Q.Arushi Ltd. issued 5,000, 10% debentures of ₹100 each at par but redeemable at a premium of 5% after 5 years. Show these items in the balance sheet of the company.
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Start your 14-day free trial to unlock the full solution →The ₹5,00,000 debentures are long-term borrowings; the ₹25,000 premium payable on their redemption (5% of ₹5,00,000) is an Other long-term liability, and the equal loss on issue is carried as a negative balance (₹25,000) in Reserves and Surplus.
Concept
When debentures are issued at par but are redeemable at a premium, the company must recognise, right at issue, the extra amount it will have to pay back. The Premium on Redemption of Debentures is a liability (settled after 5 years here), classified under Other long-term liabilities. The corresponding 'Loss on Issue of Debentures' is a capital loss written off over the debentures' life; until written off it sits as a negative balance in the Statement of Profit and Loss / Reserves and Surplus.
Solution — Balance Sheet (Extract)
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| I. Equity and Liabilities | ||
| 1. Shareholders' Funds | ||
| Reserve and Surplus | 1 | (25,000) |
| 2. Non-current Liabilities | ||
| (a) Long term borrowings | 2 | 5,00,000 |
| (b) Other long-term liabilities | 3 | 25,000 |
| Total | 5,00,000 | |
| II. Assets | ||
| 1. Current Assets | ||
| (a) Cash and Cash Equivalents | 4 | 5,00,000 |
| Total | 5,00,000 |
Notes to Accounts
| Particulars | Amount (₹) |
|---|---:| …
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