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Q.Pass the necessary journal entries in the books of Pankaj Limited for the issue of Debentures in the following cases :

(a) Issued 7500, 10% Debentures of ₹ 100 each at a discount of ₹ 10,000 redeemable at a premium of 5%.
(b) Issued 5000, 10% Debentures of ₹ 100 each at a premium of 10% redeemable at a premium of 10%.
(c) Issued 1000, 9% Debentures of ₹ 100 each at par redeemable at par.
(d) Issued ₹ 2,00,000, 9% Debentures of ₹ 100 each at a discount of 10% redeemable at par.
(e) Issued 5000, 9% Debentures of ₹ 100 each at 20% premium redeemable at par.
CBSECBSE Class XII Board 2022Subjective· 5mImportance★★★★★
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Journal entries for five debenture issues with varying terms of issue (at par/discount/premium) and redemption (at par/premium), recording application/allotment, discount/premium on issue, and loss on issue where applicable.

Concept: Issue of Debentures – Accounting Treatment

When a company issues debentures, it borrows money from the public. The accounting treatment depends on two critical factors: the issue price (par, discount, or premium) and the redemption price (par or premium).

The fundamental entries follow this logic:

At the time of issue:

  • Bank Account Dr. – with the actual cash received (issue price × number of debentures)
  • Discount on Issue of Debentures Account Dr. – if issued below par (face value − issue price)
  • Loss on Issue of Debentures Account Dr. – if redeemable at premium, the total loss = discount on issue + premium on redemption
  • To Debentures Account – with face value
  • To Premium on Redemption of Debentures Account – if redeemable above par
  • To Securities Premium Account – if issued at premium

The Loss on Issue of Debentures represents the total sacrifice the company makes: any discount given at issue plus any premium promised at redemption. This loss is a capital loss and must be written off against Securities Premium or Statement of Profit & Loss over the debenture life.

Watch out

A common mistake is to confuse "Discount on Issue" with "Loss on Issue." When debentures are redeemable at premium, the entire loss (discount + redemption premium) is debited to Loss on Issue of Debentures Account, NOT to Discount on Issue Account.


Solution: Journal Entries

(a) 7,500, 10% Debentures of ₹100 each at discount of ₹10,000, redeemable at 5% premium

DateParticularsL.F.Debit (₹)Credit (₹)
Bank Account Dr.7,40,000
Loss on Issue of Debentures Account Dr.47,500
To 10% Debentures Account7,50,000
To Premium on Redemption of Debentures Account37,500
(Being 7,500 debentures of ₹100 each issued at a discount of ₹10,000, redeemable at 5% premium)

Working Note 1: Calculation for case (a)

  • Face value of debentures = 7,500 × ₹100 = ₹7,50,000
  • Discount on issue = ₹10,000
  • Issue price = ₹7,50,000 − ₹10,000 = ₹7,40,000
  • Premium on redemption = 5% of ₹7,50,000 = ₹37,500
  • Loss on issue = Discount + Premium on redemption = ₹10,000 + ₹37,500 = ₹47,500

(b) 5,000, 10% Debentures of ₹100 each at 10% premium, redeemable at 10% premium

DateParticularsL.F.Debit (₹)Credit (₹)
Bank Account Dr.5,50,000
Loss on Issue of Debentures Account Dr.50,000
To 10% Debentures Account5,00,000
To Securities Premium Account50,000
To Premium on Redemption of Debentures Account50,000
(Being 5,000 debentures of ₹100 each issued at 10% premium, redeemable at 10% premium)

Working Note 2: Calculation for case (b)

  • Face value of debentures = 5,000 × ₹100 = ₹5,00,000
  • Premium on issue = 10% of ₹5,00,000 = ₹50,000
  • Issue price = ₹5,00,000 + ₹50,000 = ₹5,50,000
  • Premium on redemption = 10% of ₹5,00,000 = ₹50,000
  • Loss on issue = Premium on redemption (since issued at premium, the loss is only the redemption premium) = ₹50,000

(c) 1,000, 9% Debentures of ₹100 each at par, redeemable at par

DateParticularsL.F.Debit (₹)Credit (₹)
Bank Account Dr.1,00,000
To 9% Debentures Account1,00,000
(Being 1,000 debentures of ₹100 each issued at par, redeemable at par)

Working Note 3: Calculation for case (c)

  • Face value of debentures = 1,000 × ₹100 = ₹1,00,000
  • Issue price = ₹1,00,000 (at par)
  • No discount, no premium on issue or redemption
Tip

When debentures are issued at par and redeemable at par, the entry is straightforward: Bank Dr., To Debentures. No loss, no premium accounts involved.


(d) ₹2,00,000, 9% Debentures of ₹100 each at 10% discount, redeemable at par

| Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …

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