Arushi Ltd. issued 5,000, 10% debentures of Rs. 100 each at par but redeemable at a premium of 5% after 5 years. Which of the following is correct classification of Premium on redemption of debentures and loss on issue of debentures in the current year in the Balance Sheet of Arushi Ltd?

Both option 1 and 3

The correct answer is option 4- Both option 1 and 3.

* Bank A/c Dr. ₹500000
       To 10% debenture application and allotment A/c ₹500000
(Application money received)

*10% debenture application and allotment A/c  Dr. ₹500000
 Loss on issue of debentures Dr.                  ₹25000
         To 10% Debentures A/c                             ₹500000
         To premium on redemption of debentures A/c        ₹25000

* Statement of profit and loss A/c Dr. ₹25,000
    To Loss on Issue of Debentures A/c             ₹25,000

The above journal entries are passed for the issue of debentures.

* Premium on redemption is a liability of a company payable in future. It is a provision and is shown under the head Non-current liabilities under subhead ‘ Long-term Borrowings’ until debentures are redeemed

* Discount or Loss on issue of debentures is a capital loss and is written off in the year when debentures are issued. Discount or loss can be written off from securities premium reserve [section 52(2)]. In case, capital profit do not exist or are inadequate, the amount should be written off against revenue profits of the year. The journal entry passed is-
Securities Premium Reserve A/c Dr. [If exists to the extent of balance]
Statement of Profit and Loss Dr.
       To Discount/Loss on Issue of Debentures A/c
(Discount/Loss on issue of debentures written-off)