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Which of the following statements correctly describes the accounting treatment for discount on issue of debentures?

medium MCQ 2 marks Class 12 · Accountancy · Accounting for Debentures
  1. A. Debit Debentures Account and credit Discount on Issue of Debentures (a liability).
  2. B. Debit Discount on Issue of Debentures and credit Bank, and amortize the discount to Interest Expense over the life of debentures.
  3. C. Credit Debentures Account at face value and debit Discount on Issue of Debentures, then amortize the discount to Interest Expense.
  4. D. Record discount on issue as a revenue in Profit & Loss account immediately.
Answer
C. Credit Debentures Account at face value and debit Discount on Issue of Debentures, then amortize the discount to Interest Expense.

Step-by-step solution

  1. Identify that discount on issue reduces the amount actually received but the Debentures Account must be shown at face value.
  2. Record the discount as a debit entry to a separate account called Discount on Issue of Debentures.
  3. The discount is not expensed immediately; it is amortized over the life of the debenture and transferred to Interest Expense each year.
Common mistake: Recording the discount as immediate revenue or treating it as a liability.

Concept tested: Treatment of discount on issue of debentures

Published · How this solution was prepared and checked

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