Skip to content
Numerical Questions · Q21
Q.

MK Ltd. has outstanding Rs. 30,000 11% debentures of Rs. 100 each redeemable at 10% premium as follows:

Date of RedemptionNumber of Debentures
March 31, 201810,000
March 31, 201912,000
March 31, 2020Remaining debentures

Pass necessary journal entries in the books of the company.

Chandigarh CbseNCERTSubjective· 5mImportance★★★★★
98% · 115/117 Questions
🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

MK Ltd. redeems its 30,000, 11% debentures of ₹100 each at a 10% premium in three tranches — 10,000 debentures on March 31, 2018, 12,000 on March 31, 2019 and the remaining 8,000 on March 31, 2020. Each redemption is recorded in two steps: the amount due (face value + 10% premium) is transferred to the Debentureholders' Account, and then paid through the bank. The premium on redemption is a capital loss written off against the Securities Premium Reserve (if available) or the Statement of Profit and Loss — never credited to Capital Reserve.

Concept and Accounting Treatment

When debentures are redeemable at a premium, the company pays the debentureholders more than the face value. The extra amount — the premium on redemption — is a known future loss that is provided for at the time of issue by debiting Loss on Issue of Debentures and crediting a Premium on Redemption of Debentures Account (a liability). At the time of redemption, that liability is discharged.

For each redemption two entries are passed:

  1. Amount due: debit the 11% Debentures A/c with the face value and the Premium on Redemption of Debentures A/c with the premium, and credit the Debentureholders A/c with the total payable.
  2. Payment: debit the Debentureholders A/c and credit the Bank A/c.
Watch out

Common Mistake

The premium on redemption is not transferred to the Capital Reserve. It is a loss, written off against the Securities Premium Reserve (if available) or the Statement of Profit and Loss. Debiting the Premium on Redemption A/c a second time to credit Capital Reserve — after it has already been debited in the amount-due entry — leaves an unmatched double debit and is wrong.

Working Notes

1. Number of debentures and premium

  • Total debentures outstanding = 30,000 debentures of ₹100 each = face value ₹30,00,000.
  • Premium on redemption = 10% of ₹100 = ₹10 per debenture.

2. Tranche-wise redemption

Date of RedemptionNumber of DebenturesFace Value (₹)Premium @ 10% (₹)Total Payment (₹)
March 31, 201810,00010,00,0001,00,00011,00,000
March 31, 201912,00012,00,0001,20,00013,20,000
March 31, 20208,000 (remaining)8,00,00080,0008,80,000
Total30,00030,00,0003,00,00033,00,000

Journal Entries in the Books of MK Ltd.

For the year ended March 31, 2018 (redemption of 10,000 debentures)

DateParticularsL.F.Debit (₹)Credit (₹)
2018
Mar 31
11% Debentures A/c Dr.10,00,000
Premium on Redemption of Debentures A/c Dr.1,00,000
To Debentureholders A/c11,00,000
(Being the amount due on redemption of 10,000 debentures at a 10% premium)
Mar 31Debentureholders A/c Dr.11,00,000
To Bank A/c11,00,000
(Being the payment made to debentureholders)

For the year ended March 31, 2019 (redemption of 12,000 debentures)

DateParticularsL.F.Debit (₹)Credit (₹)
2019
Mar 31
11% Debentures A/c Dr.12,00,000
Premium on Redemption of Debentures A/c Dr.1,20,000
To Debentureholders A/c13,20,000
(Being the amount due on redemption of 12,000 debentures at a 10% premium)
Mar 31Debentureholders A/c Dr.13,20,000
To Bank A/c13,20,000

Unlock everything free for 14 days

  • Full step-by-step solutions
  • Concept-first explanations
  • Methods, shortcuts & mistakes
  • PYQ mapping + timed mock tests

Full access for 14 days. No credit card required.