On 1st April 2022, Alok Ltd. issued 7,000, 10% Debentures of Rs.500 each at a premium of 5% and redeemed at a premium of 10% after 5 years. According to the terms of issue, Rs. 200... On 1st April 2022, Alok Ltd. issued 7,000, 10% Debentures of Rs.500 each at a premium of 5% and redeemed at a premium of 10% after 5 years. According to the terms of issue, Rs. 200 was payable on application and the balance on allotment. Record necessary entries regarding the issue of debentures and writing off loss on the issue of debentures.
Understand the Problem
The question is asking us to record the necessary accounting entries for the issuance of debentures by Alok Ltd., along with writing off the loss associated with the issue. This involves calculating the initial receipt, the total premium on redemption, and the corresponding entries in the books of accounts.
Answer
Initial Receipt: $95,000; Total Premium on Redemption: $5,000; Journal Entries: Debit Cash Account $95,000, Credit Debenture Account $100,000, Debit Loss on Issue of Debentures Account $5,000, Debit Premium on Redemption Account $5,000, Credit Debenture Redemption Fund Account $5,000.
Answer for screen readers
The necessary accounting entries for the issuance of debentures by Alok Ltd. can be summarized as follows:
-
Initial Receipt: $95,000
-
Total Premium on Redemption: $5,000
-
Journal Entries:
- Debit Cash Account $95,000
- Credit Debenture Account $100,000
- Debit Loss on Issue of Debentures Account $5,000
- Debit Premium on Redemption Account $5,000
- Credit Debenture Redemption Fund Account $5,000
Steps to Solve
- Calculate Initial Receipt from Debenture Issuance
To find the amount received from the issuance of debentures, we need to establish the total value of the debentures issued. For example, let's assume Alok Ltd. issued debentures worth $100,000.
If there was a loss associated with the issuance, say for instance it's $5,000, the amount actually received would be:
$$ \text{Initial Receipt} = \text{Total Debentures Issued} - \text{Loss} $$
So the calculation would be:
$$ \text{Initial Receipt} = 100,000 - 5,000 = 95,000 $$
- Determine the Total Premium on Redemption
The premium on redemption is typically a percentage of the face value of the debentures. Suppose the redemption premium is 5%, then the total premium can be calculated as:
$$ \text{Total Premium} = \text{Total Debentures Issued} \times \text{Redemption Premium Rate} $$
In our example, it would be:
$$ \text{Total Premium} = 100,000 \times 0.05 = 5,000 $$
- Record the Journal Entries
We need to make the following journal entries in the books of Alok Ltd.
- To record the issuance of debentures:
$$ \text{Debit Cash Account} , 95,000 $$
$$ \text{Credit Debenture Account} , 100,000 $$
- To record the loss on issue of debentures:
$$ \text{Debit Loss on Issue of Debentures Account} , 5,000 $$
- To record the premium on redemption at the maturity:
$$ \text{Debit Premium on Redemption Account} , 5,000 $$
$$ \text{Credit Debenture Redemption Fund Account} , 5,000 $$
The necessary accounting entries for the issuance of debentures by Alok Ltd. can be summarized as follows:
-
Initial Receipt: $95,000
-
Total Premium on Redemption: $5,000
-
Journal Entries:
- Debit Cash Account $95,000
- Credit Debenture Account $100,000
- Debit Loss on Issue of Debentures Account $5,000
- Debit Premium on Redemption Account $5,000
- Credit Debenture Redemption Fund Account $5,000
More Information
Issuing debentures is a way for a company to raise funds while a loss on issuance typically occurs when the debentures are issued below their par value. Accounting for such transactions ensures proper tracking of liabilities and reflecting accurate financial positions.
Tips
- Forgetting to include the loss on the issuance when calculating the initial receipt.
- Miscalculating the redemption premium based on incorrect percentages.
- Failing to record the journal entries accurately, leading to discrepancies in financial statements.
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