Amortization of Discount on Debentures (Writing of Loss on Issue of Debentures)

  

Amortization of Discount on Debentures

Business organization issues debentures but government and semi government issues bonds.

Debentures and bonds are long-term loan.

Company pays interest on debentures regularly to debenture holders upto maturity period.

When a limited company or corporation issues debentures at discount or redemptions these debentures at premium, it is known as discount or loss on issue of debentures.

This is capital loss; generally, capital loss is not charged to profit and loss account in a single year.

Company amortizes or writes off discount or loss on debenture during certain period.

 

First method

In this method, company writes off the total amount of discount or loss on debenture over the life of debentures equally.

Suppose there is loss on issue of debentures; and these debentures to be redeemed after five years.

This discount amount will be divided by five.

This amount will be charged to profit and loss account for five years.

Company follows this method where debentures are redeemed at the end of a specified period

 

Second method

In this method, company writes off discount or loss on debenture in every year in proportion to the amount of debentures used every year.

Company follows this method where debentures are redeemed by draw a lot in every year.

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =  

PROBLEM: 16

Dabur Nepal Ltd issued 40,000; 8% debentures of Rs 100 each at Rs 90 on 1^st January 2016. The maturity period of these debentures are 4 years. These debentures are redeemable at 10% premium. There is not any arrears of interest.

Required:

(1) Journal entry for issue of debentures with redeemable condition

(2) Loss on issue of debentures account:  

(a) If company redeemed debentures on installment 1,000 debentures per year (Rs 10,00,000 per years)

(b) If company redeemed entire debentures at the end of maturity period.

[Answer: Loss on issue of debenture Rs 8,00,000]

SOLUTION

Journal Entry

Date	Particulars		LF	Amount Dr	Amount Cr
	Bank account Loss on issue of debentures account           To 8% Debentures  account           To Premium on redemption of debentures account   Being- 40,000; 8% debentures of Rs 100 each issued  at 10% discount, redeemable at 10% premium)	Dr Dr		36,00,000 8,00,000	40,00,000 4,00,000

 

2 (a) If company redeemed debentures on installment 1,000 debentures per year (Rs 10,00,000 per years)

Loss on Issue of Debentures Account

In the book of Dabur Nepal Ltd

Date	Particulars	Amount	Date	Particulars	Amount
2016			2016
Jan, 1	To 8% Debentures Account	800,000	Dec, 31 Dec, 31	By Profit and Loss Account By Balance c/d	320,000 480,000
		800,000			800,000
2017			2017
Jan, 1	To Balance b/d	480,000	Dec, 31 Dec, 31	By Profit and Loss Account By Balance c/d	240,000 240,000
		480,000			480,000
2018			2018
Jan, 1	To Balance b/d	240,000	Dec, 31 Dec, 31	By Profit and Loss Account By Balance c/d	160,000 80,000
		240,000	.		240,000
2019		–	2019		–
Jan, 1	To Balance b/d	80,000	Dec, 31	By Profit and Loss Account	80,000
		80,000			80,000

 

Given and working note:

Year	Outstanding Debentures	Ratio	Loss written off
2016 2017 2018 2019	40,00,000 30,00,000 20,00,000 10,00,000	4 3 2 1	8,00,000 x 4/10  = 320,000 8,00,000 x 3/10  = 240,000 8,00,000 x 2/10  = 160,000 8,00,000 x 1/10  =   80,000
Total		10	800,000

 

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2 (b) If company redeemed entire debentures at the end of maturity period.

Loss on Issue of Debentures Account

In the book of Dabur Nepal Ltd

Date	Particulars	Amount	Date	Particulars	Amount
2016			2016
Jan, 1	To 8% Debentures Account	800,000	Dec, 31 Dec, 31	By Profit and Loss Account By Balance c/d	200,000 600,000
		800,000			800,000
2017			2017
Jan, 1	To Balance b/d	600,000	Dec, 31 Dec, 31	By Profit and Loss Account By Balance c/d	200,000 400,000
		600,000			600,000
2018			2018
Jan, 1	To Balance b/d	400,000	Dec, 31 Dec, 31	By Profit and Loss Account By Balance c/d	200,000 200,000
		400,000	.		400,000
2019		–	2019		–
Jan, 1	To Balance b/d	200,000	Dec, 31	By Profit and Loss Account	200,000
		200,000			200,000

 

Given and working note:

Year	Outstanding Debentures	Ratio	Loss written off
2016 2017 2018 2019	40,00,000 40,00,000 40,00,000 40,00,000	4 4 4 4	8,00,000 x 4/16 8,00,000 x 4/16 8,00,000 x 4/16 8,00,000 x 4/16	= 200,000 = 200,000 = 200,000 = 200,000
Total		16	800,000

 

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PROBLEMS   AND   ANSWERS

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

AP: 12

DG Company Ltd issued 8% Debentures of the par value of $/₹/Rs 10,00,000 at a discount of 6% on 1^st January 2015. The debentures were repayable by annual drawings of Rs 200,000.

Required: (a) Journal entry at the time of issue

(b) Show discount account in the company’s ledger for the period of duration of debentures.

 [Answer: Loss on issue of debenture Rs 60,000]

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