Loss on Issue of Debentures Part 5

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Company may issue debentures with the stipulation that the repayment of the debentures on maturity will be made at premium. The amount of the premium payable is debited to Loss on Issue of Debentures A/c at the time of issue of debentures. Then the amount of loss will be written off in the following manner –

When All Debentures Are Redeemed After Fixed Period

Journal Entry for Amount of Loss on issue of debentures written off each year

Profit and Loss A/c Dr.

To Loss on Issue of Debentures A/c

When Debentures Are Redeemed in Installments

Over a fixed period of time debentures loss amount can be written off in installments and the written off amount will be in proportion to the amount of debentures redeemed

Example: A company issues 1000 10% Debentures of Rs 1000 each on 1st Jan, 2006 payable at a premium of 10% after 5 years. Make journal entries and open Loss on Issue of Debentures A/c for the year ending 31st December 2006.

Solution:

Amount of Loss on issue of Debentures = = 1,00,000

Calculation of amount to be written off every year:

Table of Calculation of Amount to Be Written off Every Year
Title: Table of Calculation of amount to be written off every year

Year End

Amount outstanding

Ratio

Amount to be written off every year

1st

2nd

3rd

4th

5th

100000

66667

40000

20000

6667

5

4

3

2

1

100000×5/15 = 33333

100000×4/15 = 26667

100000×3/15 = 20000

100000×2/15 = 13333

100000×1/15 = 6667

Journal Entry:

2006 Profit and Loss A/c Dr. 33333

Dec 31 To Loss on Issue of Debentures A/c 33333

(Amount of Loss on Issue of Debentures written of for year 2006)

Note: Journal entries will be passed same as above for all 5 years.

Interest on Debentures:

Generally advertisement of Debentures comes with percentage of interest ex. Issue of 9% Debentures. 9% denotes the rate of interest per annum given by the company either annually or semi-annual basis.

Journal Entries:

Table of Journal Entries Payment of Interest on Debentures & Transfer of Debenture Interest to P&L a/C:
Title: Table of Journal Entries Payment of interest on debentures & Transfer of Debenture interest to P&L A/c:

Payment of interest on debentures:

Debenture Interest A/c Dr.

To Bank A/c

(Interest on …% Debentures paid semi-annually @...% per annum)

Transfer of Debenture interest to P&L A/c:

Profit and Loss A/c Dr.

To Debenture Interest A/c

(Debenture Interest transferred to Profit and Loss A/c)

Example: X Ltd has issued 5000 9% Debentures of Rs 1000 each, on 1st April, 2006 Interest is payable after every six months. Make journal entries for the interest paid for the first six months after the date of issue.

Solution:

Calculation of Interest payable at six monthly intervals:

Amount of Debentures = 5000 × Rs 1000 = Rs 5000000

Interest payable at six monthly intervals =

= = 2,25,000

Journal Entry:

Table of Make Journal Entries
Title: Table of Make Journal Entries

S. No

Particulars

L.F

Amount (Rs.)

Dr.

Cr.

2006

30th Sept.

Debentures Interest A/c Dr.

To Bank A/c

(Interest on 5000 9% Debentures @ Rs 1000 per debenture paid for 6 months ending 30th Sept 2006)

225000

225000

2007

31st Mar.

Profit and Loss A/c Dr

To Debentures Interest A/c

(Debenture Interest transferred to profit and Loss A/c)

225000

225000

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