Page 170 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 7: Debentures: Conditions of Issue of Debentures from Redemption Point of View

7.4 Interest on Debentures Notes

When a company issues the debentures, it is necessary to pay interest on debentures at a fixed
percentage (which is prefixed to debentures) periodically (generally half yearly) until the
debentures are redeemed. Interest on debentures is a charge against the profits of the company
and is payable irrespective of the fact whether there is profit or not. Interest is calculated at a
fixed rate on the face value of debentures and not on issued price. Thus, issues of debentures at
par, at a discount, or at a premium will not make any difference in the calculation of interest
payable on debentures. In certain cases, Income Tax Act, 1961 has instructed that a company has
to deduct income-tax at a prescribed rate from the gross amount of interest on debentures. The
amount of tax so deducted from the gross interest is to be deposited into a government account
within a prescribed time.

Note When a company issues the debentures, it is necessary to pay interest on debentures
at a fixed percentage (which is prefixed to debentures) periodically (generally half yearly)
until the debentures are redeemed.

Accounting Treatment: Regarding the interest of on debentures, the following entries are recorded
in the books of the company:
1. When interest on debentures is due:
Debentures Interest Account Dr. (Total interest)

To Debenture-holders account (Net amount)
To Income tax payable account (Tax deducted from interest)

2. When amount of interest is paid to debentures:
Debenture-holders Account Dr.
To Bank Account.

3. When income tax is deposited to government account:
Income tax payable Account Dr.
To Bank Account.

7.5 Some Points to be Noted Regarding Interest on Debentures

1. Interest is not paid on debentures issued as collateral securities.
2. If income tax deducted from interest on debentures is not paid to government, it will be
shown in the liability side of balance sheet.
3. Interest on debentures for the full year is transferred to profit and loss account at the end
of accounting year.
4. If interest is accrued but not paid, it will be shown in the liabilities side of the balance
sheet.

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