Question

H Ltd. purchased machinery worth Rs.99,000 from P Ltd. The payment was made by issue of 12% debentures of Rs.100 each. Pass the necessary journal entries for the issue of debentures when debentures are issued at 10% discount in the books of H Ltd.

• A.

  Date	Particulars	L.F.	Dr. Amount	Cr. Amount
  	P Ltd. Dr.		1,10,000
  	To 12% Debentures A/c			1,10,000

• B.

  Date	Particulars	L.F.	Dr. Amount	Cr. Amount
  	P Ltd. Dr.		99,000
  	Discount on Issue of Debentures A/c Dr.		11,000
  	To 12% Debentures A/c			1,10,000

• C.

  Date	Particulars	L.F.	Dr. Amount	Cr. Amount
  	12% Debentures A/c		1,10,000
  	To P Ltd.			99,000
  	To Discount on Issue of Debentures A/c			11,000

• D.

  Date	Particulars	L.F.	Dr. Amount	Cr. Amount
  	12% Debentures A/c		1,10,000
  	To P Ltd.			1,10,000

Hint:

Debentures of Rs. 100 issued at Rs. 90 clear Rs. 99,000 of debt with Rs. 1,10,000 face value. The Rs. 11,000 gap is a debit to discount on issue.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
When debentures are issued to a vendor for an asset, the company owes the vendor the purchase price. The debentures are issued to settle that debt. If they are issued at a discount, the face value of debentures is more than the amount of the debt, and the difference is a loss called discount on issue of debentures.

Step 2: Find the face value of debentures:
Each debenture has a face value of Rs. 100 and is issued at 10% discount, so the issue price is Rs. 90.
Number of debentures = 99,000 / 90 = 1,100.
Face value of debentures = 1,100 x 100 = Rs. 1,10,000.
Discount = 1,10,000 - 99,000 = Rs. 11,000.

Step 3: Decide the debit and credit:
The vendor P Ltd. is a creditor for Rs. 99,000, so it is debited to clear the debt. The discount is a loss, so Discount on Issue of Debentures A/c is debited Rs. 11,000. The liability for debentures is credited at face value, Rs. 1,10,000. Debits (99,000 + 11,000) equal credits (1,10,000).

Step 4: Write the entry:
P Ltd. A/c Dr. 99,000
Discount on Issue of Debentures A/c Dr. 11,000
To 12% Debentures A/c 1,10,000.
This is the entry shown in option 2.

Step 5: Check the other options:
Option 1 debits P Ltd. for Rs. 1,10,000, which is more than the debt and ignores the discount, so it is wrong. Option 3 debits 12% Debentures and credits P Ltd. and the discount account, which is the reverse of an issue. Option 4 also reverses the entry. Only option 2 is correct.

Final Answer:
The entry debits P Ltd. Rs. 99,000 and Discount on Issue of Debentures Rs. 11,000, and credits 12% Debentures Rs. 1,10,000. This is option 2. \[ \boxed{\text{Option 2}} \]