Question

Zeba Limited issued 15,000, 9% debentures of Rs 100 each at 10% discount on 1st April, 2023. It has a balance of Rs 1,00,000 in Securities Premium Account. The 'Discount on issue of Debentures' of Rs 1,50,000 will be written off : 
 

• A. Rs 1,00,000 out of Securities Premium Account and Rs 50,000 out of Statement of Profit and Loss
• B. Rs 50,000 out of Securities Premium Account and Rs 1,00,000 out of Statement of Profit and Loss
• C. Rs 1,50,000 out of Securities Premium Account
• D. Rs 1,50,000 out of Statement of Profit and Loss

Hint:

Priority for writing off discount/loss on issue of debentures: 1st - Securities Premium, 2nd - Statement of Profit and Loss. Utilize the Securities Premium balance fully before charging the P\.

Answer 1

The Correct Option is A

To address the issue, we must ascertain the amounts expensed as 'Discount on Issue of Debentures' from both the Securities Premium Account and the Statement of Profit and Loss for Zeba Limited. The company issued 15,000 debentures, each with a nominal value of Rs 100, at a 10% discount on April 1, 2023. At that time, the Securities Premium Account held a balance of Rs 1,00,000.

1. Total Nominal Value of Debentures:
Each debenture is valued at Rs 100, and 15,000 debentures were issued. The aggregate nominal value is calculated as:

\( 15,000 \times 100 = 1,500,000 \, \text{Rs} \)

2. Determining Issue Price and Total Discount:
A 10% discount on issue means the selling price per debenture is:

\( 100 \times (1 - 0.10) = 90 \, \text{Rs} \)
The total proceeds from the debenture issuance are:

\( 15,000 \times 90 = 1,350,000 \, \text{Rs} \)
Consequently, the total discount incurred on the debenture issue amounts to:

\( 1,500,000 - 1,350,000 = 150,000 \, \text{Rs} \)

3. Application of Securities Premium Account:
Zeba Limited possesses Rs 1,00,000 in its Securities Premium Account. Accounting principles dictate that this fund should be utilized first to offset discounts on debenture issuances. Therefore, Rs 1,00,000 of the total discount is absorbed by the Securities Premium Account:

\( 1,00,000 \, \text{Rs from Securities Premium Account} \)

4. Writing Off the Remaining Discount:
The outstanding discount to be expensed is calculated as:

\( 150,000 - 1,00,000 = 50,000 \, \text{Rs} \)
This residual amount is charged against the Statement of Profit and Loss:

\( 50,000 \, \text{Rs from Statement of Profit and Loss} \)

Conclusion:
The total 'Discount on Issue of Debentures' of Rs 1,50,000 is accounted for by writing off Rs 1,00,000 from the Securities Premium Account and Rs 50,000 from the Statement of Profit and Loss. Option A is the correct choice.