Friday, July 12, 2013

Discount and Premium Debentures

Meaning when debentures are issued for an amount less than their face value they are said to be issued at discount $100 debenture is issued for $90 the difference $ 10 is the discount and are redeemable at par in this case $ 100 will be paid instead of $90.

Accounting treatment generally the amount of discount on debentures is recorded at the time of allotment the entries with regards this are given below:

A. When debenture application money received after discount
(i) For debenture application money received after discount
Bank A/c Dr.
To X% debenture application A/c
(ii) For debenture issued
X% debenture application A/c Dr.
Discount on issue of debenture A/c Dr.
To X% debentures A/c
B. When debentures are issued in installments
(i) For debenture allotment money due excluding discount
X% debenture allotment A/c Dr.
Discount on issue of debenture A/c Dr.
To X% debentures A/c
(ii) For receipt of debenture allotment money
Bank A/c Dr.
To X% debenture allotment A/c
Note:

Other entries will be made in the same manner as discussed under point 8.

Debentures issued at par and redeemable at premium

Meaning: it the debentures are issued under a condition that a premium will be paid by the company at the time of redemption X% although such premium will be paid at the time of actual redemption but as it is a known loss t6he company will record such loss at the time of issue by debiting an account called loss on issue of debentures A/c and crediting premium on redemption of debentures A/c it is done by keeping with the convention of conservatism future known loss will be recorded today and premium on redemption of debenture account is credited because it is a liabi.ity fo the company to be paid later on. For example a debenture of $ 100 is issued at $100 and is redeemable at $110. Thus the issue price is same as par value but the redemption value is more than the par value.

Accounting treatment in this regard entries will be made as follows
A. When debentures are issued and received in iumpsum
(i) For debenture application money reserve
Bank a/c Dr.
To X% debenture application A/c
(ii) For debenture application money is accepted
Debenture application A/c Dr.
Loss on issue of debentures A/c
To X % debentures A/c
To premium on redemption of debentures A/c
B. When debentures are issued in installments
(i) For debenture allotment money due excluding debenture redemption premium
X % debenture allotment A/c Dr.
Loss on issue of debentures A/c Dr.
To X % debentures A/c
To premium on redemption of debentures A/c
(ii) For receipt of debenture allotment money
Bank A/c Dr.
To X% debenture allotment A/c
Note:
Other entries will be made in the same manner as discussed under point 8.

Debentures issued at discount and redeemable at premium
Meaning: in this situation the issue price is less than par value and redemption value is more than par value. The difference between the redemption price and issue price is treated as discount loss on issue of debentures for example a debenture of $100 is issued at $96 and is redeemable at $105, the difference $ 9 $ 105,- $96 will be treated as loss on issue of debentures to be debited while passing due entry. It is to be noted that premium on redemption of debenture is also to be credited by $5 as it is a liability of the company.
Accounting treatment in this regard entrains will be made as follows
A. When debentures are issued and amount received in iumpsum
(i) For debenture application money received
Bank A/c Dr.
To debenture application A/c
(ii) For debenture application money adjusted
Debenture application A/c Dr.
Discount on issue of debentures A/c Dr.
Loss on issue of debentures A/c Dr.
To X % debentures A/c
To premium on redemption of debentures. A/c
B. When debentures are issued in installments
(i) For debenture allotment money due excluding discount loss on issue of debenture
X% debenture allotment A/c Dr.
Discount on issue of debentures A/c Dr.
To X% debentures A/c
(ii) For receipt of debenture allotment money
Bank A/c Dr.
To X% debenture allotment A/c
Note:
1. Other entries will be made in the same manner as discussed under point8.
2. Both the amount of discount allowed and premium on redemption of debentures may be grouped together under loss on issue of debentures A/c
When debenture are issued at premium and redeemable at premium
Accounting treatment: in this regard following journal entries are passed.
A. When debentures are issued in iumpsum
(a) When premium is received along with application money
Fr debenture application moan received along with premium
Bank a/c DR.
To X% debenture application A/c
(b) For debenture application money adjusted
X% debenture application A/c Dr.
Loss on issue of debentures A/c Dr.
To X % debenture A/c
To securities premium A/c
To premium on redemption of debentures A/c
B. When debentures are issued in installments
(a) When premium is received along with application money
(i) For debenture application money
Bank A/c Dr.
To X% debenture application A/c
(ii) For debenture application money adjusted
X% debenture application A/c
(b) When premium is received along with allotment money
(i) For debenture allotment money due
X% debenture allotment A/c Dr.
Loss on issue of debentures A/c
To X% debenture A/c
To securities premium A/c
To premium on redemption of debentures A/c
(ii) For debenture allotment money received
Bank A/c Dr.
To debenture allotment A/c

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