When debentures are issued at par and are redeemable at a premium, the loss on such issue is debited to:
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Loss on issue of debentures account.
The premium on redemption represent losses to the company. These are capital losses, and are accumulated under one accounting head: "Loss on Issue of Debentures Account". So, when debentures are issued at par and redeemed at a premium, the Loss on Issue of Debentures A/c is debited.
Journal entry for the issue at par and redemption at premium-
1) Bank A/c Dr.
To Debenture Application & Allotment A/c
(Receipt of application money)
2) Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr. (premium on redemption)
To Debentures A/c (with nominal value of debenture)
To Premium on Redemption of Debentures A/c (with premium on redemption)
(Allotment of debentures at par and redeemable at premium)