Question

A company issued debentures of the face value of Rs. 5,00,000 at a discount of 6% on January 1, 2001. These debentures are redeemable by annual drawings of Rs.1,00,000 made on December 31st each year. The directors decided to write off discount based on the debentures outstanding each year.

Calculate the amount of discount to be written-off each year. Give journal entries also.

Answer 1

$\text{Journal Entries}$
$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}\\ 2001& & & & & \\ \text{Jan 1}& \text{Bank A/c}& \text{Dr}& & 4,70,000& \\ & \text{To Debentures Application and Allotment A/c}& & & & 4,70,000\\ & \text{(Being debentures application money received)}& & & & \\ & \underset{–}{}& & & & \\ \text{Jan 1}& \text{Debentures Application and Allotment A/c}& \text{Dr}& & 4,70,000& \\ & \text{Discount on issue of Debenture A/c}& \text{Dr}& & 30,000& \\ & \text{To Debenture A/c}& & & & 5,00,000\\ & \text{(Being debentures application money transferred}& & & & \\ & \text{to debenture account)}& & & & \end{array}$

Amount of Discount on issue of Debenture = $5,00,000\times \frac{6}{100}=30,000$

$\begin{array}{cccc}\text{Year}& \text{Debenture Outstanding}& \text{Ratio}& \text{Amount Written of Every Year}\\ 2001& 5,00,000& 5& 30,000\times \frac{5}{15}=10,000\\ 2002& 4,00,000& 4& 30,000\times \frac{4}{15}=8,000\\ 2003& 3,00,000& 3& 30,000\times \frac{3}{15}=6,000\\ 2004& 2,00,000& 2& 30,000\times \frac{2}{15}=4,000\\ 2005& 1,00,000& 1& 30,000\times \frac{1}{15}=2,000\\ & & 15& \text{Rs.30,000}\end{array}$

$\text{Journal Entries}$
$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}\\ 2001& & & & & \\ \text{Dec 31}& \text{Profit and Loss A/c}& \text{Dr}& & 10,000& \\ & \text{To Discount on Issue of Debentures A/c}& & & & 10,000\\ & \text{(Being discount on issue of debentures written off)}& & & & \\ & \underset{–}{}& & & & \\ 2002& & & & & \\ \text{Dec 31}& \text{Profit and Loss A/c}& \text{Dr}& & 8,000& \\ & \text{To Discount on Issue of Debentures A/c}& & & & 8,000\\ & \text{(Being discount on issue of debentures written off)}& & & & \\ & \underset{–}{}& & & & \\ 2003& & & & & \\ \text{Dec 31}& \text{Profit and Loss A/c}& \text{Dr}& & 6,000& \\ & \text{To Discount on Issue of Debentures A/c}& & & & 6,000\\ & \text{(Being discount on issue of debentures written off)}& & & & \\ & \underset{–}{}& & & & \\ 2004& & & & & \\ \text{Dec 31}& \text{Profit and Loss A/c}& \text{Dr}& & 4,000& \\ & \text{To Discount on Issue of Debentures A/c}& & & & 4,000\\ & \text{(Being discount on issue of debentures written off)}& & & & \\ & \underset{–}{}& & & & \\ 2005& & & & & \\ \text{Dec 31}& \text{Profit and Loss A/c}& \text{Dr}& & 2,000& \\ & \text{To Discount on Issue of Debentures A/c}& & & & 2,000\\ & \text{(Being discount on issue of debentures written off)}& & & & \end{array}$