When debentures are issued at par and redeemable at a premium, the premium payable on redemption is debited to:
Answer & explanation
Correct answer: option 3
The correct answer is option 3- Loss on issue of debentures account.
When debentures are issued at par and redeemable at a premium, the premium payable on redemption is debited to 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)