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%.
Answer & explanation
Correct answer: option 1
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%.