AccountancyNEB 2076 (old course)
A company Ltd. issued 8,000, 10% debentures at a discount of 10% and redeemable after 5 years at a premium of 5%. Required: Entries for issue and redemption of debentures.
5Answer
Journal Entries for Issue and Redemption of Debentures
1. Journal Entry for Issue of Debentures
When a company issues debentures at a discount, the following entry is passed:
| Date | Particulars | L.F. | Amount (Rs.) | Amount (Rs.) |
|---|---|---|---|---|
| 2076/07/01 | Discount on Issue of Debentures A/c | Dr. | 80,000 | |
| Bank A/c | Dr. | 720,000 | ||
| To 10% Debentures A/c | 800,000 | |||
| Working Notes: | ||||
| - Face Value of Debentures = 8,000 × Rs. 100 = Rs. 800,000 | ||||
| - Discount (10%) = 800,000 × 10% = Rs. 80,000 | ||||
| - Issue Price = Face Value – Discount = 800,000 – 80,000 = Rs. 720,000 |
2. Journal Entry for Redemption of Debentures
When debentures are redeemed at a premium after 5 years, the following entry is passed:
| Date | Particulars | L.F. | Amount (Rs.) | Amount (Rs.) |
|---|---|---|---|---|
| 2081/07/01 | 10% Debentures A/c | Dr. | 800,000 | |
| Premium on Redemption of Debentures A/c | Dr. | 40,000 | ||
| To Bank A/c | 840,000 | |||
| Working Notes: | ||||
| - Premium (5%) = 800,000 × 5% = Rs. 40,000 | ||||
| - Redemption Amount = Face Value + Premium = 800,000 + 40,000 = Rs. 840,000 |
3. Adjustment for Discount on Issue of Debentures (Amortization)
The discount on issue of debentures is written off over the life of the debentures (5 years) using the straight-line method:
| Year | Discount Written Off (Rs.) | Debenture A/c (Dr.) | Discount on Issue of Debentures A/c (Cr.) |
|---|---|---|---|
| 1 | 16,000 | 16,000 | 16,000 |
| 2 | 16,000 | 16,000 | 16,000 |
| 3 | 16,000 | 16,000 | 16,000 |
| 4 | 16,000 | 16,000 | 16,000 |
| 5 | 16,000 | 16,000 | 16,000 |
| Total | 80,000 | 80,000 | 80,000 |
Final Balance:
- Debenture A/c = Rs. 800,000 (face value)
- Discount on Issue of Debentures A/c = Rs. 0 (fully written off)
Note: The premium on redemption is treated as an expense and is written off immediately at the time of redemption.
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