Question

If face value of debentures is more than issue price, then the debentures are said to be issued at a _________.

• A. Premium
• B. Discount
• C. Par
• D. None of above

Answer 1

The correct option is B Discount

Issue of Debentures at Discount:

When debentures are issued by company at a price less than its nominal value (face value) it is said to be issued at discount. It is important to note that the Companies Act has not put any restriction on the maximum limit of discount. For example, if a debenture of Rs. 1,000 is offered to public at Rs. 950, it is issue at a discount. Here Rs. 50 on each debenture is loss to the company. As a principle of equity, it is desirable to write off this loss.

Disclosure of Discount in Balance Sheet:

It is a capital loss and until it is written off-completely, it is shown on the asset side of balance sheet, under the heading ‘Miscellaneous Expenditure’, as a fictitious asset. Discount on issue of debentures account is supposed to be allowed on allotment, unless, otherwise, mentioned.

Accounting Treatment:

The requisite entries to be passed are as follows:

(a) When allotment money becomes due

Debenture allotment a/c

Discount on issue of debenture a/c

To Debentures a/c

(b) When allotment money is received

Bank a/c

To Debenture allotment a/c

(c) To Write off Discount

Profit & Loss A/c

To Discount on Issue of Debenture A/c.