Question

H Ltd. purchased machinery worth Rs.99,000 from P Ltd. The payment was made by issue of 12% debentures of Rs.100 each. Pass the necessary journal entries for the issue of debentures when debentures are issued at 10% discount in the books of H Ltd.

• A.

  Date	Particulars	L.F.	Dr. Amount	Cr. Amount
  	P Ltd. Dr.		1,10,000
  	To 12% Debentures A/c			1,10,000

• B.

  Date	Particulars	L.F.	Dr. Amount	Cr. Amount
  	P Ltd. Dr.		99,000
  	Discount on Issue of Debentures A/c Dr.		11,000
  	To 12% Debentures A/c			1,10,000

• C.

  Date	Particulars	L.F.	Dr. Amount	Cr. Amount
  	12% Debentures A/c		1,10,000
  	To P Ltd.			99,000
  	To Discount on Issue of Debentures A/c			11,000

• D.

  Date	Particulars	L.F.	Dr. Amount	Cr. Amount
  	12% Debentures A/c		1,10,000
  	To P Ltd.			1,10,000

Hint:

Debentures of Rs. 100 issued at Rs. 90 clear Rs. 99,000 of debt with Rs. 1,10,000 face value. The Rs. 11,000 gap is a debit to discount on issue.

Answer 1

The Correct Option is B

Step 1: Use the ratio of price to face value:
A debenture of Rs. 100 issued at 10% discount is sold for Rs. 90. So Rs. 90 of the debt is settled for every Rs. 100 of face value. The face value needed is \[ 99{,}000 \times \frac{100}{90} = 1{,}10{,}000 \]

Step 2: Discount is the gap:
The company records debentures at face value, but the debt settled is only Rs. 99,000. The gap is Rs. 11,000, which is 10% of Rs. 1,10,000. This gap is booked as Discount on Issue of Debentures, a debit balance.

Step 3: Balance the entry:
Debit side: P Ltd. 99,000 plus Discount 11,000 = 1,10,000. Credit side: 12% Debentures 1,10,000. Both sides are equal, so the entry balances.

Step 4: Eliminate wrong entries:
An issue of debentures always credits the Debentures account, so options 3 and 4, which debit it, are wrong. Option 1 ignores the discount and shows Rs. 1,10,000 owed to P Ltd., so it is wrong too.

Final Answer:
Option 2 shows the correct entry. \[\boxed{\text{Option 2}}\]