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CA Foundation · Accounting · Company Accounts

A company's debentures with a face value of ₹50,000 are issued at a discount of 8%. On maturity after 5 years, the company must redeem them at par. Which accounting treatment is correct during the life of the debentures?

Debenture discount must be amortized over the period to maturity and charged as an expense to the Profit and Loss Account each year. This spreads the cost over the life of the debenture and ensures the carrying amount equals par value on redemption date, matching revenue with the cost of raising capital.

  1. AThe discount is written off entirely in the year of issue against the issue proceeds
  2. BThe discount is amortized over the 5-year period and charged to the Profit and Loss Account each yearCorrect
  3. CThe discount is transferred to a Debenture Redemption Reserve
  4. DThe discount remains as a liability in the Balance Sheet until redemption

Explanation

Debenture discount must be amortized (written off) systematically over the period to maturity. Annual amortization = ₹50,000 × 8% ÷ 5 = ₹800 per year, debited to P&L. This ensures the carrying amount reaches par value by redemption date. Immediate write-off (option A) violates matching principle; options C and D are incorrect applications.

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