What will be the treatment of premium on redemption of debentures?

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Looking for what is the accounting treatment and journal entry of premium on redemption of debentures account as per the syllabus of class 12 CBSE, ISC, and state Board.

This topic is concerned with the accounting for debentures chapter of class 12.

I have explained this topic in detail.

What is the premium on redemption of debentures account is?

When the Debentures are redeemed (payback) at the price above the face value. This excess amount is called a premium on redemption.

Here redemption means payback of debentures amounts to debentures holders after maturity.

For example, A ltd issued 200 debentures @ ₹ 100 each redeemable at 20% premium. Thus ₹ 20 per share is the premium on redemption.

However, the company receives a total of ₹ 20,000 by issuing debentures. But would repay ₹ 24,000. This ₹ 4,000 excess amount is the premium on redemption.

What will be the treatment of premium on redemption of debentures account?

Premium on redemption of debentures account is the liability. Thus credited at the time of issue of debentures.

With another concept, It is also anticipated losses and expenses.

Therefore as per the Prudence Principle of Accounting, at the time of issue of debentures, the loss arising because of premium payable at the time of redemption is provided at the time of issue of debentures.

Journal entries of premium on redemption of debentures

Following are the journal entries and accounting treatment of premium on redemption of debentures at the time of issue and repayment.

Journal entries of debentures redeemable at premium at the time of issue

Following at the different cases

1. Debentures issued at par redeemable at premium

Following are the journal entries

Bank A/c ..Dr.
To Debentures Application and Allotment A/c

Debentures Application and Allotment A/c ..Dr.
Loss on the issue of Debenture A/c ..Dr.
To ..% Debentures A/c
To Premium on Redemption of Debentures A/c

2. Debentures issued at discount redeemable at premium

Bank A/c ..Dr.
To Debentures Application and Allotment A/c

Debentures Application and Allotment A/c
Discount on issue of Debenture A/c
Loss on issue of Debentures A/c
To ..%Debentures A/c
To Premium on Redemption of Debentures A/c

3. Debentures issued at premium redeemable at premium

Bank A/c ..Dr.
To Debentures Application and Allotment A/c

Debentures Application and Allotment A/c
Loss on issue of Debentures A/c
To ..%Debentures A/c
To Securities Premium Reserve A/c
To Premium on Redemption of Debentures A/c

Where Premium on Redemption of Debentures account is shown in Balance Sheet

Following are the two alternatives.

a) Under the main head ‘Non-Current Liabilities; and sub-head ‘Other long term liabilities’ If Debentures are shown as ‘Long-term Borrowings’.

b) Under the main head ‘Current Liabilities’ and sub-head ‘Other Current Liabilities’ If Debentures are shown as ‘Current Maturities of Long term Debts’.

Following points to be kept in mind about the premium on redemption of debentures Account

Loss on Issue of Debentures is debited at the time of issue of debentures following the Prudence Concept of accounting. The concept requires providing all possible losses and expenses. Since it is certain that premium will be paid at the time of redemption, it is provided for.

Loss on Issue of Debentures is written off from Securities Premium Reserve, Capital Reserve, and thereafter from Statement of Profit and Loss.

‘Loss on Issue of Debentures Account; is a loss (Expense Account) and ‘Premium on Redemption of Debenture Account’ is a Liability Account.

‘Premium on Redemption of Debentures Account’ is debited at the time of payment, i.e, on redemption of debentures.

Premium on Redemption of Debentures Account is shown:

a) Under the main head ‘Non-Current Liabilities’ and Subhead ‘other long term liabilities’ If debentures are shown as ‘Long term Borrowings’.

b) Under the main head ‘Current Liabilities’ and the subhead ‘other current liabilities’ if Debentures are shown as ‘Current Maturities of Long term Debts’.

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Anurag Pathak
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