Alpha Ltd issues 20 debentures of Rs\,1,00,000 each, 12\% interest payable annually, at 101\% of face value. Issue expenses are Rs\,3,000 per debenture and the company receives a 10\% discount on these expenses. The debentures have a tenure of 8 years. Calculate: (a) the amount to be shown in the Debentures Account, (b) net cash received, (c) annual amortization of the discount on issue expenses, (d) total interest expense for the first year (including amortization).

Step-by-step solution

1. Face value of each debenture = Rs\,1,00,000; total face value = 20 $\times$ Rs\,1,00,000 = Rs\,2,000,000. This is the amount shown in the Debentures Account.
2. Issue price per debenture = 101\% of face = Rs\,1,01,000. Total issue price = 20 $\times$ Rs\,1,01,000 = Rs\,2,020,000.
3. Total issue expenses before discount = Rs\,3,000 $\times$ 20 = Rs\,60,000.
4. Discount on issue expenses = 10\% of Rs\,60,000 = Rs\,6,000; therefore net issue expense = Rs\,60,000 - Rs\,6,000 = Rs\,54,000.
5. Net cash received = Issue price - net issue expense = Rs\,2,020,000 - Rs\,54,000 = Rs\,1,966,000.
6. Discount on issue expenses of Rs\,6,000 is amortized straight‑line over 8 years: Rs\,6,000 $÷$ 8 = Rs\,750 per year.
7. Cash interest for the first year = Face value $\times$ rate = Rs\,2,000,000 $\times$ 12\% = Rs\,240,000.
8. Total interest expense for the first year = cash interest + amortization of discount on issue expenses = Rs\,240,000 + Rs\,750 = Rs\,240,750.

Concept tested: Issue costs, discount on issue expenses and amortization

Published 26 September 2026 · How this solution was prepared and checked