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Numerical Questions · Q8

Q.R. Ltd. offered 20,00,000, 10% debentures of Rs. 200 each at a discount of 7% redeemable at premium of 8% after 9 years. Record necessary entries in the books of R. Ltd.

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R. Ltd. issues 20,00,000, 10% debentures of ₹200 each at a 7% discount (₹14 per debenture) and redeemable at an 8% premium (₹16 per debenture). Cash received is ₹37,20,00,000. The total loss on issue is ₹6,00,00,000 — discount ₹2,80,00,000 plus premium payable on redemption ₹3,20,00,000 — recorded in one Loss on Issue of Debentures Account, with the ₹3,20,00,000 premium set up as a liability at the time of issue.

Concept and Accounting Treatment

When debentures are issued at a discount AND are redeemable at a premium, both the discount and the premium payable on redemption are a loss to the company. Under the current NCERT treatment they are combined in a single Loss on Issue of Debentures Account at the time of issue, and the premium payable is credited to a Premium on Redemption of Debentures Account (a liability). The Debentures Account always carries the face value.

Figures:

  • Face value = 20,00,000 × ₹200 = ₹40,00,00,000.
  • Discount = 7% of ₹200 = ₹14 per debenture = ₹2,80,00,000.
  • Premium on redemption = 8% of ₹200 = ₹16 per debenture = ₹3,20,00,000.
  • Cash received = 20,00,000 × ₹186 = ₹37,20,00,000.
  • Total loss on issue = ₹2,80,00,000 + ₹3,20,00,000 = ₹6,00,00,000.

Journal Entry in the Books of R. Ltd.

DateParticularsL.F.Debit (₹)Credit (₹)
Bank A/c Dr.37,20,00,000
Loss on Issue of Debentures A/c Dr.6,00,00,000
To 10% Debentures A/c40,00,00,000
To Premium on Redemption of Debentures A/c3,20,00,000
(20,00,000, 10% debentures of ₹200 each issued at a 7% discount, redeemable at an 8% premium; discount ₹2,80,00,000 and premium on redemption ₹3,20,00,000 recorded as loss on issue)
Watch out

The premium on redemption is 8% of the face value ₹200 = ₹16 per debenture, so the total premium is ₹3,20,00,000 (not ₹1,60,00,000). The Debentures Account is credited with the full face value ₹40,00,00,000; the premium is a separate liability, never merged into the Debentures Account.

Working Notes …

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