Page 165 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes (i) When the redemption of debentures is in lump sum after specified period: Equal Instalment
Method – When debentures are redeemable at the end of a specified period, total discount
on the issue of debentures is spread over the life of debentures equally.
For example, if total discount allowed is ` 15,000 and debentures are redeemable at the
end of fifteen years, total discount will be divided by 15 and the amount so arrived
15,000
(i.e. = 1,000) will be transferred to Profit and Loss account every year for 15
`
15
years. Thus at the end of 15 years, the total amount of discount will be eliminated from
books. This method is suitable only when debentures are redeemable at the expiry of a
specified period.
(ii) When redemption of debentures is made in instalments: Proportion Method – In such case,
the total amount of discount on issue of debentures should be written off in the proportion
to the benefit received from the money collected by the issue of debentures or outstanding
balance every year. The reason is simple: the years which enjoy the use of the larger
proportion of cash should bear the larger proportion of discount.

Note 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.

Accounting Treatment: When discount on issue of debentures is written off against the profits of
the company, the following journal entry is passed:
Profit and Loss Account Dr.
To Discount on Issue of Debentures Account.

Example 3: Debentures Discount – Proportion Method
Suresh Co. Ltd. issued 2,00,000; 15% Debentures of ` 100 each at 5% discount. These debentures
are redeemable in instalments of ` 40,00,000 every year. Open discount on issue of Debentures
Account in the books of Suresh Limited. The working note will be a part of the solution.

Solution:
Discount on Issue of Debentures Account
Year Particulars (`) Year Particulars (`)
To 15% Debentures Account 10,00,000 By P&L Account 3,33,333
By Balance c/d 6,66,667
10,00,000 10,00,000
To Balance b/d 6,66,667 By P&L Account 2,66,667
By Balance c/d 4,00,000
6,66,667 6,66,667
To Balance b/d 4,00,000 By P&L Account 2,00,000
By Balance c/d 2,00,000
4,00,000 4,00,000
To Balance b/d 2,00,000 By P&L Account 1,33,333
Contd...
By Balance c/d 66,667
2,00,000 2,00,000
To Balance b/d 66,667 By P&L Account 66,667

158 LOVELY PROFESSIONAL UNIVERSITY
66,667 66,667