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

Sharma Ltd issued ₹5,00,000 of 9% debentures on 1 July. Interest is payable annually on 31 March. The books are closed on 31 March. What entry for interest should be made on 31 March of the first year, before payment, ignoring TDS?

The company should debit Debenture Interest and credit Interest Payable with ₹33,750. Interest accrues for nine months, from 1 July to 31 March, at 9% on ₹5,00,000. Under accrual accounting the expense is recorded when it is incurred, not when paid.

  1. ADebenture Interest A/c Dr 33,750; To Debenture-holders' Interest Payable 33,750Correct
  2. BDebenture Interest A/c Dr 45,000; To Debenture-holders' Interest Payable 45,000
  3. CDebenture Interest A/c Dr 22,500; To Debenture-holders' Interest Payable 22,500
  4. DNo entry until interest is actually paid

Explanation

From 1 July to 31 March is 9 months. Interest = 5,00,000 x 9% x 9/12 = 33,750. Full-year interest of 45,000 overstates the expense, and the accrual basis requires recording the amount due even before payment.

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