Debiting the Discount on Issue of Debentures Account

When debentures are issued at a discount and are redeemable at a premium, the Discount on Issue of Debentures Account is debited at the time of issue of debentures. This account is created to record the discount offered on the issue of debentures.

Reason for debiting the Discount on Issue of Debentures Account

When a company issues debentures at a discount, it means that the debentures are sold for a value lower than their face value. The discount is essentially an expense for the company, as it represents the difference between the face value of the debentures and the amount received from their sale.

By debiting the Discount on Issue of Debentures Account, the company recognizes this expense and records it in the financial statements. This allows for proper accounting treatment of the discount and ensures that the financial statements reflect the true cost of issuing the debentures.

Impact on Financial Statements

Debiting the Discount on Issue of Debentures Account has the following impact on the financial statements:

1. Balance Sheet: The Discount on Issue of Debentures Account is shown as a contra-liability under the head 'Reserves and Surplus.' This reduces the carrying value of the debentures on the liability side of the balance sheet.

2. Income Statement: The discount is treated as an expense and is charged to the income statement over the period of the debentures. This reduces the company's net income and, consequently, its retained earnings.

3. Cash Flow Statement: The cash flows related to the discount on issue of debentures are reflected in the financing activities section of the cash flow statement.

Example

Let's consider an example to understand how the Discount on Issue of Debentures Account is debited:

Company XYZ issues debentures with a face value of $100 each at a discount of 10%. The total value of debentures issued is $1,000,000.

The journal entry to record the issue of debentures at a discount would be as follows:

Discount on Issue of Debentures Account Dr. $100,000
To Debentures Account Cr. $100,000

The Discount on Issue of Debentures Account is debited by $100,000, representing the discount offered on the issue of debentures. The Debentures Account is credited for the face value of the debentures issued.

This journal entry ensures that the discount on the issue of debentures is properly recognized and accounted for in the financial statements of the company.