Question

The following journal entry appears in the books of Latvion Ltd.: 

The discount on issue of debentures is:

• A. 15 %
• B. 5 %
• C. 10 %
• D. 95 %

Hint:

Discount on issue of debentures is the difference between the face value and the issue price (cash received). It is part of the 'Loss on Issue of Debentures' account, which also includes any premium payable on redemption. Discount % = (Discount Amount / Face Value) * 100.

Answer 1

The Correct Option is B

The journal entry shows: Face Value of Debentures issued (credited to 12% Debentures A/c) = Rs 5,00,000. Cash received (debited to Bank A/c) = Rs 4,75,000. The discount on issue is the difference between the face value and the issue price (cash received), when the issue price is lower. Discount = Face Value - Issue Price \[ \text{Discount} = 5,00,000 - 4,75,000 = Rs 25,000 \] The 'Loss on Issue of Debentures A/c' includes both the discount on issue and the premium payable on redemption. Loss on Issue = Discount on Issue + Premium on Redemption Loss on Issue shown = Rs 75,000 Premium on Redemption shown = Rs 50,000 Discount on Issue = Loss on Issue - Premium on Redemption = 75,000 - 50,000 = Rs 25,000. This matches our calculation. Now, calculate the discount percentage: Discount Percentage = \( \frac{\text{Discount Amount}}{\text{Face Value}} \times 100 \) \[ \text{Discount } = \frac{25,000}{5,00,000} \times 100 = \frac{1}{20} \times 100 = 5 \%\]