Question

A company issued 10% debentures of the face value Rs. 1,20,000 at a discount of 6% on January 1, 2001. The debentures are payable by annual drawings of Rs.40,000 commencing from the end of third year.

How will you deal with discount on debentures?

Show the discount on debentures account in the company ledger for the period of duration of debentures. Assume accounts are closed on December 31.

Answer 1

$\text{Dr}\text{Discount on Issue of Debentures Account}\text{Cr}$
$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}\\ 2001& & & & 2001& & & \\ \text{Jan 1}& \text{10\% Debenture}& & 7,200& \text{Dec 31}& \text{Profit and Loss}& & 1,800\\ & & & & & \text{Balance c/d}& & 5,400\\ & & & \underset{–}{\overline{\underset{–}{7,200}}}& & & & \underset{–}{\overline{\underset{–}{7,200}}}\\ 2002& & & & 2002& & & \\ \text{Jan 1}& \text{Balance b/d}& & 5,400& \text{Dec 31}& \text{Profit and Loss}& & 1,800\\ & & & & & \text{Balance c/d}& & 3,600\\ & & & \underset{–}{\overline{\underset{–}{5,400}}}& & & & \underset{–}{\overline{\underset{–}{5,400}}}\\ 2003& & & & 2003& & & \\ \text{Jan 1}& \text{Balance b/d}& & 3,600& \text{Dec 31}& \text{Profit and Loss}& & 1,800\\ & & & & & \text{Balance c/d}& & 1,800\\ & & & \underset{–}{\overline{\underset{–}{3,600}}}& & & & \underset{–}{\overline{\underset{–}{3,600}}}\\ 2004& & & & 2004& & & \\ \text{Jan 1}& \text{Balance b/d}& & 1,800& \text{Dec 31}& \text{Profit and Loss}& & 1,200\\ & & & & & \text{Balance c/d}& & 600\\ & & & \underset{–}{\overline{\underset{–}{1,800}}}& & & & \underset{–}{\overline{\underset{–}{1,800}}}\\ 2005& & & & 2005& & & \\ \text{Jan 1}& \text{Balance b/d}& & 600& \text{Dec 31}& \text{Profit and Loss}& & 600\\ & & & \underset{–}{\overline{\underset{–}{600}}}& & & & \underset{–}{\overline{\underset{–}{600}}}\end{array}$

Working Note :

Amount of Discount on issue of Debenture = $1,20,000\times \frac{6}{100}=7,200$

$\begin{array}{cccc}\text{Year}& \text{Debenture Outstanding}& \text{Ratio}& \text{Amount Written of Every Year}\\ 2001& 1,20,000& 3& 7,200\times \frac{3}{12}=10,000\\ 2002& 1,20,000& 3& 7,200\times \frac{3}{12}=8,000\\ 2003& 1,20,000& 3& 7,200\times \frac{3}{12}=6,000\\ 2004& 80,000& 2& 7,200\times \frac{2}{12}=4,000\\ 2005& 40,000& 1& 7,200\times \frac{1}{12}=2,000\\ & & 12& \text{Rs.7,200}\end{array}$