Q.Pass necessary journal entries for issue of debentures for the following transactions :
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Start your 14-day free trial to unlock the full solution →AB Ltd. issues 30,000 debentures at ₹105 (5% premium) redeemable at ₹110 (10% premium); CD Ltd. issues 40,000 debentures at par (₹100) redeemable at ₹110 (10% premium). Both record the issue proceeds, the liability at face value, and the loss on issue (discount + redemption premium) as a capital loss debited to Loss on Issue of Debentures Account.
Concept: Accounting Treatment for Issue of Debentures
When a company issues debentures, three elements determine the accounting entries:
- Issue price – what the company actually receives (at par, premium, or discount).
- Face value – the nominal value of the debenture, which becomes the liability recorded in the Debentures Account.
- Redemption price – what the company will pay back at maturity (at par or at a premium).
The total loss on issue is the sum of any discount on issue and any premium on redemption. This loss is a capital loss and is debited to Loss on Issue of Debentures Account (an intangible asset written off over the life of the debentures or against Securities Premium Reserve if available). The accounting entries follow the principle:
- Debit Bank Account with the amount received (issue price × number of debentures).
- Debit Loss on Issue of Debentures Account with the total loss (discount on issue + premium on redemption).
- Credit Debentures Account with the face value (the liability).
- Credit Premium on Redemption of Debentures Account with the redemption premium (a liability, shown under "Current Liabilities" or as a provision).
If debentures are issued at a premium, the premium received is credited to Securities Premium Account (a reserve under shareholders' funds).
Solution
(i) AB Ltd.: 30,000, 10% Debentures of ₹100 each at 5% premium, redeemable at 10% premium
Working Note 1: Amounts for AB Ltd.
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Number of debentures = 30,000
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Face value per debenture = ₹100
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Issue price per debenture = ₹100 + 5% of ₹100 = ₹105
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Redemption price per debenture = ₹100 + 10% of ₹100 = ₹110
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Total face value = 30,000 × ₹100 = ₹30,00,000
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Amount received (Bank) = 30,000 × ₹105 = ₹31,50,000
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Securities Premium (issue premium) = 30,000 × ₹5 = ₹1,50,000
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Premium on Redemption = 30,000 × ₹10 = ₹3,00,000
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Loss on Issue of Debentures = Premium on Redemption = ₹3,00,000
(Since issue is at a premium, there is no discount on issue; the only loss is the redemption premium.)
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c | 31,50,000 | |||
| Loss on Issue of Debentures A/c | 3,00,000 | |||
| To 10% Debentures A/c | 30,00,000 | |||
| To Securities Premium A/c | 1,50,000 | |||
| To Premium on Redemption of Debentures A/c | 3,00,000 | |||
| (Being 30,000, 10% Debentures of ₹100 each issued at ₹105, redeemable at ₹110) |
Students often forget to record the Premium on Redemption of Debentures as a separate liability. It is NOT part of the Debentures Account; it represents an additional amount payable at redemption and must be credited separately.
(ii) CD Ltd.: 40,000, 8% Debentures of ₹100 each at par, redeemable at 10% premium
Working Note 2: Amounts for CD Ltd.
-
Number of debentures = 40,000
-
Face value per debenture = ₹100
-
Issue price per debenture = ₹100 (at par)
-
Redemption price per debenture = ₹100 + 10% of ₹100 = ₹110
-
Total face value = 40,000 × ₹100 = ₹40,00,000
-
Amount received (Bank) = 40,000 × ₹100 = ₹40,00,000
-
Premium on Redemption = 40,000 × ₹10 = ₹4,00,000
-
Loss on Issue of Debentures = Premium on Redemption = ₹4,00,000 …
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