When debentures are issued at a premium and redeemed at a premium, the journal entry will have the following combination: (A) Discount on issue of debentures account is credited (B) Loss on issue of debentures account is debited (C) Security premium account is credited (D) Premium on redemption of debentures account is credited Choose the correct answer from the options given below:
(B), (C) and (D) only
Debenture Accounting: Issue and Redemption at Premium
Understanding the accounting treatment for debentures issued at a premium and redeemed at a premium is crucial. This scenario involves recognizing both the premium received at the time of issue and the premium payable at the time of redemption. The journal entry passed at the time of issuing such debentures needs to account for these aspects.
Let's break down the journal entry components when debentures are issued at a premium and are to be redeemed at a premium:
- When debentures are issued at a premium, the extra amount received over the face value is credited to the Security Premium Account.
- When debentures are to be redeemed at a premium, the extra amount payable over the face value at the time of redemption is a loss to the company. This future loss is recognized at the time of issue. This loss is debited to the Loss on Issue of Debentures Account.
- Corresponding to the loss recognized on issue, a liability is created for the premium amount that will be paid on redemption. This liability is credited to the Premium on Redemption of Debentures Account.
- The face value of the debentures is credited to the Debenture Account.
- The amount received from the applicants (face value + issue premium) is debited to the Bank Account.
The typical journal entry structure at the time of issue would be:
Bank Account Dr.
Loss on Issue of Debentures Account Dr.
To Debentures Account
To Security Premium Account
To Premium on Redemption of Debentures Account
Now let's analyze the given statements in the context of this journal entry:
- (A) Discount on issue of debentures account is credited: This statement is incorrect. Discount on issue of debentures is debited when debentures are issued at a discount. It is not relevant when debentures are issued at a premium.
- (B) Loss on issue of debentures account is debited: This statement is correct. When debentures are redeemed at a premium, a 'Loss on Issue of Debentures' account is debited at the time of issue to record the future liability/loss arising from the premium payable on redemption.
- (C) Security premium account is credited: This statement is correct. When debentures are issued at a premium, the 'Security Premium Account' is credited with the amount of premium received on issue.
- (D) Premium on redemption of debentures account is credited: This statement is correct. When debentures are redeemed at a premium, a 'Premium on Redemption of Debentures Account' is credited at the time of issue to represent the additional amount payable on redemption, which is a liability.
Based on this analysis, statements (B), (C), and (D) correctly describe components of the journal entry when debentures are issued at a premium and redeemed at a premium.
Revision Table: Debenture Journal Entries
| Scenario | Issue Journal Entry (Relevant Accounts) | Key Accounts Effected |
|---|---|---|
| Issued at Par, Redeemed at Par | Bank Dr., To Debentures A/c | Bank (Dr.), Debentures A/c (Cr.) |
| Issued at Premium, Redeemed at Par | Bank Dr., To Debentures A/c, To Security Premium A/c | Bank (Dr.), Debentures A/c (Cr.), Security Premium A/c (Cr.) |
| Issued at Discount, Redeemed at Par | Bank Dr., Discount on Issue of Debentures Dr., To Debentures A/c | Bank (Dr.), Discount on Issue of Debentures (Dr.), Debentures A/c (Cr.) |
| Issued at Par, Redeemed at Premium | Bank Dr., Loss on Issue of Debentures Dr., To Debentures A/c, To Premium on Redemption of Debentures A/c | Bank (Dr.), Loss on Issue of Debentures (Dr.), Debentures A/c (Cr.), Premium on Redemption of Debentures A/c (Cr.) |
| Issued at Premium, Redeemed at Premium | Bank Dr., Loss on Issue of Debentures Dr., To Debentures A/c, To Security Premium A/c, To Premium on Redemption of Debentures A/c | Bank (Dr.), Loss on Issue of Debentures (Dr.), Debentures A/c (Cr.), Security Premium A/c (Cr.), Premium on Redemption of Debentures A/c (Cr.) |
| Issued at Discount, Redeemed at Premium | Bank Dr., Loss on Issue of Debentures Dr. (includes discount + redemption premium), To Debentures A/c, To Premium on Redemption of Debentures A/c | Bank (Dr.), Loss on Issue of Debentures (Dr.), Debentures A/c (Cr.), Premium on Redemption of Debentures A/c (Cr.) |
Additional Information: Debenture Accounting Concepts
Debentures: These are instruments used by companies to borrow money. They represent a debt owed by the company to the debenture holder.
Issue at Premium: When a debenture is issued for a price higher than its face value. The excess amount is called security premium.
Redemption at Premium: When a company promises to repay debenture holders an amount higher than the face value upon maturity.
Loss on Issue of Debentures: This account reflects the total cost or loss associated with issuing debentures below par or redeeming them above par. It includes discount on issue and premium payable on redemption. This loss is typically written off over the life of the debentures.
Security Premium Reserve: A reserve account that holds the premium received on the issue of shares or debentures. It can be used for specific purposes as per the Companies Act, such as writing off preliminary expenses or discount/loss on issue of debentures.
Premium on Redemption of Debentures: This is a liability account representing the extra amount the company will have to pay to debenture holders at the time of redemption over and above the face value. It is shown on the liabilities side of the balance sheet.
Important Questions from Accounting for Debentures
Balance of Debenture Redemption Reserve A/c after the redemption of debenture is credited to:
Calculate the number of Debentures issued by A Ltd. for consideration other than cash:
‘Discount on issue of debenture’, which is to be written off under one operating cycle is shown under:
If the consideration for issue of Debentures is less than the amount of debentures issued, then the difference is:
When Debentures are issued at par and are redeemable at a premium, the Loss on such an issue is debited to:
