Question

On May $01$ Ltd issued $12\%,10,000$ convertible debentures of Rs$100$ each at a premium of $20\%$. Interest is payable on September $30$ and March $31$ every year. Assuming that the interest runs from the date of issue, the amount of interest expenditure debited to profit and loss account for the year ended March $31$ is ________.

• A. Rs$50,000$
• B. Rs$60,000$
• C. Rs$1,10,000$
• D. None of these

Answer 1

Answer: (C)

Rs$1,10,000$

Amount of Interest expenditure debited to profit & loss account for the year ended

= interest expense payable on 30 september + interest expense payable on 31 march

= 50000 (W.N.2a) + 60000(W.N.2b)

= 110000

Working notes(W.N.) :

1. Interest is calculated at coupon rate on nominal value periodically and as per given question: a. coupon rate= 12% b. nominal value of debenture= 10000 debenture * 100 = 1000000 c. period is half- yearly i.e. on every 30 september and 31 march
2. Interest expense will be calculated as below: a. on 30 september
   

• period for calculating interest= 01 may to 30 september = 5 months ( as given in the question interest will be calculated from the date of issue )
  
• Interest= 1000000*12/100*5/12= 50000
  
• Entry for interest due is as below: Debenture Interest A/c dr. 50000 To debenture holders A/c 50000 b. on 31st march
  
• period for calculating interest = 01 october to 31st march = 6 months

• Interest = 1000000*12/100*6/12 = 60000
  
• Entry for Interest due is as below- Debenture Interest A/c dr. 60000 To debenture holders A/c 60000 3. Entry of interest expenditure debited to profit & loss account for the year ended march 31 is as below: Profit & loss account dr. 110000 To debenture interest A/c 110000 (50000+60000)