Loading....
Coupon Accepted Successfully!

 

Treatment of Discount On Issue of Debentures

The discount on issue of debentures is amortized over a period between the issuance date and redemption date.

Q.6  HDC Ltd. issues 10,000. 12% debentures of Rs. 100 each at Rs. 94 on 1st January, 2006. Under the terms of issue, the debentures are redeemable at the end of 8 years from the date Lumsum of the issue. Calculate the amount of discount to be written-off in each of the 8 years.

Q.7  HDC Ltd. issues 10,000. 12% debentures of Rs. 100 each at Rs. 94 on 1st January, 2006. Under the terms of issue, 1/5th of the debentures are annually redeemable by drawings, the first redemption occurring on 31st December, 2006. Calculate the amount of discount to be written off in 2006 to 2010.


Interest On Debentures

Following accounting entries are to be recorded in this regard:

1.          For making interest due

Interest A/c

Dr.

 

To debenture holders A/c

 

To TDS Payable

 

2.          For making payment of interest

Debenture holders A/c

Dr.

To Bank A/c

 

 

3.          For making payment of tax deducted at source

TDS payable A/c

Dr.

To Bank A/c

 

 

4.          For transferring interest to profit and loss account

Profit and loss A/c

Dr.

To Interest A/c

 


Solved Example:

Q.8  A company issued 12% debentures of the face value of Rs. 2,00,000 at 10% discount on 1.1.2005. Debenture interest after deducting tax at source @ 10% was payable on 30th June and 31st of December every year. All the debentures were to be redeemed after the expiry of five year period at 5% premium

Pass journal entries for the accounting year 2005.

Solution :

Date

Journal

 

Dr. (Rs.)

Cr. (Rs.)

1.1.2005

Bank A/c

Debenture discount A/c

Loss on issue of debentures A/c

     To 12% debentures A/c

     To premium on redemption of debentures A/c

(For issue of debentures at discount redeemable at premium)

Dr.

Dr.

Dr.

1,80,000

20,000

10,000

 

 

 

2,00,000

10,000

30.6.2005

Debenture Interest A/c

     To Debentureholders A/c

     To Tax deducted at source A/c

(For interest payable)

Dr.

12,000

 

10,800

1,200

Debentureholders A/c

Tax deducted at source A/c

        To bank A/c

(For payment of interest and TDS)

Dr.

Dr.

10,800

1,200

 

 

12,000

31.12.2005

Debenture interest A/c

   To Debentureholders A/c

   To tax deducted at source A/c

(For interest payable)

Dr.

12,000

 

10,800

1,200

Debentureholders A/c

Tax deducted at source A/c

        To bank A/c

(For payment of interest and tax)

Dr.

Dr.

10,800

1,200

 

 

12,000

Profit and Loss A/c

        To Debenture Interest A/c

(For transfer of debenture interest to profit and loss account)

Dr.

24,000

 

24,000

Profit and Loss A/c

 To Debenture Discount A/c

(For proportionate debenture discount written off, i.e. 20,000 ´ 1/5)

Dr.

4,000

 

4,000

Profit and Loss A/c

To loss on issue of debenture A/c

(For proportionate loss on issue written off, i.e. 1/5 ´ 10,000)

Dr.

2,000

 

2,000

It may be noted that loss on issue of debenture is also written off in the ratio of debentures outstanding during different accounting years.

Q.9. Difference between Share and Debenture.

Ans. The followingare the points of differences between share and a debenture:

Basis of difference

Share

Debenture

1.  Statues

Sharehol­ders are the owners of the com­pany.

Debenture holders are the creditors of the company. 

2.  Return

Return on shares is known as dividend.

Return on dentures is known as interest.

3.  Regularity of returns

The rate of dividend is not fixed in the case of equity shares. Divi­dend will depend upon the pro­fits and the dividend policy of the company.

Interest on debentures are fixed and is to be paid whether there are profits or not.

4.  Security

Shares are not secured.

Debentures are generally secured by a fixed or floating charge.

5.  Right to attend General Meeting

A Shareholder enjoys voting rights and right to attend general meetings thereby participates in the management of the company.

Debenture holders cannot attend at vote in general meeting unless any decision relating to their interest is taken. (Sec.117)

6.  Redemption

Normally share cannot be redeemed during the life time of the company except preference shares which can be redeemed.

Debentures has to be redeemed after a fixed period of time as per the conditions of issue.

7.  Priority in the return of principal

At the time of winding up share capital is returned after payment of debentures.

Debentures are redeemed prior to the share capital of the company at winding up.

8.  Restriction on issue at discount.

Shares can be issued at discount only when the conditions laid down in Sec.79 of the companies Act are fulfilled

There are no conditions on the issue of debentures at discount.

9.  Conditions on Re-purchase

A company can buy back its own shares only after fulfilling the conditions U/S 77.

There is no condition on the company for buy back of its own debentures.

10.     Convertibility

Shares cannot be converted into debentures.

Debentures can be converted into shares.






Test Your Skills Now!
Take a Quiz now
Reviewer Name