By what amount will the Debenture Interest Account be debited for the…

Based on following information answer question:

Apex Ltd. issued to public ₹10,00,000, 10% Debentures of ₹100 each at par, redeemable at a premium of 20%. It also issued 10,000, 11% Debentures of ₹100 each as collateral security against a bank loan of ₹8,00,000.

The company bought building worth ₹50,00,000 from Beta Ltd. against a cheque of ₹20,00,000 and balance by issue of 12% Debentures of ₹100 each at a premium of 20%.

By what amount will the Debenture Interest Account be debited for the year, if debenture interest is payable annually?

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → ₹4,00,000

Debenture interest is worked out on the nominal (face) value of the debentures actually issued as a loan, at the rate in their name. Debentures given to a bank as collateral security create no liability of their own; the company pays interest on the bank loan, not on these debentures, so they carry no debenture interest.

10% Debentures: ₹10,00,000 × 10% = ₹1,00,000
12% Debentures to Beta Ltd.: 25,000 × ₹100 = ₹25,00,000 × 12% = ₹3,00,000
11% Debentures as collateral security: no interest = Nil
Debenture interest for the year = ₹4,00,000

Note: Interest on the 12% debentures is on the face value of ₹25,00,000, not on the ₹30,00,000 received for them, and the collateral debentures carry no interest of their own.

NCERT (2026-27 edition):
Interest on Debentures – “When a company issues debentures, it is under an obligation to pay interest thereon at fixed percentage (half yearly) periodically until debentures are repaid. This percentage is usually as part of the name of debentures like 8% debentures, 10% debentures, etc., and interest payable is calculated at the nominal value of debentures.”

NCERT (2026-27 edition):
First Method – “No entry is made in the books of accounts since no liability is created by such issue. However, on the liability side of the balance sheet, below the item of loan, a note to the effect that it has been secured by issue of debentures as a collateral security is appended.”