Question

Debenture Application & Allotment A/c ........ Dr. 95,000
Loss on Issue of Debentures A/c ................. Dr. 10,000
\hspace{0.5cm} To 9% Debenture A/c ...................................... 1,00,000
\hspace{0.5cm} To Premium on Redemption of Debentures A/c .... 5,000
On the basis of the above entry, determine the rate of discount at which Rs. 1,00,000, 9% debentures of Rs. 100 each were issued if they were to be redeemed at a premium of 5%.

• A. 5%
• B. 10%
• C. 15%
• D. 20%

Hint:

Check journal entries carefully: Cash received indicates discount, while Loss on Issue combines discount and redemption premium.

Answer 1

The Correct Option is B

Step 1: Recall formula.
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption.

Step 2: Given values.
Loss on Issue = Rs. 10,000.
Premium on Redemption = Rs. 5,000.
Therefore, Discount on Issue = Loss on Issue - Premium on Redemption = 10,000 – 5,000 = Rs. 5,000.

Step 3: Calculate Rate of Discount.
Total Face Value of Debentures = Rs. 1,00,000.
Discount = Rs. 5,000.
\[\text{Rate of Discount} = \frac{\text{Discount}}{\text{Face Value of Debentures}} \times 100 = \frac{5,000}{1,00,000} \times 100 = 5%\] Analysis of Journal Entry: The journal entry indicates Rs. 95,000 cash received for debentures with a face value of Rs. 1,00,000. This confirms a discount of Rs. 5,000. The total loss on issue (Rs. 10,000) comprises the discount on issue (Rs. 5,000) and the premium on redemption (Rs. 5,000). Consequently, the rate of discount is 5%.

Final Answer: \[\boxed{\text{5%}}\]