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When debentures are redeemable at different dates, the total amount of discount on issue of debentures should be written off
- a)Every year by applying the sum of the year digit method
- b)Every year by applying the straight line method
- c)To profit and loss account in full in the year of final or last redemption.
- d)To profit and loss account in full in the year of first redemption.
Correct answer is option 'A'. Can you explain this answer?
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When debentures are redeemable at different dates, the total amount of...
Sum of the Year Digit Method for Writing off Discount on Issue of Debentures
When debentures are redeemable at different dates, the total amount of discount on issue of debentures should be written off every year by applying the sum of the year digit method. Here's how this method works:
Calculation of Year Digit
- Start by calculating the total number of years from the date of issue to the date of final redemption.
- Allocate digits to each year, starting from 1 for the first year, 2 for the second year, and so on, until the last year of redemption.
Writing off Discount
- Calculate the total amount of discount on issue of debentures.
- Calculate the sum of the year digit, which is the total of all the digits assigned to each year of redemption.
- Write off a portion of the discount each year by applying the formula: (Remaining discount to be written off / Sum of the year digit) x Digit for the current year.
Example
Let's say the total discount on issue of debentures is $10,000 and the debentures are redeemable over 5 years. The sum of the year digit would be 15 (1+2+3+4+5).
In the first year, the discount to be written off would be (10,000 / 15) x 1 = $666.67. In the second year, it would be (9,333.33 / 15) x 2 = $1,333.33, and so on.
By using the sum of the year digit method, the discount on issue of debentures is systematically and fairly distributed over the different redemption periods, providing a more accurate reflection of the financial impact on the company each year.
When debentures are redeemable at different dates, the total amount of discount on issue of debentures should be written off every year by applying the sum of the year digit method. Here's how this method works:
Calculation of Year Digit
- Start by calculating the total number of years from the date of issue to the date of final redemption.
- Allocate digits to each year, starting from 1 for the first year, 2 for the second year, and so on, until the last year of redemption.
Writing off Discount
- Calculate the total amount of discount on issue of debentures.
- Calculate the sum of the year digit, which is the total of all the digits assigned to each year of redemption.
- Write off a portion of the discount each year by applying the formula: (Remaining discount to be written off / Sum of the year digit) x Digit for the current year.
Example
Let's say the total discount on issue of debentures is $10,000 and the debentures are redeemable over 5 years. The sum of the year digit would be 15 (1+2+3+4+5).
In the first year, the discount to be written off would be (10,000 / 15) x 1 = $666.67. In the second year, it would be (9,333.33 / 15) x 2 = $1,333.33, and so on.
By using the sum of the year digit method, the discount on issue of debentures is systematically and fairly distributed over the different redemption periods, providing a more accurate reflection of the financial impact on the company each year.
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When debentures are redeemable at different dates, the total amount of discount on issue of debentures should be written offa)Every year by applying the sum of the year digit methodb)Every year by applying the straight line methodc)To profit and loss account in full in the year of final or last redemption.d)To profit and loss account in full in the year of first redemption.Correct answer is option 'A'. Can you explain this answer?
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