X Ltd. issued 2,000, 10% debentures of Rs. 100 each at a discount of 8% on April 01, 2019 which are redeemable. It has balance in Securities Premium Reserve of Rs. 30,000. Calculate the amount to be written-off from securities Premium Reserve.
Amount to be written-off from Securities Premium Reserve: Rs. 16,000
Working Notes:
1. Calculation of Discount on Issue of Debentures: Number of Debentures issued = 2,000 Face Value per Debenture = Rs. 100 Discount Rate = 8%
Total Discount = 2,000 × Rs. /100 = Rs. 16,000
2. Comparison with Securities Premium Reserve Balance: Balance in Securities Premium Reserve = Rs. 30,000 Total Discount on Issue = Rs. 16,000
Since the balance in Securities Premium Reserve (Rs. 30,000) exceeds the discount amount (Rs. 16,000), the entire discount of Rs. 16,000 can be written-off from Securities Premium Reserve Account.
Journal Entry: Securities Premium Reserve A/c Dr. 16,000 To Discount on Issue of Debentures A/c 16,000 (Discount on issue of debentures written-off)
Explanation
This question tests the student's understanding of writing off discount on issue of debentures. As per the textbook example, when a company issues debentures at a discount, the discount amount is first calculated (Number of debentures × Face value × Discount rate). This discount is then written off from Securities Premium Reserve to the extent of available balance. If the Securities Premium Reserve balance is sufficient to cover the entire discount, the full amount is written off from it. In this case, Rs. 16,000 (discount) is less than Rs. 30,000 (available balance), so the entire discount is written off from Securities Premium Reserve.
Solution Steps
Step 1: Calculate total discount on issue of debentures = 2,000 × Rs. % = Rs. 16,000
Step 2: Compare discount (Rs. 16,000) with Securities Premium Reserve balance (Rs. 30,000)
Step 3: Since Securities Premium Reserve balance exceeds the discount, entire Rs. 16,000 is written off from Securities Premium Reserve