Sunrise Ltd issues 12% debentures of Rs 1,00,000 each, 50 debentures, at 102. Issue costs are Rs 2,000 per debenture and a 5% discount on these costs is allowed. Determine (a) the amount to be shown in the Debentures Account and (b) the net proceeds received by the company.
Answer
(a) Rs 5,00,00,000; (b) Rs 50,05,000
The correct answer is (a) Rs 5,00,00,000; (b) Rs 50,05,000 — Net proceeds = total issue price – net issue costs = Rs 5,10,00,000 – Rs 95,000 = Rs 50,05,000.
Step-by-step solution
- Face value per debenture = Rs 1,00,000; total face value = 50 × Rs 1,00,000 = Rs 5,00,00,000. This amount is credited to Debentures Account.
- Issue price per debenture = 102% of face = Rs 1,02,000; total issue price = 50 × Rs 1,02,000 = Rs 5,10,00,000.
- Issue costs = Rs 2,000 per debenture; total = 50 × Rs 2,000 = Rs 1,00,000.
- Discount on issue costs = 5% of Rs 1,00,000 = Rs 5,000; net issue costs = Rs 1,00,000 – Rs 5,000 = Rs 95,000.
- Net proceeds = total issue price – net issue costs = Rs 5,10,00,000 – Rs 95,000 = Rs 50,05,000.
Common mistake: Adding the discount on issue costs instead of subtracting it from total issue costs
Concept tested: Accounting for issue costs and discount on issue costs
Published · How this solution was prepared and checked
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