Treatment of Discount (Loss) on Issue of Debentures in cash flow statement.

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Confused, what is the accounting treatment of Discount or Loss on Issue of Debentures in Cash Flow Statement.

How Discount (Loss) on Issue of Debentures is recorded in Cash flow statement

As per the rule, Discount or Loss on the Issue of debentures is first written off against the securities premium reserve

If Securities Premium Reserve is not enough to write off the whole Discount (Loss) on Issue of debentures then remaining is written off against Capital Reserve.

If Capital Reserve is also not enough the remaining is written off against the Profit and Loss account.

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When only Securities Premium Reserve is given in the question along with the discount (loss) on issue of debentures

Here there may be two situations.

Case – I

Securities Premium Reserve is less than the Discount (Loss) on the issue of debentures.

Let’s for example assume, Securities premium reserve is ₹ 2000 and Discount (Loss) on the issue of debentures is ₹ 3,000.

In this case, Discount (Loss) on the issue of debentures up to ₹ 2000 are written off against securities Premium Reserve, remaining ₹ 1000 are written off against profit and loss account of the current year.

The Discount (Loss) on the issue of debentures up to ₹ 1000 is added to Profit before tax and extraordinary items to calculate Cash Flow from Operating Activities.

The Securities Premium Reserve of ₹ 3,000 is added and ₹ 2,000 is subtracted in Financing Activity.

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Case – 2

Securities Premium Reserve is more than the Discount (Loss) on the issue of debentures

Let’s for example assume Securities Premium Reserve is ₹ 4,000 and Discount (Loss) on the issue of debentures is ₹ 3,000.

In this case, the Whole discount (loss) on the issue of debentures ₹ 3,000 is written off against Securities Premium Reserve.

No amount of Discount (Loss) on the issue of debentures is considered while calculating Cash flow from Operating activities. As no amount is written off against the Profit and Loss Account.

In Financing Activity, Securities Premium Reserve ₹ 4,000 is added and ₹ 3,000 Discount (Loss) on the issue of debentures is subtracted.

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When the securities Premium Reserve and Capital reserve is given along with Discount (Loss) on issue of debentures in the question

Case – I

Securities Premium Reserve and Capital Reserve is less than the Discount (Loss) on issue of debentures

Let’s say Securities Premium Reserve ₹ 2,000 and Capital Reserve ₹ 1,000 and Discount (Loss) on issue of debentures ₹ 4500.

Discount (loss) on the issue of debentures up to ₹ 2,000 and ₹ 1000 are written off against Securities premium reserve and capital reserve respectively.

The remaining, Discount (loss) on the issue of debentures ₹ 1500 is written off against the Profit and Loss Account.

In this case, discount (loss) on issue of debentures ₹ 1500 is added to Net Profit before tax and extraordinary items to calculate Cash flow from operating activities.

In financing activity, Securities Premium Reserve ₹ 2,000 is added and Discount (Loss) on the issue of debentures ₹ 4500 is subtracted from issue of debentures amount. no treatment of capital reserve is done either in operating, investing, or financing activity.

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Case – 2

Securities Premium Reserve and Capital Reserve is more than the Discount (Loss) on issue of debentures.

Let’s assume, Securities Premium Reserve ₹ 2,000, Capital Reserve ₹ 1,000, and Discount (Loss) on the issue of debentures ₹ 2500.

The Discount (Loss) on the issue of debentures up to ₹ 2000 and ₹ 500 is written off against securities premium reserve and capital reserve.

The remaining ₹ 500 Discount (Loss) on issue of debentures is written of against profit and loss account.

In the cash flow statement, the discount (loss) on issue of debentures ₹ 500 is added to the Net Profit before tax and extraordinary items to calculate Cash flow from operating activities.

In Financing Activity, Securities premium reserve ₹ 2,000 is added, Discount (Loss) on the issue of debentures is subtracted from Issue of debentures amount.

When Securities Premium Reserve and Capital Reserve is not given

in this case, discount (loss) on the issue of debentures is added to Net Profit before tax and extraordinary item and the same amount is subtracted from the amount of issue of debentures or redemption of debentures amount in a financing activity.

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