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Do It Yourself · Q5

Q.On 1.4.2019, Fast Computers Ltd. issued 20,00,000, 6% debentures of ₹100 each at a discount of 4%, redeemable at a premium of 5% after three years. The amount was payable as follows: On application ₹50 per debenture, Balance on allotment. Record the necessary journal entries for issue of debentures.

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Issued at ₹96 (4% discount) and redeemable at ₹105 (5% premium), so the loss on issue is ₹9 per debenture. The redemption premium is set up as a liability at issue, and the whole ₹1,80,00,000 loss is debited to Loss on Issue of Debentures A/c — keeping the allotment entry in balance.

Concept

When debentures are issued at a discount and are redeemable at a premium, both the discount (a shortfall in cash) and the premium payable on redemption (a future liability) are a loss to the company at the time of issue. The total is debited to 'Loss on Issue of Debentures A/c', the premium on redemption is credited to a liability account (Premium on Redemption of Debentures A/c), and the issue entry must balance.

Working Note — Amounts (20,00,000 debentures of ₹100 each)

  • Face value = 20,00,000 × ₹100 = ₹20,00,00,000
  • Issue price at 4% discount = ₹96; discount = ₹4 × 20,00,000 = ₹80,00,000
  • Redemption at 5% premium = ₹5 × 20,00,000 = ₹1,00,00,000
  • Loss on issue = discount ₹80,00,000 + redemption premium ₹1,00,00,000 = ₹1,80,00,000
  • Application ₹50; allotment = ₹96 – ₹50 = ₹46 per debenture.
  • Application money = 20,00,000 × ₹50 = ₹10,00,00,000; allotment money = 20,00,000 × ₹46 = ₹9,20,00,000.

Solution — Journal (in the books of Fast Computers Ltd.)

DateParticularsL.F.Debit (₹)Credit (₹)
2019 Apr 1Bank A/c Dr.10,00,00,000
   To Debenture Application A/c10,00,00,000
(Application money on 20,00,000 debentures at ₹50 each)
2019 Apr 1Debenture Application A/c Dr.10,00,00,000
   To 6% Debentures A/c10,00,00,000
(Application money transferred to Debentures A/c)
2019 Apr 1Debenture Allotment A/c Dr.9,20,00,000
Loss on Issue of Debentures A/c Dr.1,80,00,000
   To 6% Debentures A/c10,00,00,000
   To Premium on Redemption of Debentures A/c1,00,00,000
(Allotment due; discount and redemption premium recorded as loss on issue)
2019 Apr 1Bank A/c Dr.9,20,00,000
   To Debenture Allotment A/c9,20,00,000

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