The Discount on issue of Debentures should be written off out of which of the following?
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Both 1 and 2.
Discount on issue of debentures is treated as a capital loss (fictitious asset) and is written off over a period of time. It can be written off:
- Out of Securities Premium Account, as permitted uses of this account include writing off such losses.
- Out of Profit and Loss Account, by charging it as an expense over the years.
"When a debenture is issued at a price below its nominal value, it is said to be issued at a discount. For example, the issue of Rs. 100 debentures at Rs. 95, Rs. 5 being the amount of discount. The discount on issue of debentures can be written off either by debiting it to profit and Loss account or out of Securities Premium Reserve, if any, during the life time of debentures."