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Numerical Questions · Q14

Q.A. Ltd. issued 50,00,000, 8% debentures of Rs. 100 at a discount of 6% on April 01, 2018, redeemable at premium of 4% by draw of lots as under: 20,00,000 debentures on March 2020; 10,00,000 debentures on March 2021; 20,00,000 debentures on March 2022. Record journal entries for issue of debentures. Prepare discount/loss on issue of debenture account.

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The debentures are issued at ₹94 (6% discount) and redeemable at ₹104 (4% premium). The total loss on issue is discount ₹3,00,00,000 + redemption premium ₹2,00,00,000 = ₹5,00,00,000. Because the debentures are redeemed in instalments (draw of lots), this loss is written off in the ratio of the debentures outstanding each year — 50 : 50 : 30 : 20.

Working Notes

  • Number of debentures = 50,00,000; face value ₹100 each → total face value ₹50,00,00,000.
  • Discount on issue = 6% of ₹100 = ₹6 per debenture = 50,00,000 × ₹6 = ₹3,00,00,000.
  • Premium on redemption = 4% of ₹100 = ₹4 per debenture = 50,00,000 × ₹4 = ₹2,00,00,000.
  • Total loss on issue = ₹3,00,00,000 + ₹2,00,00,000 = ₹5,00,00,000.
  • Cash received = 50,00,000 × ₹94 = ₹47,00,00,000.

Journal Entries (Issue of Debentures)

DateParticularsDebit (₹)Credit (₹)
2018 Apr 01Bank A/c Dr.47,00,00,000
To Debenture Application & Allotment A/c47,00,00,000
(Money received on 50,00,000 debentures @ ₹94)
2018 Apr 01Debenture Application & Allotment A/c Dr.47,00,00,000
Loss on Issue of Debentures A/c Dr.5,00,00,000
To 8% Debentures A/c50,00,00,000
To Premium on Redemption of Debentures A/c2,00,00,000
(50,00,000 debentures issued at 6% discount, redeemable at 4% premium; loss on issue = discount ₹3,00,00,000 + redemption premium ₹2,00,00,000)

Writing off the Loss on Issue

The debentures are redeemed in instalments — 20,00,000 in March 2020, 10,00,000 in March 2021 and 20,00,000 in March 2022 — so the loss is written off using the outstanding-amount method, in proportion to the face value outstanding at the start of each year.

YearOutstanding at start (₹)RatioAmount written off (₹)
2018-1950,00,00,000501,66,66,667
2019-2050,00,00,000501,66,66,667
2020-2130,00,00,000301,00,00,000
2021-2220,00,00,0002066,66,666
Total1505,00,00,000

Discount/Loss on Issue of Debentures Account

DateParticulars₹DateParticulars₹
2018 Apr 01To 8% Debentures A/c (discount)3,00,00,0002019 Mar 31By Statement of Profit and Loss1,66,66,667
To Premium on Redemption A/c2,00,00,0002019 Mar 31By Balance c/d3,33,33,333
Total5,00,00,000Total5,00,00,000

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