Treatment of Loss on Issue of Debenture Video Lecture | Accountancy CUET Preparation - Commerce

let us now move on to treatment of
discount on issue of debentures the
treatment of discount on issue of
Avengers is exactly the same as loss on
issue of debentures account so sometimes
only one account is wielding the
accounting treatment for both are
exactly the same so we have either a
discount initiative debentures or loss
on issuer debentures how is this loss
written off this loss or discount is
written off over the life of the
debentures one is equally either it is
written off equally well is it written
of equally suppose a company has issued
debentures for 50 lakhs and these are
redeemable repayable after 5 years so
the entire 50 lakhs will be repaid after
5 years so if there was a discount on
issue of debentures or other loss on
issue aventures this would be written
off the discount which is involved would
be written off over a period of 5 years
equally suppose the amount of discount
was an amount of only one leg one leg
divided by 5 20,000 would be written off
to profit and loss account every year
profit and loss account debit to loss on
issue of debentures the amount would be
20,000 each year or it may be in the
ratio second option is to write it off
in the ratio of the debentures
outstanding or the sum of the digits
method suppose a company has issued 50
like the ventures and the scheme of
redemption is such that 10 lakhs are
redeemed or repaid every year this means
in the first year the benefit of
aventures was for 50 lakhs second year
got the benefit of 40 lakhs
courier got the benefit of 30 lights
second year so fourth year got the
benefit of 20 lakhs and the final year
got a benefit of only 10 lakh aventures
therefore it is only fair to write off
this one lag in the ratio of the benefit
which is received so 1 lakh is written
off in the ratio of 50 is to 40 is to
cut T is to 20 is to 10 or 5 is to 4 is
to 3 is to 2 is to 1 it is the same
thing as using the sum of the digits
method which we discussed while
discussing depreciation in the ratio of
the debentures outstanding would be
equal to the sum of the digits method
what is the sum of the digits method in
year 1 the amount to be written off is
the total amount of discount into the
remaining life of the debentures
including that year so in the first year
the remaining life is 4 years plus the
year the first year itself that is 5
divided by 5 plus 4 plus 3 plus 2 plus 1
in the second year it would be 1 lakh
into 4 because the lie remaining life is
3 years plus the second year itself by 5
plus 4 plus 3 plus 2 plus 1 in the third
year it would be 1 lakh into 3 years
because 2 years remaining plus the
current here so it's the remaining life
of the debentures including the current
year plus again 5 plus 4 plus 3 plus 2
plus 1 second year 1 lakh into 2 by 5
plus 4 plus 3 plus 2 plus 1 and finally
1 lakh into 1 by 5 plus 4
plus three plus two plus one both the
results are exactly the same
if the debentures are irredeemable then
the loss on issue of debentures may be
written off over a reasonable period of
and maybe over a period of seven years
or tennis a company issued 10 lakh 10%
debentures at a discount of 10%
redeemable after four years what would
be the amount of discount to be written
off each so what is the total discount
discount is rupees 10 lakh into 10
percent the total amount is 1 lakh this
is redeemable after 4 years
therefore discount to be written off
every year would be 1 lakh
divided by 4 equal to 25,000 let us
consider another example where a company
has issued 10 lakh debentures at a
discount of 10% again we have one lakh
discount but they are redeemed at the
rate of 2 lakh each year what would be
the amount of discount to be written off
each so I am applying the sum of digits
method the total discount is again 1
lakh
what is the life of the debenture poor
lack is written off every year which
means it is written off over a period of
five years if I take the sum of the
digits then it would be in year 1 it
would be 1 lakh into 5 by 15 which is
the sum of 5 plus 4 plus 3 plus 2 plus 1
in year 2 it would be 1 lakh into 4 by
15 year 3 it would be 1 lakh into 3 by
15 fourth year into 1 lakh into 2 by 15
and the fifth year 1 lakh into 1 by 15
the amount of discount would therefore
be 33,000 333 in the first year so
that's 33 like 333 for the first year
for the second year is 1 lakh into 4 by
15 this would work out to 26,000 667 for
the third year it's 1 lakh into 3 by 15
that would be 20,000 the third year 1
lakh into 2 by 15 which would be 13,000
333 and in the final year 1 lakh divided
by 15 which would be 6 left 6 67
therefore this would cover the entire
one