2,00,000 / ₹40,00,000) \times 100 = 5\%$

   ✓Final answer

   The debentures were issued at a discount of 5%.

2. CBSE 2026Set 67/4/11 markMCQ
   Q.Amik Ltd. issued 70,000, 9% Debentures of ₹ 100 each at a premium of 5%, redeemable at a premium of 10%. 'Loss on Issue of Debentures Account' will be debited in the books of Amik Ltd. by : (A) ₹ 10,50,000 (B) ₹ 7,00,000 (C) ₹ 3,50,000 (D) ₹ 6,30,000

   ›Reveal solutionSolution

   The 'Loss on Issue of Debentures Account' will be debited by ₹ 7,00,000, representing the premium payable on redemption of debentures.

   When a company issues debentures, it needs to account for all costs and potential losses associated with that issue at the time the debentures are issued. This practice aligns with the prudence principle (which dictates anticipating all future losses but not future profits) and the matching principle (which requires expenses to be recognized in the period they are incurred, even if the cash outflow happens later).

   The 'Loss on Issue of Debentures Account' is a nominal account (or a deferred revenue expenditure) created to record the total loss arising from the issue of debentures. This loss typically comprises two main components:

   1. Discount on Issue of Debentures: If debentures are issued at a price lower than their face value, the difference is a discount, which represents a loss to the company.
   2. Premium Payable on Redemption of Debentures: If debentures are to be redeemed at a price higher than their face value, the excess amount (premium) is a definite future liability and a loss that is certain to occur. This loss must be recognized upfront at the time of issue.

   In this question, Amik Ltd. issues debentures at a premium of 5%. This premium received on issue is a capital gain for the company and is credited to 'Securities Premium Reserve Account'. It is not a loss and therefore does not contribute to the 'Loss on Issue of Debentures Account'.

   The only component contributing to the 'Loss on Issue of Debentures Account' in this scenario is the premium payable on redemption. This premium represents a future obligation that reduces the net proceeds from the debenture issue over their lifetime. Therefore, it is treated as a loss at the time of issue.

   The journal entry to record this loss involves:

   • Debiting 'Loss on Issue of Debentures Account': To recognize the total loss (discount on issue + premium on redemption).
   • Crediting 'Premium on Redemption of Debentures Account': To record the liability for the premium that will be paid at the time of redemption.

   ---

   Working Notes

   1. Total Face Value of Debentures:

      Number of Debentures $\times$ Face Value per Debenture

      $70,000 \times ₹ 100 = ₹ 70,00,000$

   2. Premium on Issue of Debentures:

      $5\%$ of Face Value per Debenture $\times$ Number of Debentures

      $5\%$ of $₹ 100 = ₹ 5$ per debenture

      $₹ 5 \times 70,000 = ₹ 3,50,000$

      (This amount is credited to Securities Premium Reserve Account and does not contribute to 'Loss on Issue of Debentures Account'.)

   3. Premium on Redemption of Debentures:

      $10\%$ of Face Value per Debenture $\times$ Number of Debentures

      $10\%$ of $₹ 100 = ₹ 10$ per debenture

      $₹ 10 \times 70,000 = ₹ 7,00,000$

      (This amount represents a future loss and is debited to 'Loss on Issue of Debentures Account'.)

   4. Amount to be Debited to Loss on Issue of Debentures Account:

      This account is debited with the total loss incurred at the time of issue. Since there is no discount on issue (rather, a premium is received), the only loss component is the premium payable on redemption.

      Amount = Premium on Redemption of Debentures

      Amount = ₹ 7,00,000

   ---

   Solution: Journal Entry for Issue of Debentures

   While the question only asks for the amount debited to 'Loss on Issue of Debentures Account', understanding the full journal entry helps clarify the treatment.

   Date	Particulars	L.F.	Debit (₹)	Credit (₹)
   	Bank A/c (or Debenture Application & Allotment A/c)		73,50,000
   	Loss on Issue of Debentures A/c		7,00,000
   	To 9% Debentures A/c			70,00,000
   	To Securities Premium Reserve A/c			3,50,000
   	To Premium on Redemption of Debentures A/c			7,00,000
   	(Being 70,000, 9% Debentures of ₹100 each issued at 5% premium, redeemable at 10% premium)
   	TOTAL		80,50,000	80,50,000

   Watch out

   A common mistake is to include the premium received on issue (Securities Premium Reserve) as part of the 'Loss on Issue of Debentures Account'. Remember, premium on issue is a gain, while premium on redemption is a loss. Only the loss components are debited to 'Loss on Issue of Debentures Account'.

   ---

   ✓Final answer

   The 'Loss on Issue of Debentures Account' will be debited in the books of Amik Ltd. by ₹ 7,00,000.

3. CBSE 2026Set 67/5/11 markMCQ
   Q.On 1st April, 2024, DD Ltd. issued 2,000, 9% Debentures of ₹ 50 each at a premium of 5%, redeemable at a premium of ₹ 10 per debenture after five years. Interest on the debentures was to be paid on half-yearly basis on 30th September and 31st March. Interest on the debentures for the year ended 31st March, 2025 will be : (A) ₹ 4,500 (B) ₹ 9,000 (C) ₹ 9,450 (D) ₹ 4,725

   ›Reveal solutionSolution

   The interest on debentures for the year ended 31st March, 2025 is ₹9,000, calculated on the face value of the debentures at the stated coupon rate, irrespective of the issue price or redemption premium.

   Concept First: Why Interest is Calculated on Face Value

   The key principle here is that interest on debentures is always calculated on the face value (nominal value) of the debentures, not on the issue price (which may include a premium) or the redemption value. The 9% coupon rate is applied to the ₹50 face value per debenture.

   The premium on issue (₹5 per debenture) and the premium on redemption (₹10 per debenture) are capital items. They affect the company's securities premium account and the loss on issue of debentures account, respectively — but they have no bearing on the interest calculation. Interest is a charge against profit, paid to debenture holders as compensation for the use of their funds, and that compensation is contractually fixed on the face value.

   Watch out

   Common Pitfall

   Students often mistakenly calculate interest on the issue price (₹55) or the redemption price (₹60). This is incorrect. The coupon rate is always applied to the face value (₹50) unless the question explicitly states otherwise. The premium on issue is a capital receipt, not income for the debenture holder in the context of interest.

   Solution: Calculating the Interest

   Step 1: Determine the total face value of debentures issued.

   Number of debentures = 2,000

   Face value per debenture = ₹50

   Total face value = 2,000 × ₹50 = ₹1,00,000

   Step 2: Apply the annual interest rate.

   Annual interest rate = 9%

   Annual interest = 9% of ₹1,00,000 = ₹9,000

   Step 3: Verify the half-yearly payment (for understanding, though the question asks for the annual amount).

   Half-yearly interest = ₹9,000 ÷ 2 = ₹4,500

   This would be paid on 30th September 2024 and 31st March 2025.

   Since the question asks for the interest for the year ended 31st March, 2025, it covers the full financial year from 1st April 2024 to 31st March 2025. Both half-yearly payments fall within this period.

   Total interest for the year = ₹4,500 (Sept 2024) + ₹4,500 (March 2025) = ₹9,000

   Tip

   Shortcut

   For any debenture question, remember: Interest = (Number of debentures × Face value per debenture × Rate of interest). Ignore issue price, redemption price, and time period fractions unless the debentures were issued or redeemed mid-year.

   Working Note

   Particulars	Calculation	Amount (₹)
   Total face value of debentures	2,000 debentures × ₹50 each	₹1,00,000
   Annual interest @ 9%	9% of ₹1,00,000	₹9,000
   Half-yearly interest (30 Sept & 31 March)	₹9,000 ÷ 2	₹4,500 each

   ✓Final answer

   The interest on debentures for the year ended 31st March, 2025 is ₹9,000 (Option B). This is calculated as 9% of the total face value of ₹1,00,000 (2,000 debentures × ₹50 each). The issue premium of ₹5 per debenture and redemption premium of ₹10 per debenture do not affect the interest calculation.

4. CBSE 2026Set MARCH1 mark
   Q.What do you mean by Redemption of debentures?

   ›Reveal solutionSolution

   Redemption of debentures is the repayment/discharge of debentures to the holders as per the terms of issue.

   A debenture is a loan raised by a company that carries a fixed rate of interest and a promise to repay. Redemption is the process by which the company returns the debenture money to the debenture holders.

   ✓Final answer

   Redemption of debentures means repaying the debenture amount to the debenture holders - either on the maturity date, in instalments, or by purchase in the open market - as per the terms of issue. It may be at par or at a premium, and it discharges the company's liability towards the debenture holders.

5. CBSE 2026Set ANNUAL1 markMCQ
   Q.Loss on issue of Debentures is written off _______.

   (a) during the lifetime of the Debentures

   (b) in the year of the issue of debentures

   (c) within two years of the issue of debentures

   (d) when debentures are redeemed

   (a) during the lifetime of the Debentures

   (b) in the year of the issue of debentures

   (c) within two years of the issue of debentures

   (d) when debentures are redeemed

   ›Reveal solutionSolution

   Loss on issue of Debentures is written off during the lifetime of the Debentures (Option A).

   'Loss on Issue of Debentures' typically arises when debentures are issued at a discount and/or are redeemable at a premium. This loss is in the nature of a capital loss, and the benefit of raising funds through the debentures is enjoyed by the company over the entire period the debentures are outstanding (i.e., till redemption). Following the matching principle, this loss is therefore written off gradually, usually in proportion to the balance of debentures outstanding, over the life of the debentures (charged to the Securities Premium Reserve first, if available, and the balance to the Statement of Profit and Loss), rather than being written off fully in the year of issue or in any one later year.

   ✓Final answer

   (A) during the lifetime of the Debentures.

6. CBSE 2025Set 67/5/11 markMCQ
   Q.On 1st April, 2023, Viya Ltd. issued 20,000, 10% debentures of ₹ 100 each at a premium of 10%. The total amount of interest on debentures for the year ended 31st March, 2024 will be : (A) ₹ 2,000 (B) ₹ 2,20,000 (C) ₹ 2,00,000 (D) ₹ 20,000

   (OR)

   Radhya Ltd. issued 5,000, 9% debentures of ₹ 100 each at ₹ 97 per debenture. The 9% debentures account will be credited by : (A) ₹ 4,85,000 (B) ₹ 5,00,000 (C) ₹ 4,50,000 (D) ₹ 50,000

   ›Reveal solutionSolution

   Part (a): Interest = 20,000 × ₹100 × 10% = ₹2,00,000 — option (C).

   Part (b): 9% Debentures A/c credited at face value 5,000 × ₹100 = ₹5,00,000 — option (B).

   Part (a)

   Interest on debentures is a fixed return on the nominal (face) value, independent of whether they were issued at par, premium or discount. For Viya Ltd.: 20,000 × ₹100 × 10% = ₹2,00,000 for the year. Calculating on the ₹110 issue price (giving ₹2,20,000) is the classic trap.

   ✓Final answer

   (C) ₹2,00,000.

   Part (b)

   When debentures are issued at a discount, the Debentures Account is credited with the full face value (the amount repayable at maturity); Bank is debited with cash received and the shortfall goes to Discount on Issue of Debentures. For Radhya Ltd.: face value = 5,000 × ₹100 = ₹5,00,000; Bank ₹4,85,000; Discount ₹15,000.

   ✓Final answer

   (B) ₹5,00,000.

7. CBSE 2025Set MARCH1 markMCQ
   Q.Before the company decides to redeem the debentures out of profit, the company has to transfer ______ % of total face value of issued debentures to debenture redemption reserve account.

   (a) 10

   (b) 25

   (c) 100

   (d) 15

   ›Reveal solutionSolution

   A Debenture Redemption Reserve of at least 25% of the face value of issued debentures must be created before redemption out of profits. Correct option: (b) 25.

   In GSEB Class-12 Commerce Accountancy (Issue and Redemption of Debentures):

   • To protect debenture-holders, a company redeeming debentures out of profit must first transfer an adequate amount to the Debenture Redemption Reserve (DRR).

   • The prescribed adequacy is 25% of the face value of the outstanding/issued debentures.

   ✓Final answer

   (b) 25.

8. CBSE 2025Set ANNUAL1 markMCQ
   Q.Deep Ltd. issued 10,00,000, 7% debentures of Rs. 100 each at a discount of 4%, redeemable after 5 years at a premium of 6%. Loss on the issue of debenture is (A) Rs. 10,00,000 (B) Rs. 6,00,000 (C) Rs. 4,00,000 (D) None of these

   ›Reveal solutionSolution

   Loss on issue of debentures = discount on issue + premium payable on redemption. For 10,00,000 debentures of Rs 100 issued at 4% discount and redeemable at 6% premium, that is Rs 40,00,000 + Rs 60,00,000 = Rs 1,00,00,000 — not equal to any figure in (A)/(B)/(C) — so the answer is (D) None of these.

   When debentures are issued at a discount and are also redeemable at a premium, the total Loss on Issue of Debentures combines both:

   • Discount allowed on issue (an upfront loss)
   • Premium payable on redemption (a future loss provided for at issue)

   Working (BSEB Inter / Bihar Class-12 Accountancy):

   Particulars	Computation	Amount (Rs)
   Number of debentures	given	10,00,000
   Face value per debenture	given	100
   Discount on issue @ 4%	10,00,000 x 100 x 4%	40,00,000
   Premium on redemption @ 6%	10,00,000 x 100 x 6%	60,00,000
   Total Loss on Issue of Debentures	40,00,000 + 60,00,000	1,00,00,000

   The computed loss is Rs 1,00,00,000 (one crore). Options (A) Rs 10,00,000, (B) Rs 6,00,000 and (C) Rs 4,00,000 do not match this figure. Therefore the correct choice is (D) None of these.

   ✓Final answer

   (D) None of these — Loss on Issue of Debentures = Rs 1,00,00,000.

9. CBSE 2025Set ANNUAL1 markMCQ
   Q.When debentures are issued at par and are redeemable at a premium, the loss on such an issue is debited to (A) Profit & Loss Statement (B) Debenture Application & Allotment A/c (C) Loss on Issue of Debenture A/c (D) Premium on Redemption A/c

   ›Reveal solutionSolution

   Issuing debentures at par but redeemable at a premium creates a future loss (the redemption premium), which is recognised at issue by debiting the Loss on Issue of Debentures A/c. Hence the answer is (C).

   For Bihar Class-12 (BSEB Inter) commerce candidates, the entry at the time of issue (par issue, redeemable at premium) is:

   • Bank A/c Dr. (amount received at par)
   • Loss on Issue of Debentures A/c Dr. (premium payable on redemption)
   • To Debentures A/c (face value)
   • To Premium on Redemption of Debentures A/c (premium payable)

   The loss represents the premium the company has committed to pay on redemption. It is first debited to the Loss on Issue of Debentures A/c and later written off against the Statement of Profit and Loss (or Securities Premium). So at the moment of issue the loss is debited to the Loss on Issue of Debenture A/c. Hence option (C).

   ✓Final answer

   (C) Loss on Issue of Debenture A/c.

10. CBSE 2025Set ANNUAL1 markMCQ
    Q.Premium on redemption of debenture is a (A) Personal A/c (B) Real A/c (C) Nominal A/c (D) Suspense A/c

    ›Reveal solutionSolution

    Premium on Redemption of Debentures represents an amount payable to debenture holders, so the account is a Personal account — option (A).

    When debentures are to be redeemed at a premium, the company undertakes to pay more than the face value on repayment. The 'Premium on Redemption of Debentures account' records this extra amount owed to the debenture holders. Since it represents a sum payable to persons, it is a Personal (representative personal / liability) account, and is shown as a liability until paid.

    • (B) Real A/c is WRONG — real accounts record tangible/intangible assets, not amounts owed to persons.

    • (C) Nominal A/c is WRONG — the premium here is a liability, not an expense or loss account (the loss on issue is written off separately).

    • (D) Suspense A/c is WRONG — a suspense account is a temporary balancing account, which this is not.

    ✓Final answer

    (A) Personal A/c — Premium on Redemption of Debentures is an amount payable to debenture holders, hence a personal (liability) account.

11. CBSE 2025Set ANNUAL1 markMCQ
    Q.Premium of Redemption of Debentures A/c is

    (a) an asset

    (b) a liability

    (c) an expense

    (d) a revenue

    ›Reveal solutionSolution

    When debentures are issued redeemable at a premium, the premium payable is recognised immediately as a liability, matched by a loss on issue.

    If debentures are issued on terms that they will be redeemed at a premium (say, 10% above face value), the company is contractually obligated, from the moment of issue, to pay that extra amount when redemption falls due. Accounting recognises this obligation upfront:

    Bank A/c                         Dr.
    Loss on Issue of Debentures A/c  Dr.
          To Debentures A/c
          To Premium on Redemption of Debentures A/c
    

    "Premium on Redemption of Debentures A/c" is carried as a liability in the Balance Sheet (usually under Other Long-term Liabilities, or Current Liabilities as redemption approaches) because it represents money the company will definitely have to pay in future — it is not an asset (no future economic benefit flows to the company from it), not an expense in itself (the Loss on Issue of Debentures A/c is the expense/loss side), and not a revenue.

    ✓Final answer

    Premium on Redemption of Debentures A/c is a liability of the company.

12. CBSE 2025Set ANNUAL1 markMCQ
    Q.8,000, 8 % debentures of Rs. 100 each are issued at a discount of 5 % but are repayable at a premium of 5 %. In this case, Loss on Issue of Debentures A/c be debited with –

    (a) Rs. 32,000

    (b) Rs. 72,000

    (c) Rs. 50,000

    (d) Rs. 40,000

    ›Reveal solutionSolution

    Total face value = 8,000 × Rs. 100 = Rs. 8,00,000. Discount (5%) = Rs. 40,000; Premium on redemption (5%) = Rs. 40,000; combined 'Loss on Issue of Debentures' (the standard NCERT treatment) = Rs. 80,000 — a figure not listed among the given options.

    When debentures are issued at a discount AND are also redeemable at a premium, the company suffers a loss on BOTH counts — the discount (money foregone at issue) and the premium (extra amount payable on redemption, over and above face value). Standard accounting (per NCERT Class-12 Accountancy, Issue & Redemption of Debentures) debits BOTH amounts to a single 'Loss on Issue of Debentures A/c' and writes it off over the life of the debentures (or against Securities Premium/Statement of P&L).

    Calculation:

    Number of debentures = 8,000; Face value = Rs. 100 each → Total face value = Rs. 8,00,000.

    Discount on issue (5%) = 8,00,000 × 5% = Rs. 40,000.

    Premium on redemption (5%) = 8,00,000 × 5% = Rs. 40,000.

    Total Loss on Issue of Debentures = 40,000 + 40,000 = Rs. 80,000.

    Journal entry at issue:

    Bank A/c Dr Rs. 7,60,000 (8,00,000 − 40,000 discount)

    Loss on Issue of Debentures A/c Dr Rs. 80,000

    To 8% Debentures A/c Rs. 8,00,000

    To Premium on Redemption of Debentures A/c Rs. 40,000

    Honest note: the four printed MCQ options (Rs. 32,000 / 72,000 / 50,000 / 40,000) do not include the technically-correct total of Rs. 80,000. The only option that matches ANY individual component of the correct working is Rs. 40,000 (option d) — which equals EITHER the discount alone OR the premium alone (each is independently Rs. 40,000), but not their combined 'Loss on Issue' figure. A student should know the full, correct method shown here; if this exact MCQ appears with these options on the real paper, the closest/intended pick is most likely (d) Rs. 40,000, understood as just one of the two components, not the complete loss figure.

    ✓Final answer

    Correctly worked out, Loss on Issue of Debentures A/c should be debited with Rs. 80,000 (Rs. 40,000 discount + Rs. 40,000 premium on redemption) — this full figure is not among the printed options; of the given choices, only Rs. 40,000 (option d) matches a single component (either the discount or the premium alone).