Question

B Ltd. issued debentures at 94% for Rs.4,00,000 on April 1, 2000 repayable by five equal drawings of Rs. 80,000 each. The company prepares its final accounts on December 31 every year

Indicate the amount of discount to be written-off every accounting year assuming that the company decides to write off the debentures discount during the life of debentures. (Amount to be written-off ; 2000- Rs. 6,000; 2001- Rs. 6,800; 2002 - Rs.5,200; 2003- Rs.3,600; 2004- Rs. 2,000, 2005- Rs. 400)

Answer 1

Debentures face value = 100%

Debentures issued = 94%

Therefore Discount on issue = 6%

Amount of Discount on issue of Debenture = $4,00,000\times \frac{6}{100}$ = 24,000

Amount of Discount to written off every year

In 2000 = Rs.6,000

In 2001 = 2,000 + 4,800 = Rs.6,800

In 2002 = 1,600 + 3,600 = Rs.5,200

In 2003 = 1,200 + 2,400 = Rs.3,600

In 2004 = 800 + 1,200 = Rs.2,000

In 2005 = Rs.400

Working Note :

(i) Amount of discount to be written off every year

$\begin{array}{cccccc}\text{Year}& \text{Debenture}& \text{Ratio}& \text{Months}& \text{New Ratio}& \text{Amount Written of}\\ & \text{Outstanding}& & & \text{Ratio times Months}& \\ 2000& & & & & \\ \text{Apr-Dec}& 4,00,000& 5& 9& 45& 24,000\times \frac{45}{180}=6,000\\ 2001& & & & & \\ \text{Jan-Mar}& 4,00,000& 5& 3& 15& 24,000\times \frac{15}{180}=2,000\\ \text{Apr-Dec}& 3,20,000& 4& 9& 36& 24,000\times \frac{36}{180}=4,800\\ 2002& & & & & \\ \text{Jan-Mar}& 3,20,000& 4& 3& 12& 24,000\times \frac{12}{180}=1,600\\ \text{Apr-Dec}& 2,40,000& 3& 9& 27& 24,000\times \frac{27}{180}=3,600\\ 2003& & & & & \\ \text{Jan- Mar}& 2,40,000& 3& 3& 9& 24,000\times \frac{9}{180}=1,200\\ \text{Apr-Dec}& 1,60,000& 2& 9& 18& 24,000\times \frac{18}{180}=2,400\\ 2004& & & & & \\ \text{Jan- Mar}& 1,60,000& 2& 3& 6& 24,000\times \frac{6}{180}=800\\ \text{Apr-Dec}& 80,000& 1& 9& 9& 24,000\times \frac{9}{180}=1,200\\ 2005& & & & & \\ \text{Jan-Dec}& 80,000& 1& 3& 3& 24,000\times \frac{3}{180}=400\\ & & & & 180& 24,000\end{array}$