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Illustrations · Illustration 8

Q.National Packaging Company purchased assets of the value of ₹1,90,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of ₹100 each at a discount of 5%. Record necessary journal entries.

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✓ Free question

National Packaging Company allots 2,000, 10% debentures of ₹100 each at a 5% discount to settle a vendor's claim of ₹1,90,000 — the ₹10,000 shortfall between the face value issued and the amount owed is debited to Discount on Issue of Debenture A/c.

Concept

When debentures are issued at a discount, each debenture is actually worth less than its face value to the company that receives it, so more face value must be allotted than the amount actually owed to the vendor. The difference is a real economic loss to the company and is debited to Discount on Issue of Debentures A/c, while the Debentures account is still credited with the full face value issued.

Working Note

Number of debentures issued = 2,000 (given). Face value credited to Debentures A/c = 2,000 × ₹100 = ₹2,00,000. Discount debited = 2,000 × ₹5 (5% of ₹100) = ₹10,000. Vendors A/c is debited only for the ₹1,90,000 actually owed, so the debit total (₹1,90,000 + ₹10,000 = ₹2,00,000) equals the credit total (₹2,00,000).

Solution

Books of National Packaging Company

Journal

DateParticularsL.F.Debit (₹)Credit (₹)
Sundry Assets A/c Dr.1,90,000
To Vendors A/c1,90,000
(Assets purchased from vendors)
Vendors A/c Dr.1,90,000
Discount on Issue of Debenture A/c Dr.10,000
To 10% Debentures A/c2,00,000
(Allotment of 2,000 debentures of ₹100 each at a discount of 5% as purchase consideration)
✓Final answer

Sundry Assets A/c Dr. ₹1,90,000 To Vendors A/c ₹1,90,000; then Vendors A/c Dr. ₹1,90,000, Discount on Issue of Debenture A/c Dr. ₹10,000 To 10% Debentures A/c ₹2,00,000.

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