Question 12 of 85advanced🔧 ApplyNumerical6 marks

Z Ltd. issued 5,000,10% debentures of Rs. 100 each at a discount of 10% on 1.4.2019. The debentures are to be redeemed every year by draw of lots – 1,000 debentures to be redeemed every year starting on 31.03.2021. Record the necessary journal entries including the payment of interest and writing off the discount on issue of debentures. The interest is payable on September 30 and March 31. Z Ltd. closes its books of accounts on March 31 every year.

Correct Answer

Working Notes:

1. Calculation of Discount on Issue:

  • Face Value = 5,000 × Rs. 100 = Rs. 5,00,000
  • Issue Price = Rs. 90 per debenture (10% discount)
  • Amount Received = 5,000 × Rs. 90 = Rs. 4,50,000
  • Total Discount = Rs. 50,000

2. Interest Calculation:

  • Annual Interest = Rs. 5,00,000×10000 \times 10% = Rs. 50,000
  • Half-yearly Interest = Rs. 25,000

3. Writing off Discount (Proportionate Method): Debentures outstanding: Year 1: 5,000; Year 2: 5,000; Year 3: 4,000; Year 4: 3,000; Year 5: 2,000; Year 6: 1,000. Total = 20,000

YearRatioDiscount Written Off
2019-205,000/20,000Rs. 12,500
2020-215,000/20,000Rs. 12,500
2021-224,000/20,000Rs. 10,000
2022-233,000/20,000Rs. 7,500
2023-242,000/20,000Rs. 5,000
2024-251,000/20,000Rs. 2,500

Journal Entries in the books of Z Ltd.:

DateParticularsL.F.Dr. (Rs.)Cr. (Rs.)
2019 Apr 1Bank A/c Dr.4,50,000
To Debentures Application A/c4,50,000
(Being application money received on 5,000 debentures @ Rs. 90 each)
2019 Apr 1Debentures Application A/c Dr.4,50,000
Discount on Issue of Debentures A/c Dr.50,000
To 10% Debentures A/c5,00,000
(Being 5,000, 10% debentures issued at 10% discount)
2019 Sep 30Debenture Interest A/c Dr.25,000
To Bank A/c25,000
(Being half-yearly interest paid)
2020 Mar 31Debenture Interest A/c Dr.25,000
To Bank A/c25,000
(Being half-yearly interest paid)
2020 Mar 31Statement of Profit & Loss A/c Dr.12,500
To Discount on Issue of Debentures A/c12,500
(Being discount written off)
2020 Mar 31Statement of Profit & Loss A/c Dr.50,000
To Debenture Interest A/c50,000
(Being interest transferred to P&L)
2020 Sep 30Debenture Interest A/c Dr.25,000
To Bank A/c25,000
(Being half-yearly interest paid)
2021 Mar 31Debenture Interest A/c Dr.25,000
To Bank A/c25,000
(Being half-yearly interest paid)
2021 Mar 31Statement of Profit & Loss A/c Dr.12,500
To Discount on Issue of Debentures A/c12,500
(Being discount written off)
2021 Mar 31Statement of Profit & Loss A/c Dr.50,000
To Debenture Interest A/c50,000
(Being interest transferred to P&L)
2021 Mar 3110% Debentures A/c Dr.1,00,000
To Debentureholders A/c1,00,000
(Being 1,000 debentures due for redemption)
2021 Mar 31Debentureholders A/c Dr.1,00,000
To Bank A/c1,00,000
(Being payment made on redemption)

(Similar entries for subsequent years with proportionate discount write-off and reduced interest on outstanding debentures)

Exercise: Do it Yourself | Q: 3 | (Page 32)
For More Understanding

Explanation

This question tests understanding of debenture issue at discount, interest payment, proportionate discount write-off over redemption period, and redemption by draw of lots. The discount is written off proportionally based on debentures outstanding each year. Interest is calculated on the face value and paid half-yearly. Redemption entries are passed each year when debentures are drawn for redemption.

Solution Steps

  1. Step 1: Calculate total discount on issue (Rs. 50,000) and half-yearly interest (Rs. 25,000)

  2. Step 2: Pass journal entries for issue of debentures at discount

  3. Step 3: Pass interest payment entries on September 30 and March 31 each year

  4. Step 4: Write off discount proportionally based on debentures outstanding each year

  5. Step 5: Pass redemption entries when debentures are drawn by lot each year starting March 31, 2021

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