Lesson eLearning

On the redemption date, a firm redeems 5,000 debentures of Rs 100 each at 105. Prepare the journal entry for this redemption.

medium 2 marks Class 12 · Accountancy · Accounting for Debentures
Answer
Debentures Account Dr. Rs 5,00,000; Premium on Redemption A/C Dr. Rs 25,000; Bank A/C Cr. Rs 5,25,000

The correct answer is Debentures Account Dr. Rs 5,00,000; Premium on Redemption A/C Dr. Rs 25,000; Bank A/C Cr. Rs 5,25,000 — Credit Bank A/C with the total cash paid Rs 5,25,000.

Step-by-step solution

  1. Calculate face value redeemed: 5,000 × Rs 100 = Rs 5,00,000. Debit Debentures Account for this amount.
  2. Redemption price is 105% of face value: 5,00,000 × 105% = Rs 5,25,000.
  3. Premium on redemption = Rs 5,25,000 – Rs 5,00,000 = Rs 25,000. Debit Premium on Redemption A/C for Rs 25,000.
  4. Credit Bank A/C with the total cash paid Rs 5,25,000.
Common mistake: Crediting Premium on Redemption instead of debiting it

Concept tested: Redemption of debentures at premium

Published · How this solution was prepared and checked

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