On 1st April, 2024 Bhumika Ltd. issued 500, 9% debentures of Rs. 500 each at a discount of 10% redeemable at a premium of 6% after five years. On 31st March, 2025 the company had a balance of Rs. 30,000 in its Securities Premium Account.
Pass necessary journal entries for issue of 9% Debentures and writing off Loss on issue of Debentures. Also prepare 'Loss on Issue of Debentures Account'.
On 1st April, 2024 Bhumika Ltd. issued 500, 9% debentures of Rs. 500 each at a discount of 10% redeemable at a premium of 6% after five years. On 31st March, 2025 the company had a balance of Rs. 30,000 in its Securities Premium Account.
Pass necessary journal entries for issue of 9% Debentures and writing off Loss on issue of Debentures. Also prepare 'Loss on Issue of Debentures Account'.
Working:
- Face value of debentures = 500 × Rs. 500 = Rs. 2,50,000
- Discount on issue (10%) = Rs. 25,000
- Premium on redemption (6%) = Rs. 15,000
- Loss on Issue of Debentures = Rs. 25,000 + Rs. 15,000 = Rs. 40,000
- Available Securities Premium balance = Rs. 30,000 (write off loss first from this, balance Rs. 10,000 from Statement of Profit and Loss)
Journal Entries
| Particulars | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|
| Bank A/c Dr. | 2,25,000 | |
| To Debenture Application and Allotment A/c | 2,25,000 | |
| (Being application money received on 500, 9% debentures @ Rs. 450 each, i.e. at 10% discount) | ||
| Debenture Application and Allotment A/c Dr. | 2,25,000 | |
| Loss on Issue of Debentures A/c Dr. | 40,000 | |
| To 9% Debentures A/c | 2,50,000 | |
| To Premium on Redemption of Debentures A/c | 15,000 | |
| (Being debentures allotted at 10% discount, redeemable at 6% premium) | ||
| Securities Premium A/c Dr. | 30,000 | |
| Statement of Profit and Loss Dr. | 10,000 | |
| To Loss on Issue of Debentures A/c | 40,000 | |
| (Being loss on issue of debentures written off, first against Securities Premium then against Statement of Profit and Loss) |
Loss on Issue of Debentures Account
| Dr. | Amount (Rs.) | Cr. | Amount (Rs.) |
|---|---|---|---|
| To 9% Debentures A/c (Discount) | 25,000 | By Securities Premium A/c | 30,000 |
| To Premium on Redemption of Debentures A/c | 15,000 | By Statement of Profit and Loss | 10,000 |
| Total | 40,000 | Total | 40,000 |
Marking Scheme
- 11 mark: correct discount on issue (Rs. 25,000) and premium on redemption (Rs. 15,000), total loss Rs. 40,000.
- 21.5 marks: correct journal entries for application, allotment and debentures issue with loss on issue debited.
- 31 mark: correct entry writing off loss on issue first against Securities Premium (Rs. 30,000) then Statement of Profit and Loss (Rs. 10,000).
- 40.5 mark: correctly balanced Loss on Issue of Debentures Account.
Hint
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption; write it off first against Securities Premium, then against the Statement of Profit and Loss.
Quick Oral Answer
The total loss on issue of debentures (discount plus premium on redemption) is written off first against any available Securities Premium balance, and the remaining shortfall is charged to the Statement of Profit and Loss in the year of issue.
Analysis & Explanation
This tests the combined treatment of discount-on-issue and premium-on-redemption as a single 'loss on issue' item.
Concept: Both the discount given at issue and the premium promised at redemption are losses to the company, and both are recognised at the time of issue itself, since the redemption premium liability becomes certain immediately.
Key rule: As per current Companies Act treatment, this loss must be written off in the year of issue — first against any available Securities Premium balance, and only the shortfall against the Statement of Profit and Loss.
Exam trap: Students often forget to utilise the Securities Premium balance first, charging the entire loss to the Statement of Profit and Loss directly.
Real-world use: Companies frequently issue debentures at a discount to make them attractive to investors while promising a redemption premium as an added incentive.
Common Mistakes
- 1Treating discount on issue and premium on redemption as two separate losses instead of combining both into a single 'Loss on Issue of Debentures' figure of Rs. 40,000.
- 2Writing off the entire loss against the Statement of Profit and Loss without first utilising the available Securities Premium balance.
- 3Crediting Premium on Redemption of Debentures at the time of actual redemption instead of at the time of issue itself, when the obligation becomes certain.
Interesting Facts
Since the Companies (Share Capital and Debentures) Rules, 2014, discount/loss on issue of debentures is no longer shown as a fictitious asset on the Balance Sheet — it must be written off in the same year it arises.
Premium payable on redemption of debentures is recognised as a liability at the time of ISSUE itself, not at redemption, since the obligation becomes certain the moment the debentures are issued on those terms.
Debentures are one of the few financial instruments a company can legally issue below their face value — equity shares generally cannot be issued at a discount under the Companies Act, 2013.
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Frequently Asked Questions
Why is Premium on Redemption of Debentures credited at the time of issue itself?
Because the liability to pay the premium on redemption becomes certain as soon as the debentures are issued on those terms, so it must be recognised immediately, not deferred until actual redemption.
In what order is Loss on Issue of Debentures written off?
It is first written off against any existing balance in the Securities Premium Account, and only the remaining balance (if insufficient) is charged to the Statement of Profit and Loss.
Is discount on issue of debentures shown as an asset in the Balance Sheet?
No. As per current Companies Act rules, discount/loss on issue of debentures must be written off in the year it is incurred and is not carried forward as a fictitious asset.