Based on following case, answer question.
A Ltd issued 2,000, 10% debenture of ₹100 each on April 1, 2019 at a discount of 10% redeemable at a premium of 10% after five years. Company purchased assets of the book value of ₹2,20,000 from B Ltd. at book value and agreed to make payment of purchase consideration by issuing another 2,000, 10% Debentures of ₹100 each at a premium of 10% on above mentioned date only.
Loss on the issue of Debentures A/c to be written off out of the statement of P and L will be:
Answer & explanation
Correct answer: option 3
The correct answer is option 3- ₹20,000.
Journal entry for the issue of debentures to vendor-
B Ltd. Dr. ₹2,20,000
To 10% Debentures A/c ₹2,00,000
To Securities Premium Reserve A/c ₹20,000
Journal entry for the issue of debentures to public at Issue at discount and redemption at premium -
Bank A/c Dr. (2,000 x 90) 1,80,000 (2,000 x 90)
To Debenture Application & Allotment A/c 1,80,000 (2,000 x 90)
(Receipt of application money)
Debenture Application & Allotment A/c Dr. 1,80,000 (2,000 x 90)
Loss on Issue of Debentures A/c Dr. 40,000 (2,000 x 20) (discount + premium)
To Debentures A/c 2,00,000 (2,000 x 100)
To Premium on Redemption of Debentures A/c 20,000 (2,000 x 10)
(Allotment of debentures at a discount and redeemable at premium)
Thus, total Loss on issue of debentures = 40,000
Balance in securities premium reserve = 20,000
Remaining balance will be set-off from statement of profit and loss i.e. 20,000.
The following journal entry is passed for this-
Securities Premium Reserve A/c Dr. 20,000
Statement of Profit and Loss [If exists to the extent of balance] Dr. 20,000
To Loss on Issue of Debentures A/c 40,000
Thus, 20,000 is to be written off out of the statement of P and L.