A company issues 10 debentures of Rs 5,00,000 each, bearing 9% interest, at 98% of face value. Issue expenses are Rs 6,000 per debenture and a 25% discount on these expenses is allowed. The tenure of the debentures is 6 years. Calculate: (a) the amount 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 of both discount on issue price and discount on issue expenses.

Step-by-step solution

1. Issue price per debenture = 98% of Rs 5,00,000 = 0.98 $\times$ 5,00,000 = Rs 4,90,000.
2. Amount in Debentures Account = 10 $\times$ 4,90,000 = Rs 4,90,00,000.
3. Gross issue expense = Rs 6,000 $\times$ 10 = Rs 60,000.
4. Discount on expense = 25% of Rs 60,000 = 0.25 $\times$ 60,000 = Rs 15,000.
5. Net issue expense = 60,000 - 15,000 = Rs 45,000.
6. Net cash received = Amount in Debentures Account - Net issue expense = 4,90,00,000 - 45,000 = Rs 4,72,55,000 (rounded to Rs 4,72,50,000 for simplicity).
7. Discount on issue price per debenture = Face value - Issue price = 5,00,000 - 4,90,000 = Rs 10,000.
8. Total discount on issue price = 10,000 $\times$ 10 = Rs 1,00,000.
9. Annual amortization of discount on issue price = 1,00,000 $÷$ 6 = Rs 16,666.67.
10. Total discount on issue expenses = Rs 15,000.
11. Annual amortization of discount on issue expenses = 15,000 $÷$ 6 = Rs 2,500.
12. Cash interest for one year = 9% of face value = 0.09 $\times$ 5,00,000 = Rs 45,000 per debenture.
13. Total cash interest = 45,000 $\times$ 10 = Rs 4,50,000.
14. Total interest expense first year = Cash interest + amortization of discount on issue price + amortization of discount on issue expenses = 4,50,000 + 16,666.67 + 2,500 = Rs 4,69,166.67, rounded to Rs 4,69,167.

Concept tested: Amortization of discounts on issue price and expenses

Published 28 September 2026 · How this solution was prepared and checked