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 = Face Value - Issue Price (Cash Received). Loss on Issue includes both Discount on Issue and Premium on Redemption. Always calculate percentage based on Face Value.

Answer 1

The Correct Option is B

To determine the discount on Latvion Ltd.'s debenture issuance, analyze the provided journal entry. The entry shows a debit to 'Loss on Issue of Debentures A/c' of Rs 75,000, a credit to '12% Debentures A/c' of Rs 5,00,000, a credit to 'Premium on Redemption of Debentures A/c' of Rs 50,000, and a debit to 'Bank A/c' of Rs 4,75,000.

1. Journal Entry Analysis:
This entry reflects the issuance of debentures with a face value of Rs 5,00,000. The company received Rs 4,75,000 in cash. The Rs 75,000 debit to 'Loss on Issue of Debentures A/c' encompasses both the discount on issue and any premium payable upon redemption. The Rs 50,000 credit to 'Premium on Redemption of Debentures A/c' signifies the amount to be paid as premium at the time of redemption.

2. Discount on Issue Calculation:
The 'Loss on Issue of Debentures A/c' is the sum of the discount on issue and the premium on redemption. Let 'D' represent the discount on issue. The formula is:

\( \text{Loss on Issue} = \text{Discount on Issue} + \text{Premium on Redemption} \)
Using the given figures:

\( 75,000 = D + 50,000 \)
Solving for 'D':

\( D = 75,000 - 50,000 = 25,000 \, \text{Rs} \)

3. Discount Percentage Determination:
The nominal value of the debentures is Rs 5,00,000, and the calculated discount on issue is Rs 25,000. The discount percentage is calculated as:

\( \text{Discount Percentage} = \left( \frac{\text{Discount}}{\text{Nominal Value}} \right) \times 100 \)
Substituting the values:

\( \text{Discount Percentage} = \left( \frac{25,000}{5,00,000} \right) \times 100 = 5\% \)

Final Answer:
The discount on the issue of debentures amounts to 5%. Option B is correct.