Q.Laser India Ltd. issued 7,00,000, 8% debentures of ₹100 each at par. Interest is to be paid on these debentures half-yearly on September 30 and March 31, every year. Record necessary journal entries assuming that income tax is deducted @10% of the amount of interest.
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Start your 14-day free trial to unlock the full solution →On 7,00,000 debentures of ₹100 each (face value ₹7,00,00,000), 8% annual interest is ₹56,00,000, paid half-yearly as ₹28,00,000 on 30 Sep and 31 Mar. TDS @10% (₹2,80,000) is deducted each time, so holders receive ₹25,20,000 and ₹2,80,000 goes to the government; ₹56,00,000 is charged to the Statement of Profit and Loss.
Concept
Interest on debentures is a charge against profit and is paid at the coupon rate on the face value, irrespective of the issue price (here the issue is at par). The company deducts income tax at source (TDS) on the interest, credits debentureholders with the net amount, and treats the tax withheld as a liability until it is paid to the government. The whole year's interest is transferred to the Statement of Profit and Loss.
Working Note
- Face value of debentures = 7,00,000 × ₹100 = ₹7,00,00,000
- Annual interest = 8% of ₹7,00,00,000 = ₹56,00,000
- Half-yearly interest = ₹56,00,000 ÷ 2 = ₹28,00,000
- TDS @10% of ₹28,00,000 = ₹2,80,000
- Net paid to debentureholders each half-year = ₹28,00,000 − ₹2,80,000 = ₹25,20,000
Solution
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Sep 30 | Debenture Interest A/c Dr. | 28,00,000 | ||
| To Debentureholders A/c | 25,20,000 | |||
| To Income Tax Payable A/c | 2,80,000 | |||
| (Interest due for the half-year and tax deducted at source @10%) | ||||
| Sep 30 | Debentureholders A/c Dr. | 25,20,000 | ||
| To Bank A/c | 25,20,000 | |||
| (Net interest paid to debentureholders) | ||||
| Sep 30 | Income Tax Payable A/c Dr. | 2,80,000 | ||
| To Bank A/c | 2,80,000 | |||
| (Tax deducted at source deposited with the government) | ||||
| Mar 31 | Debenture Interest A/c Dr. | 28,00,000 | ||
| To Debentureholders A/c | 25,20,000 | |||
| To Income Tax Payable A/c | 2,80,000 |
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