Question

On 1^st April, 2018, Halogen Ltd. issued 4,000, 8% Debentures of ₹ 100 each, to be redeemed in four equal annual installments beginning from 31^st March, 2024. The interest on these debentures was payable half-yearly, on 30^th September and 31^st March, every year.

What is the journal entry to close the Interest on Debentures A/c on the 31^st March, 2021?

Options

• Debit Statement of P/L ₹ 32,000; Credit Interest on Debentures A/c ₹ 32,000.

• Debit Statement of P/L ₹ 16,000; Credit Interest on Debentures A/c ₹ 16,000.

• Debit Statement of P/L ₹ 24,000; Credit Interest on Debentures A/c ₹ 24,000.

• Debit Statement of P/L ₹ 8,000; Credit Interest on Debentures A/c ₹ 8,000.

Answer 1

Debit Statement of P/L ₹ 24,000; Credit Interest on Debentures A/c ₹ 24,000.

Explanation:

The annual interest expense can be calculated as follows:

Total value of debentures = 4,000 debentures × ₹ 100 each = ₹ 400,000

Since the debentures were redeemed on 31st March, 2020, in the first instalment, the balance is ₹ 300,000

Annual interest rate = 8%

Annual interest expense = Total value of debentures × Annual interest rate

Annual interest expense = ₹ 300,000 × 8% = ₹ 24,000 

Since the interest is paid semi-annually, but we need the total annual interest expense for the journal entry as of 31st March 2021, we consider the full year’s interest.