The following journal entry appears in the books of X Co. Ltd. In this case the debentures have been issued at a discount of 5%. What is the rate of premium on redemptionBank 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
of debentures ?
This question asks us to determine the rate of premium on the redemption of debentures, given a specific journal entry and the discount rate on issuance.
Understanding the Journal Entry
The provided journal entry is:
- Bank A/c: Debited with 4,75,000 (This is the cash received from issuing debentures).
- Loss on issue of debenture A/c: Debited with 75,000 (This represents the total loss incurred at the time of issuing debentures, which includes both the discount and the premium on redemption).
- 12% Debentures A/c: Credited with 5,00,000 (This is the face value or nominal value of the debentures issued).
- Premium on Redemption of Debenture A/c: Credited with 50,000 (This is the amount of premium the company has promised to pay back to debenture holders upon redemption).
Calculating Discount on Issue
We are told that the debentures were issued at a 5% discount. The face value of the debentures is 5,00,000.
Calculation of Discount Amount:
Discount = Face Value \(\times\) Discount Rate
Discount = 5,00,000 \(\times\) 5%
Discount = 5,00,000 \(\times\) \(\frac{5}{100}\)
Discount = 25,000
This discount amount (25,000) is part of the total loss recorded.
Determining Premium on Redemption Amount
The journal entry shows a total debit to 'Loss on issue of debenture A/c' of 75,000. This loss is composed of:
- Discount on Issue of Debentures
- Premium on Redemption of Debentures
We can calculate the premium on redemption amount using the total loss:
Total Loss = Discount on Issue + Premium on Redemption
75,000 = 25,000 + Premium on Redemption
Premium on Redemption = 75,000 - 25,000
Premium on Redemption = 50,000
This calculated premium amount (50,000) matches the amount credited to the 'Premium on Redemption of Debenture A/c' in the journal entry, confirming our understanding.
Calculating the Rate of Premium on Redemption
The question asks for the *rate* of premium on redemption. We know the amount of premium and the face value of the debentures.
Face Value of Debentures = 5,00,000
Premium on Redemption Amount = 50,000
The formula to calculate the rate of premium on redemption is:
Rate of Premium on Redemption = \(\frac{\text{Premium on Redemption Amount}}{\text{Face Value of Debentures}} \times 100\)
Rate = \(\frac{50,000}{5,00,000} \times 100\)
Rate = \(\frac{1}{10} \times 100\)
Rate = 10%
Conclusion
Therefore, the rate of premium on redemption of debentures is 10%.
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 - 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? 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%.
