Q.Y Ltd. purchased equipment worth ₹ 1,99,500 and issued debentures to the vendor as purchase consideration. Pass necessary Journal entries in the following two situations: Situation 1: If 12% Debentures of ₹ 100 each are issued to the vendor at a premium of 5%.
Situation 2: If 12% Debentures of ₹ 100 each are issued to the vendor at a discount of 5%.

Discount on Issue of Debentures Account is a fictitious asset — option (c).

A fictitious asset is not a real asset — it has no physical existence and no resale value; it is an expense or capital loss not yet written off, shown on the asset side only until it is gradually amortised.

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Interest on debentures is a charge against profit — option (a).

A debenture is a loan/borrowing of the company. Interest on it is a contractual obligation that must be paid irrespective of whether the company makes a profit or a loss. Such a compulsory payment is a charge against profit, debited to the Statement of Profit & Loss (as a finance cost) before computing net profit.

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Discount on issue is written off in proportion to debentures outstanding; with four equal redemption instalments the outstanding amounts are 4 : 3 : 2 : 1 — answer (d).

This WBCHSE HS Accountancy MCQ tests the write-off of discount on issue of debentures when redemption is in instalments.

The benefit of the debenture money is enjoyed as long as the debentures remain outstanding, so discount is written off over their life in proportion to the amount outstanding each year.

With four equal annual redemption instalments, let each instalment be one unit:

| Year | Debentures outstanding during the year |

|---|---| …

Correct option: (a) charge against profit. Interest on debentures is a fixed, contractual expense payable regardless of profit, so it is charged against profit, not appropriated from it.

Debentureholders are creditors (lenders), not owners, and their interest must be paid whether the company makes a profit or a loss. It is therefore debited to the Statement of Profit and Loss as a finan …

Debenture interest is a charge against profit. At year-end the Interest on Debenture (Debenture Interest) Account is closed by crediting it and debiting the Profit and Loss Account.

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