On 1st April, 2021, Narmada Ltd. issued 5,000, 8% Debentures of ₹ 100 each at a premium of 10%. The total amou

Question

Q. On 1st April, 2021, Narmada Ltd. issued 5,000, 8% Debentures of ₹ 100 each at a premium of 10%. The total amount of interest on debentures for the year ending 31st March, 2022 will be : (A) ₹ 25,000 (B) ₹ 20,000 (C) ₹ 50,000 (D) ₹ 40,000

CBSECBSE Class XII Board 2023MCQ· 1mImportance★★★★★

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Concept understanding — Premium on Redemption

Let’s start with something you already know from everyday life. Suppose you borrow ₹1,000 from a friend and promise to pay it back after one year. But when the year ends, you don’t just return ₹1,000 — you also pay an extra ₹50 as a “thank you” for the favour. That extra ₹50 is like a premium — an amount above the face value.

Now replace your friend with a company, and the loan with a redeemable preference share or a debenture. When a company issues these, it promises to repay the holder at a future date. Sometimes, the company agrees to repay more than the face value — say, a ₹100 share is repaid at ₹110. That extra ₹10 is the premium on redemption.

Why does a company offer a premium on redemption?

It’s not generosity. A company offers a premium to make its shares or debentures more attractive to investors. If the market interest rate is high, investors won’t buy a low-coupon debenture unless they know they’ll get a bonus at redemption. The premium is the sweetener.

From the company’s side, this premium is a cost — an extra outflow of cash when the instrument is redeemed. And like any cost, it must be accounted for properly.

The accounting treatment — the core rule

The premium on redemption is not a loss that hits the Profit & Loss account directly. Instead, it is adjusted against the company’s reserves and surplus — specifically, the Securities Premium Reserve (if available) or the General Reserve / Retained Earnings.

Here’s the precise journal entry when the premium is paid at the time of redemption:

Journal Entry for Premium on Redemption Payable Date Particulars Dr. (₹) Cr. (₹) Securities Premium Reserve A/c \dots Dr. xxx General Reserve A/c \dots Dr. (if needed) xxx To Premium on Redemption of Debentures/Preference Shares A/c xxx (Being the premium payable on redemption provided for)

Then, when the actual payment is made:

| | Premium on Redemption of Debentures/Preference Shares A/c … Dr. | xxx | |

| | To Bank A/c | | xxx |

| | (Being the premium paid to debenture/shareholders) | | |

Which account is debited and which is credited — the logic

Debit the reserve account (Securities Premium Reserve first, then General Reserve, then any other free reserve). Why? Because the company is using its accumulated profits (reserves) to meet this extra cost — it’s not a business expense like salary or rent.
Credit a temporary liability account called “Premium on Redemption of … A/c”. This shows that the company owes this premium to the holders. Later, when paid, that liability is cleared by crediting Bank.

Watch out

Never debit the Profit & Loss Account for premium on redemption. The NCERT textbook is clear: premium on redemption is a capital loss (or a distribution of accumulated profits), not a revenue expense. Doing otherwise would understate the year’s profit.

Where does this appear in the financial statements?

In the Balance Sheet, before redemption, the “Premium on Redemption of … A/c” appears under Current Liabilities (or as a separate item under Non-Current Liabilities if the redemption is due after one year). After payment, it disappears. …

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The total debenture interest for the year is ₹ 40,000, calculated on the face value of the debentures.

When calculating interest on debentures, it is crucial to understand that interest is always computed on the nominal or face value of the debentures, not on their issue price. The issue price might be at a premium or discount, but this premium or discount affects the capital structure and the cash flow at the time of issue, not the periodic interest payment. The interest rate (e.g., 8% in this question) is a percentage of the face value that the company promises to pay to debenture holders for using their funds.

Debenture interest is a charge against profits, meaning it must be paid whether the company makes a profit or not. It is typically debited to the 'Debenture Interest Account' and credited to 'Debenture Holders Account' when due, and then 'Debenture Holders Account' is debited and 'Bank Account' is credited upon payment. For the purpose of this question, we only need to calculate the total interest amount for the year.

Solution

The total amount of interest on debentures for the year ending 31st March, 2022, will be calculated as follows:

Identify the Face Value: Each debenture has a face value of ₹ 100.
Identify the Number of Debentures: Narmada Ltd. issued 5,000 debentures.
Calculate Total Face Value: Multiply the number of debentures by the face value per debenture.
Apply the Interest Rate: The interest rate is 8% per annum. This rate is applied to the total face value for the period the debentures were outstanding. Since the debentures were issued on 1st April, 2021, and the interest is for the year ending 31st March, 2022, it covers a full year.

Working Notes …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 30 on this concept.

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:

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.

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

Calculate the total face value of debentures:

Number of Debentures $\times$ Face Value per Debenture

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

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 $₹40,00,000 = ₹8,00,000$

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 = $₹13,00,000 - ₹3,00,000 = ₹10,00,000$

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

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

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.

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

Total Face Value of Debentures:

Number of Debentures $\times$ Face Value per Debenture

$70,000 \times ₹ 100 = ₹ 70,00,000$

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'.)

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'.)

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. …
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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. …
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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.

…

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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 debentur …

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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. …
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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):

…

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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
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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) …
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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. …
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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

…
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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

…

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Particulars	Dr. (₹)	Cr. (₹)
Securities Premium Reserve A/c … Dr.	xxx
General Reserve A/c … Dr. (if needed)	xxx
To Premium on Redemption of Debentures/Preference Shares A/c		xxx
(Being the premium payable on redemption provided for)

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

Q.On 1st April, 2021, Narmada Ltd. issued 5,000, 8% Debentures of ₹ 100 each at a premium of 10%. The total amount of interest on debentures for the year ending 31st March, 2022 will be : (A) ₹ 25,000 (B) ₹ 20,000 (C) ₹ 50,000 (D) ₹ 40,000

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