Issue of Debentures

Treatment of Interest on Debentures

The company borrows some amount of capital at a fixed rate of interest for expansion which is known as a debenture. Interest on debentures is extra capital debenture holders receive for investing in the company’s debenture. But if the debenture is issued as collateral security then there will be no interest paid by the company. In this article, we will learn about the Treatment of Interest on Debentures.

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Treatment of Interest on Debentures

We calculate Interest on debentures at a fixed rate on its nominal (face) value payable quarterly, half yearly or yearly as per the terms of issue.

The rate of interest is a prefix value to the debenture, say 9% Debentures and, therefore, is payable even if the company incurs a loss. It is a charge against profit. Interest payment may be subject to tax deducted at source (TDS).

We show Interest on Debentures as ‘Finance Cost’ in Statement of Profit and Loss.

Browse more Topics under Issue Of Debentures

Learn more about the meaning, advantages, disadvantages, and features of debentures here in detail.

TDS (Tax Deducted at Source)

The company paying interest on debentures deducts income tax on interest at the prescribed rate. Companies deposit the amount of tax deducted with the income tax authorities.

interest on debentures

Accounting Entries

Entries for interest on debentures and Tax Deducted at Source are as follows:

1. When interest is due and we ignore Tax:

Date Particulars Amount (Dr) Amount (Cr)
Interest on Debentures A/c Dr.  XXX
   To Debentureholders’ A/c Cr.  XXX
(Being interest payable)

2. When interest is due and tax is deducted at source:

Date Particulars Amount (Dr) Amount (Cr)
Interest on Debentures A/c Dr.  XXX
   To Debentureholders’ A/c Cr.  XXX
   To TDS Payable A/c Cr.  XXX
(Being interest is payable on debentures and TDS)

3. On payment of interest:

Date Particulars Amount (Dr) Amount (Cr)
Debentureholders’ A/c Dr.  XXX
   To Bank A/c Cr.  XXX
(Being interest paid is deposited in bank)

4. On deposit of TDS in Government Account:

Date Particulars Amount (Dr) Amount (Cr)
TDS Payable A/c Dr.  XXX
    To Bank A/c Cr.  XXX
(Being TDS deposited in bank)

5. On transfer of Interest to Statement of Profit and Loss at the end of the year:

Date Particulars Amount (Dr) Amount (Cr)
Statement of Profit and Loss Dr.  XXX
   To Interest on Debentures A/c Cr.  XXX
(Being the interest in debentures transferred to Statement of Profit and Loss)

 Points To Remember for Interest on Debentures:

  1. Interest on Debentures is a charge against the profit of the company.
  2. We calculate Interest on Debentures at a fixed rate of interest on the nominal value.
  3. Interest is not payable on debentures issued as collateral security.
  4. The interest rate is prefixed.
  5. We need to transfer the balance in Interest on Debentures to the Statement of Profit and Loss at the end of the year.
  6. If the amount of interest accrued and due is not paid, it is known as Interest Accrued and Due or Interest Outstanding.
  7. If the date of payment of interest and accounting date is different, we will credit the Interest Accrued and Due account at the end of the year to maintain accounting record on an accrual basis.
  8. We show the Interest Accrued (whether due or not) on debentures is under the head ‘Current Liabilities,’ and sub-head ‘Other Current Liabilities’

Solved Question For You

On 1st April 2017, T.T. Ltd. issued 500, 9% Debentures of ₹ 500 each at a discount of 4% redeemable at a premium of 5% after three years.

Pass necessary Journal entries for the issue of debentures and debenture interest for the year ended 31st March 2018 assuming that interest is payable on 30th September and 31st March and the rate of T.D.S. is 10%. On 31st March every year, the company closes its books.

Ans:
Date Particulars   Amount (Dr) Amount (Cr)
2017
April 1 Bank A/c (500 x ₹ 480) Dr. 2,40,000
   To Debentures Application and Allotment A/c Cr. 2,40,000
(Being the receipt of application money for 500 debentures @ ₹ 480 each)
 
Debentures Application and Allotment A/c Dr. 2,40,000
  Loss on Issue of Debentures A/c Dr.    22,500
   To 9% Debentures A/c Cr. 2,50,000
   To Premium on Redemption of Debentures A/c Cr.    12,500
(Being the issue of 500, 9% Debentures of ₹ 500 each at 4% discount and redeemable at 5% premium)
Sept 30 Interest on Debentures A/c Dr. 11,250
   To Debentureholders’ A/c Cr. 10,125
   To TDS Payable A/c Cr.   1,125
(Being the interest payable on 9% Debentures for 6 months and TDS @ 10%)
Sept 30 Debentureholders’ A/c Dr. 10,125
TDS Payable A/c Dr.   1,125
   To Bank A/c Cr. 11,250
(Being payment of interest to debenture holders and deposit of tax deducted at source in the bank)
2018
March 31 Interest on Debentures A/c Dr. 11,250
   To Debentureholders’ A/c Cr. 10,125
   To TDS Payable A/c Cr.   1,125
(Being interest payable on 9% Debentures for 6 months and tax deducted at source @ 10%)
March 31 Debentureholders’ A/c Dr. 10,125
TDS Payable A/c Dr.   1,125
   To Bank A/c Cr. 11,250
(Being payment of interest to debenture holders and deposit of tax deducted at source in the bank)
March 31 Statement of Profit and Loss Dr. 22,500
   To Interest on Debentures A/c Cr. 22,500
(Being transfer of the interest in debentures to Statement of Profit and Loss)

 

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