Debenture Application & Allotment A/c Dr. 95,000 Loss on Issue of Debentures A/c Dr. 10,000 To 9% Debenture A/c 1,00,000 To Premium on Redemption of Debentures A/c 5,000
On the basis of the above entry, determine the rate of discount at which Rs. 1,00,000, 9% debentures of Rs. 100 each
were issued if they were to be redeemed at a premium of 5%.
Understanding the Debenture Issue and Journal Entry
The question asks us to find the rate of discount on the issue of debentures based on a given journal entry. The journal entry provides crucial information about the amounts involved in the debenture issuance and subsequent redemption.
The provided journal entry is:
| Debenture Application & Allotment A/c | Dr. | 95,000 |
| Loss on Issue of Debentures A/c | Dr. | 10,000 |
| To 9% Debenture A/c | 1,00,000 | |
| To Premium on Redemption of Debentures A/c | 5,000 |
We are given that the nominal value of the 9% debentures is Rs. 1,00,000, and each debenture has a face value of Rs. 100. The debentures are to be redeemed at a premium of 5%.
Analyzing the Journal Entry Components
- Nominal Value (Face Value): The credit to '9% Debenture A/c' is Rs. 1,00,000. This represents the total face value of the debentures issued.
- Amount Received (Issue Price): The debit to 'Debenture Application & Allotment A/c' is Rs. 95,000. This is the actual amount collected from debenture holders upon issuance.
- Discount on Issue: The difference between the nominal value and the amount received is the discount on issue.
Discount on Issue = Nominal Value - Amount Received
Discount on Issue = $1,00,000 - 95,000 = 5,000$
- Premium on Redemption: The question states this is 5% of the nominal value.
Premium on Redemption = $5\% \times 1,00,000 = \frac{5}{100} \times 1,00,000 = 5,000$
This matches the credit to 'Premium on Redemption of Debentures A/c' in the journal entry.
- Loss on Issue: The total loss incurred on issuing debentures includes both the discount on issue and any premium payable on redemption.
Total Loss = Discount on Issue + Premium on Redemption
Total Loss = $5,000 + 5,000 = 10,000$
This matches the debit to 'Loss on Issue of Debentures A/c' in the journal entry, confirming our calculations.
Calculating the Rate of Discount
We need to determine the rate of discount based on the discount amount calculated.
- Discount Amount = Rs. 5,000
- Nominal Value = Rs. 1,00,000
- The formula for the rate of discount is:
Rate of Discount = $ \frac{\text{Discount Amount}}{\text{Nominal Value}} \times 100\% $
- Substituting the values:
Rate of Discount = $ \frac{5,000}{1,00,000} \times 100\% $
Rate of Discount = $ 0.05 \times 100\% $
Rate of Discount = $5\%$
Conclusion
Based on the journal entry and the calculations, the debentures were issued at a discount rate of 5%.
Important Questions from Debentures
Match List–I with List–II :
List I
List II
(a)
Secured debentures (i)
are a form of long-term debt and can be referred as a debt security. (b)
Bonds (ii)
are debentures which do not carry any charge on the assets of the company. (c)
Bearer debentures (iii)
are secured by a charge on the whole or a part of assets of the company. (d)
Naked debentures (iv)
are treated as negotiable instruments and are transferable by delivery alone.
Select the correct answer using the codes given below.- G.S. Rai company ltd. purchased assets of the book value of Rs. 98,000 from another firm. It was agreed that purchase
consideration be paid by issuing 11% debentures of Rs. 100 each. Assume debentures have been issued at discount of
20%
Identify the number of debentures issued by the company to the vendor The following journal entry appears in the books of X Co. Ltd.
Bank A/c Dr. 4,75,000 Loss on issue of debenture A/c Dr 75,000 To 12% Debentures A/c 5,00,000 To Premium on Redemption of Debenture A/c 50,000
In this case the debentures have been issued at a discount of 5%. What is the rate of premium on redemption
of debentures ?- If a company issue Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5% but redeemable at premium of 5%
then what amount will be debited to Loss on Issue of Debentures Account?
