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In case debentures of Rs. 10,000 are issued at par but payable at a premium of 10%, the premium payable will be debited to :
- a)Debentures Suspense Account
- b)Premium on Redemption of Debenture A/c
- c)Loss on issue of Debenture A/c
- d)None
Correct answer is option 'C'. Can you explain this answer?
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In case debentures of Rs. 10,000 are issued at par but payable at a pr...
Explanation:
When debentures are issued at par but payable at a premium, the premium amount is treated as a capital receipt and is credited to the Premium on Redemption of Debenture account. However, as this premium amount is not a revenue receipt, it cannot be directly credited to the Profit and Loss Account. Instead, it needs to be transferred to the Capital Reserve or Profit and Loss Appropriation Account.
At the time of redemption of the debentures, the company needs to pay the face value of the debentures as well as the premium amount. To do so, the company needs to create a provision for the redemption of debentures. This provision is created by debiting the Premium on Redemption of Debenture account and crediting the Debenture Redemption Reserve account.
Therefore, when debentures of Rs. 10,000 are issued at par but payable at a premium of 10%, the premium payable will be debited to the Loss on Issue of Debenture account. This is because the premium amount is a capital receipt and cannot be directly credited to the Profit and Loss Account. Instead, it needs to be transferred to the Capital Reserve or Profit and Loss Appropriation Account. As the premium amount is not a revenue receipt, it is treated as a loss on the issue of debentures.
In summary:
- Premium on Redemption of Debenture account is credited when debentures are issued at a premium
- Premium amount cannot be directly credited to the Profit and Loss Account
- Premium amount is transferred to the Capital Reserve or Profit and Loss Appropriation Account
- Loss on Issue of Debenture account is debited for the premium amount as it is not a revenue receipt
When debentures are issued at par but payable at a premium, the premium amount is treated as a capital receipt and is credited to the Premium on Redemption of Debenture account. However, as this premium amount is not a revenue receipt, it cannot be directly credited to the Profit and Loss Account. Instead, it needs to be transferred to the Capital Reserve or Profit and Loss Appropriation Account.
At the time of redemption of the debentures, the company needs to pay the face value of the debentures as well as the premium amount. To do so, the company needs to create a provision for the redemption of debentures. This provision is created by debiting the Premium on Redemption of Debenture account and crediting the Debenture Redemption Reserve account.
Therefore, when debentures of Rs. 10,000 are issued at par but payable at a premium of 10%, the premium payable will be debited to the Loss on Issue of Debenture account. This is because the premium amount is a capital receipt and cannot be directly credited to the Profit and Loss Account. Instead, it needs to be transferred to the Capital Reserve or Profit and Loss Appropriation Account. As the premium amount is not a revenue receipt, it is treated as a loss on the issue of debentures.
In summary:
- Premium on Redemption of Debenture account is credited when debentures are issued at a premium
- Premium amount cannot be directly credited to the Profit and Loss Account
- Premium amount is transferred to the Capital Reserve or Profit and Loss Appropriation Account
- Loss on Issue of Debenture account is debited for the premium amount as it is not a revenue receipt
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In case debentures of Rs. 10,000 are issued at par but payable at a pr...
Because premium is loss for business
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In case debentures of Rs. 10,000 are issued at par but payable at a premium of 10%, the premium payable will be debited to :a) Debentures Suspense Account b) Premium on Redemption of Debenture A/c c) Loss on issue of Debenture A/c d) None Correct answer is option 'C'. Can you explain this answer?
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