Debenture Application & Allotment A/c Dr.           95,000
Loss on issue of debenture A/c            Dr.           10,000
       To 9% Debentures A/c                                      1,00,000
       To Premium on Redemption of Debenture A/c        5,000

On the basis of the above entry, determine the rate of discount at which ₹1,00,000, 9% debentures of ₹ 100 each were issued if they were to be redeemed at a premium of 5%.

5%

The correct answer is option 1- 5%.

The following Journal entry for the issue at discount 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. (with discount on issue plus 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 a discount and redeemable at premium)

So, loss on issue of debenture = Discount issued + Premium on redemption
                                 10,000 = Discount issued + 5,000
Discount issued = 10,000 - 5,000
                       = 5,000

% of discount = Discount amount/Face value x 100
                     = 5,000/1,00,000 x 100
                     = 5%

THUS, DISCOUNT IS 5%.