When debentures are issued at par and are redeemable at a premium, th…

The correct answer is Option (3) → Loss on issue of debentures account

When debentures are issued at par but are to be redeemed at a premium, the company takes on, at the time of issue, a liability to pay more than it receives. This premium on redemption is a capital loss, so it is debited to Loss on Issue of Debentures Account and credited to Premium on Redemption of Debentures Account; the loss is written off later.

Note: The book’s answer key prints “5 (b)” (Debentures applications and allotment account) for this Test your Understanding item. By the book’s own rule, quoted below, the premium on redemption is debited to Loss on Issue of Debentures Account, so the key should read 5 (c).