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CS Executive · Corporate Accounting and Financial Management · Accounting for Debentures

A company issues 10% debentures of ₹10,00,000 and the interest is payable half-yearly. Under the terms of issue, the company must deduct tax at source from the interest paid to a resident debenture-holder. Which entry correctly records payment of the first half-year's interest, assuming TDS at 10%?

The company debits Debenture Interest with the gross ₹50,000, credits Bank with ₹45,000 and credits TDS Payable with ₹5,000. The gross interest is the expense, while the tax withheld is a liability to the government until it is deposited.

  1. ADebenture Interest A/c Dr 50,000; To Bank 50,000
  2. BDebenture Interest A/c Dr 50,000; To Bank 45,000; To TDS Payable 5,000Correct
  3. CDebenture Interest A/c Dr 45,000; To Bank 45,000
  4. DDebenture Interest A/c Dr 50,000; To Bank 55,000; To TDS Payable 5,000

Explanation

Half-year interest = 10,00,000 x 10% x 6/12 = 50,000. TDS at 10% = 5,000, which is withheld and later deposited with the government. Bank pays 45,000. The full 50,000 is the expense, so the option that debits only 45,000 understates the expense.

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