How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘discount in issue of debentures’ when the debentures are to be redeemed in instalments?
Answers
Answer:
Explanation:
Discount on issue of debentures means a loss of capital which is written off during a period of time as laid in the terms of issue but before the debenture is redeemed.
It is reflected on the asset side of the balance sheet till such time it is written off. Since it is loss of capital, it is treated in two ways.
Method One
Under this method the entire discounted amount of debenture is distributed equally over the life span of the debentures. For example debentures issued at discount has to be redeemed after 5 years. The discounted amount is divided into five and the arrived amount is posted in the profit and loss account for 5 years. This process is used when the redemption of the debentures are done at the end of a specify period.
Method Two:
Under this process the discounted amount is written off each year in proportion to the debenture amount used each year. This process is used when debentures are redeemed each year by drawing a lots and by serving a notice .
Hope this helps.