Step 1: Understanding the Concept:
Debenture interest is a fixed financial charge. The percentage (e.g., 9%) mentioned in the name of the debenture indicates the annual interest rate.
A fundamental rule in accounting is that interest is always calculated on the nominal value (Face Value) of the securities.
It does not matter if the debentures were issued at a premium (above face value) or at a discount (below face value); the interest amount remains the same.
Key Formula or Approach:
1. Total Face Value = Number of Debentures $\times$ Face Value per share
2. Annual Interest = Total Face Value $\times$ Interest Rate
Step 2: Detailed Explanation:
1. Calculate the Total Face Value:
Number of debentures = 1,000
Face Value (Par Value) = \$100
\[ \text{Total Face Value} = 1,000 \times \$100 = \$100,000 \]
2. Apply the Interest Rate:
The debentures are "9% Debentures."
\[ \text{Annual Interest} = \$100,000 \times \frac{9}{100} = \$9,000 \]
3. Consider the Premium:
The debentures were issued at a 10% premium, meaning the company collected \$110 per debenture.
However, the extra \$10 per debenture goes to the "Securities Premium Account" and is not part of the debt principal for interest calculations.
Therefore, the premium is ignored for the purpose of calculating interest.
Step 3: Final Answer:
The total annual interest obligation is \$9,000.