Question

How would you deal with ‘Premium on Redemption of Debentures?

Answer 1

Debentures which are redeemed for a price which is more than its par value or nominal value is known as debentures redeemed at premium. The difference between the par value (face value) and the price at which it is redeemed is known as capital loss and this will be written off till debentures are redeemed. It is shown on the liabilities part of balance sheet till debentures are redeemed. The accounting treatment can be represented as:

At the time of the Issue of Debentures

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& L.F& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Bank/Debenture Allotment A/c}Dr& & & \\ & \text{Loss on Issue of Debenture A/c}Dr& & & \\ & \text{To Debentures A/c}& & & \\ & \text{To Premium on Redemption of Debenture A/c}& & & \\ & \text{(Debenture are issued with the term of}& & & \\ & \text{redeemable at premium)}& & & \end{array}$

For Loss Written off

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& L.F& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Profit and Loss A/c}Dr& & & \\ & \text{To Loss on Issue of Debenture A/c}& & & \\ & \text{(Loss on issued of debenture written off)}& & & \end{array}$

At the time of Redemption of Debentures

$$\begin{array}{ccccc}\text{Date}& \text{Particulars}& L.F& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Debentures A/c}Dr& & & \\ & \text{Premium on Redemption A/c}Dr& & & \\ & \text{To Debentures Holders A/c}& & & \\ & \text{(Amount of debenture due to debenture}& & & \\ & \text{holders)}& & & \end{array}$$