Question

Debenture Application & Allotment A/c ........ Dr. 95,000
Loss on Issue of Debentures A/c ................. Dr. 10,000
\hspace{0.5cm} To 9% Debenture A/c ...................................... 1,00,000
\hspace{0.5cm} To Premium on Redemption of Debentures A/c .... 5,000
On the basis of the above entry, determine the rate of discount at which Rs. 1,00,000, 9% debentures of Rs. 100 each were issued if they were to be redeemed at a premium of 5%.

• A. 5%
• B. 10%
• C. 15%
• D. 20%

Hint:

Check journal entries carefully: Cash received indicates discount, while Loss on Issue combines discount and redemption premium.

Answer 1

The Correct Option is B

Step 1: Recall formula.
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption.

Step 2: Given values.
Loss on Issue = Rs. 10,000.
Premium on Redemption = Rs. 5,000.
So, Discount on Issue = 10,000 – 5,000 = Rs. 5,000.

Step 3: Rate of discount.
Debentures issued = Rs. 1,00,000.
Discount = Rs. 5,000.
\[ \text{Rate of Discount} = \frac{5,000}{1,00,000} \times 100 = 5% \] But wait carefully: The journal entry already shows 95,000 cash received, which means discount = 5,000. Loss on Issue includes both discount (5,000) and premium on redemption (5,000). Therefore, the rate of discount = 5%, not 10%.

Final Answer: \[ \boxed{\text{5%}} \]