Question

Long Answer Question

How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘discount in issue of debentures’ when the debentures are to be redeemed in instalments?

Answer 1

When the debentures are issued at a price below its par value or face value, then it is said that the debentures are issued at discount. The difference between the issue price and the face value of the debenture is regarded as a capital loss. As per the Revised Schedule VI of the Companies Act, Discount on Issue of Debentures is shown in the Notes to Accounts:

1. With the amount that is to be written off within 12 months from the date of Balance Sheet - Shown under Other Current Assets

2. With the amount that is to be written off after 12 months from the date of Balance Sheet - Shown under Other Non-Current Assets

Accounting Treatment
For example, if a company has issued 10% debentures of Rs 6,00,000 at 5% discount redeemable annually by Rs 2,00,000 each year. The total amount of discount on Rs 6,00,000 debentures @ 5% is Rs 30,000, i.e. (6,00,000 × 5/100 = Rs 30,000). The accounting treatment for discount on issue of debentures(if it is to be written-off in 5 years) is:

Year 1: Amount to be written-off each year = `30,000 × 15=6,000">30,000 × `1/5`=6,000` Shown in Statement of Profit and Loss
Amount to be written-off in the next year = 6,000 - Shown as Other Current Assetunder Current Assets
Remaining Amount to be written-off after next year = 30,000 - 6,000 - 6,000= 18,000">30,000 − 6,000 − 6,000= 18,000 Shown as Other Non-Current Assetunder Non-Current Assets

Statement of Profit and Loss for year ended...
S. No.	Particulars	Note No.	Amount
I	Revenue from Operations
II	Other Income
III	Total Revenue (I + II)
IV	Expenses:
	Amortisation Expenses (Discount on issue of debentures written-off)		6,000

Extract of Balance Sheet as on March 31, 2013
Particulars	Note No.	Amount (Rs)
II. Assets
1. Non-Current Assets
(e) Other Non-Current Assets	1	18,000
2. Current Assets
(f) Other Current Assets	2	6,000

 

NOTES TO ACCOUNTS

Note No.	Particulars	Amount (Rs)
1	Other Non-Current Assets
	Discount of Issue of Debentures	18,000
2	Other Current Assets
	Discount of Issue of Debentures	6,000

Year 2
Amount to be written-off =  `30,000 xx (1/5) = 6,000`- Shown in Statement of Profit and Loss
Amount to be written-off in the next year = 6,000 - Shown as Other Current Asset under Current Assets
Remaining Amount to be written-off after next year = `18000 - 6000 = 12000` - Shown as Other Non-Current Asset under Non-Current Assets

At the end of Year 5, the amount of discount on issue of debentures will be completely written off.