Accountancy · Ch 6 — Issue and Redemption of Debentures
Writing off Discount/Loss on Issue of Debentures
Writing off Discount/Loss on Issue of Debentures
Writing off Discount/Loss on Issue of Debentures
When a company issues debentures at a discount, or at a discount coupled with a premium on redemption, the resulting loss is a capital loss. It is not an expense of earning revenue; it is a cost of raising long-term finance. The accounting treatment of writing off this loss is governed by the nature of the loss and the availability of certain reserves.
Nature of the Loss
Discount on issue of debentures, and any premium payable on redemption, are capital losses. They represent the difference between the amount received from debentureholders and the total amount the company will eventually have to pay back (face value plus redemption premium). This loss must be written off in the year the debentures are issued.
Sources for Writing Off
The loss can be written off from two sources, in a specific order of priority:
- Securities Premium Reserve: As per Section 52(2) of the Companies Act, the balance in the Securities Premium Reserve account can be used to write off the discount or loss on the issue of debentures. This is the first source to be used.
- Revenue Profits (Statement of Profit and Loss): If the Securities Premium Reserve does not have a sufficient balance, or does not exist at all, the remaining (or entire) amount of the loss must be written off against the revenue profits of the year. This is done by debiting the Statement of Profit and Loss.
Journal Entry
The journal entry to write off the loss is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Securities Premium Reserve A/c | Dr. | (Balance available) | ||
| Statement of Profit and Loss A/c | Dr. | (Balance amount) | ||
| To Discount/Loss on Issue of Debentures A/c | (Total loss) | |||
| (Discount/Loss on issue of debentures written off) |
Explanation of the entry:
- Securities Premium Reserve A/c is debited to the extent of its available balance. This reduces the reserve.
- Statement of Profit and Loss A/c is debited for the remaining amount. This reduces the profit for the year (or increases the loss).
- Discount/Loss on Issue of Debentures A/c is credited to close this account, as its balance has now been fully utilised.
Worked Example from the Textbook
Scenario: On July 1, 2019, a company issued 15,000, 9% debentures of ₹100 each at a 10% discount. It has a balance of ₹1,00,000 in the Securities Premium Reserve account.
Calculation:
- Face Value of Debentures = 15,000 × ₹100 = ₹15,00,000
- Discount = 10% of ₹15,00,000 = ₹1,50,000
- Securities Premium Reserve balance = ₹1,00,000
- Amount to be written off from Statement of Profit and Loss = ₹1,50,000 - ₹1,00,000 = ₹50,000
Journal Entry (for the year ending March 31, 2020): …