Page 161 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 5. When debentures are issued at discount and redeemable at premium.
Bank Account Dr. (with amount received)
Discount on Debentures Account Dr. (discount allowed)
Loss on issue of Debentures Account Dr. (premium on redemption)
To Debentures Account (face value of debentures)

To Premium on Redemption of Debentures Account (premium payable on redemption)
Alternatively, discount in issue of debentures and premium payable on redemption are
the loses of the company. Therefore, a combined account for these two losses can be made.
Then entry will be:
Bank Account Dr. (amount received)
Loss on Issue of Debentures Account Dr. (discount allowed and premium
on redemption)
To Debentures Account (false value of debentures)
To Premium on Redemption of Debentures Account
(premium payable on redemption)
It is to be noted that “premium on redemption of debentures account” is a personal account,
because it is the liability of the company to pay the Debenture-holder at a premium as per the
condition of redemption. This account will continue to appear in the liability side of the balance
sheet until redemption of debentures is made. At the time of redemption, this account will be
transferred to Debenture-holders.
The ‘loss on issue of debentures account’ is a nominal account. This is due to the promise made
by the company to pay more amount (premium) at the time of redemption of debentures. This
is a capital loss, tantamount to gradually writing off every year, during the life of the debentures.
The unwritten off portion of this loss appears in the assets side in the balance sheet of the
company under the head ‘Miscellaneous Expenditure’.

Note Debentures can be issued at par, at premium, or at discount, but redemption will
be either at par or at premium.

Example 1: Issue of Debentures in Different Conditions of Redemption
Pass the necessary journal entries in the books of B Ltd. in the following cases:

(i) 2,000, 7% Debentures of 100 each have been issued at par and are redeemable at par.
(ii) 2,000, 7% Debentures of 100 each have been issued at par and are redeemable at 4%
premium.

(iii) 2,000, 7% Debentures of 100 each have been issued at 5% discount and are redeemable at
par.
(iv) 2,000, 7% Debentures of 100 each are issued at 5% discount and are redeemable at 2.5%
premium.
(v) 2,000, 7% Debentures of 100 each are issued at 4% premium and are redeemable at par.
(B.Com., Garhwal University, 1998)

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