Question

The following journal entry appears in the books of X Co. Ltd. 

\[\text{Bank A/c Dr. 4,75,000} \\ \text{Loss on Issue of Debentures A/c Dr. 75,000} \\ \text{To 12\% Debentures A/c 5,00,000} \\ \text{To Premium on Redemption of Debenture A/c 50,000} \]

In this case, the debentures have been issued at a discount of 5%. What is the rate of premium on redemption of debentures?

• A. 5%
• B. 15%
• C. 20%
• D. 10%

Hint:

Always remember: Loss on issue of debentures includes both the discount on issue and the premium payable on redemption.

Answer 1

The Correct Option is D

Step 1: Face Value of Debentures 
The entry shows that debentures were issued at a face value of Rs. 5,00,000. \[ \text{Face Value} = 5,00,000 \]

Step 2: Issue at Discount 
Debentures were issued at 5% discount. \[ \text{Discount} = \frac{5}{100} \times 5,00,000 = 25,000 \] But in the entry, the loss shown is Rs. 75,000, which means: \[ \text{Loss on Issue of Debenture} = \text{Discount + Premium on Redemption} = 25,000 + 50,000 \] This matches the journal entry.

Step 3: Calculate Premium on Redemption Rate 
\[ \text{Premium on Redemption} = 50,000 \] \[ \text{Rate of Premium} = \frac{\text{Premium on Redemption}}{\text{Face Value}} \times 100 \] \[ = \frac{50,000}{5,00,000} \times 100 = 10% \]

Final Answer: \[ \boxed{\text{Rate of Premium on Redemption = 10\%}} \]