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Difficulty: MediumIssue and Redemption of Debentures

Apex Limited issued 2,000, 10% debentures of ₦100 each at a discount of 5% on 1st April 2024. If the company closes its accounting books on 31st December 2024, what is the amount of debenture interest to be charged to the Profit and Loss Account for the year?

  1. ₦15,000Answer
  2. B
    ₦20,000
  3. C
    ₦14,250
  4. D
    ₦19,000

Answer

The debenture interest to be charged to the Profit and Loss Account is ₦15,000.
Debenture interest is a fixed charge against profit and must be calculated on nominal value (2,000×₦100=₦200,0002,000 \times ₦100 = ₦200,000). For the 9-month period from 1st April to 31st December 2024, interest payable is ₦200,000×10%×912=₦15,000₦200,000 \times 10\% \times \frac{9}{12} = ₦15,000.

Step-by-Step Solution

1
Calculate the total nominal (face) value of the debentures issued.
Total Nominal Value = 2,000×₦100=₦200,0002,000 \times ₦100 = ₦200,000
Debenture interest is always computed on nominal value, regardless of whether debentures are issued at par, premium, or discount.
2
Calculate the annual debenture interest.
Annual Interest = 10%×₦200,000=₦20,00010\% \times ₦200,000 = ₦20,000
The rate specified on debentures (10%) is an annual coupon rate.
3
Time-apportion interest for the period from issue date (1st April 2024) to year-end (31st December 2024).
Interest for 9 months = ₦20,000×912=₦15,000₦20,000 \times \frac{9}{12} = ₦15,000
The debentures were held for 9 months during the financial year.

Key Concept

Debenture Interest Calculation and Time Apportionment
Estimated Time:1m 30s
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Topics

Issue and Redemption of Debentures

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