On 1st April, 2024, Dina Ltd. issued 8,000, 9% debentures of Rs. 100 each at a discount of 6%. The total amount of interest due on debentures for the year ended 31st March, 2025 will be :

Q: On 1st April, 2024, Dina Ltd. issued 8,000, 9% debentures of Rs. 100 each at a discount of 6%. The total amount of interest due on debentures for the year ended 31st March, 2025 will be :

**Correct option: (B) Rs. 72,000** Interest on debentures is always calculated on the **face (nominal) value**, not the issue price. Face value of debentures = $8,000 \times \text{Rs. }100 = \text{Rs. }8,00,000$. Interest @ 9% p.a. for one full year = $\text{Rs. }8,00,000 \times 9\%$ = **Rs. 72,000**.

Issue and Redemption of Debentures

Interest on Debentures

Options

(A)Rs. 48,000

(B)Rs. 72,000

(C)Rs. 1,20,000

(D)Rs. 80,000

Official Answer

Correct option: (B) Rs. 72,000

Interest on debentures is always calculated on the face (nominal) value, not the issue price. Face value of debentures = $8,000 \times \text{Rs. }100 = \text{Rs. }8,00,000$ . Interest @ 9% p.a. for one full year = $\text{Rs. }8,00,000 \times 9\%$ = Rs. 72,000.

debenturesinterest on debenturesface valueissue at discount9% debenturesfixed income liability

Marking Scheme

11 mark for correctly identifying that interest is calculated on face value (Rs. 8,00,000) and not on the discounted issue price, arriving at Rs. 72,000 (option B).

Hint

Debenture interest is always computed on face value — the issue price (at discount or premium) never affects it.

Quick Oral Answer

Interest on debentures is always calculated on the face value of the debentures at the stated coupon rate, irrespective of the price at which they were actually issued.

Analysis & Explanation

Concept

Debenture interest is a contractual fixed obligation payable on the nominal (face) value of the debentures, regardless of whether the debentures were issued at par, premium or discount.

Working

Number of debentures = 8,000; Face value each = Rs. 100 → Total face value = Rs. 8,00,000
Rate of interest = 9% p.a.; Period = full year (1st April 2024 to 31st March 2025)
Interest = $\text{Rs. }8,00,000 \times 9\% \times 1$ = Rs. 72,000

The 6% issue discount only affects the amount actually received by the company (Rs. 7,52,000) and is written off as a loss on issue of debentures; it never changes the interest liability.

Why other options are wrong

(A) Rs. 48,000 wrongly uses only 6% (the discount rate) instead of the 9% interest rate.
(C) Rs. 1,20,000 does not correspond to any correct combination of the given figures.
(D) Rs. 80,000 incorrectly applies interest on an issue-price-adjusted figure rather than the face value.

Common Mistakes

1Calculating interest on the net amount received (after discount) instead of on the face value of the debentures.
2Confusing the discount percentage (6%) with the interest rate (9%) while computing the interest figure.
3Forgetting that interest accrues for the full accounting year when debentures are issued on 1st April.

Interesting Facts

Debenture interest is a tax-deductible expense for the issuing company under the Income Tax Act, unlike dividends on shares, which is one reason companies often prefer debt financing.

Under Section 71 of the Companies Act, 2013, a company cannot issue debentures carrying voting rights, which is why debenture holders are only entitled to fixed interest, not profit-linked returns.

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Frequently Asked Questions

Is debenture interest calculated on face value or issue price?

Always on the face (nominal) value of the debentures, regardless of whether they were issued at par, premium, or discount.

Does discount on issue of debentures affect the interest expense?

No. The discount is written off separately as a loss on issue of debentures (through Securities Premium or Statement of Profit and Loss); it does not change the annual interest liability.