Since debentures are for five years, every year fifth of the discount can be taken to profit and loss account. (b) In the ratio of amount used. Since in this case the plan of redemption is given it is possible to write off discount in the ratio of amount used.
When debentures are issued at discount discount is written off?
Discount on issue of debentures is a capital loss and over a period of 3 to 5 years or is charged to “Securities Premium Account” as per the guidelines issued by ICAI. The discount on issue of debentures can be written-off either by debiting it to profit and loss or to securities premium account.
What is written off in the year when debentures are issued?
The amount of loss or discount on issue of debentures has to be not be written-off during the year of its issue since the benefit of the debentures would accumulate to the enterprise till their restitution or redemption. The loss or discount, hence, considered as a capital loss.
How is discount on issue of debentures treated in cash flow?
The increase in discount should be deducted from the face value of shares / Debentures and only net proceeds shall be treated as cash flow from Financing Activities. Decrease in Discount on issue of Shares/Debentures will be added back to current year’s profit to calculate ‘Cash from Operating Activities’.
When debentures are issued as collateral security interest is paid on?
When it pays the loan on the due date, the lender immediately releases the main security and these debentures. In a case where the company is unable to repay the principal amount and the interest on the loan on the due date, the lender becomes the holder of these debentures.
Why discount on issue of shares is an asset?
In the balance sheet, ‘Discount on Issue of Shares Account’ appears on the “Assets” side under the heading ‘Miscellaneous Expenditure’. The account represents a fictitious asset and should be gradually written off by transfer to Profit and Loss Account although there is no legal compulsion to do so.
How is the discount on issue of debenture written off explain with examples?
For example, if the total discount allowed on issue of debentures is ` 10,000 and the debentures are issued for 10 years, the amount of discount to be written off every year will be 1/10th of the total discount, i.e., every year an amount equal to (1/10 x 10,000) = 1,000 will be written off over a period of 10 years.
Are Debentures long term debt?
A debenture is a long-term debt instrument issued by corporations and governments to secure fresh funds or capital. Coupons or interest rates are offered as compensation to the lender., etc.
How do you write off expenses on Debentures?
These expenses are usually written off through the Profit & Loss Account in installments. Alternatively, ‘Securities Premium Reserve Account’ or Capital Reserve may be used to write off ‘Expenses on Issue of Debenture’. Journal Entry to write off ‘Expenses on issue of Debentures’: Profit & Loss A/c (OR) Dr.