Examkin

Question

Difficulty: MediumIssue and Redemption of Debentures

Oasis Beverages Plc issued 5,0005,000 units of 12%12\% debentures of ₦100\text{₦}100 each at a discount of 6%6\%, redeemable at a premium of 4%4\%. What is the total loss on issue of debentures (in naira) to be recognized in the books of the company?

Answer: 50000 ₦

Answer

The total loss on issue of debentures to be recognized is ₦50,000.
When debentures are issued at a discount and redeemable at a premium, the overall loss on issue consists of both the issue discount (₦30,000) and the redemption premium (₦20,000). Adding these two components together gives a total loss of ₦50,000.

Step-by-Step Solution

1
Calculate the nominal (face) value of the debentures issued
Nominal Value = 5,000×₦100=₦500,0005,000 \times \text{₦}100 = \text{₦}500,000
The nominal value represents the aggregate principal amount of the debentures.
2
Calculate the discount allowed on issue
Discount on Issue = 6%×₦500,000=₦30,0006\% \times \text{₦}500,000 = \text{₦}30,000
Issuing debentures at a 6%6\% discount means receiving ₦30,000\text{₦}30,000 less than nominal value.
3
Calculate the premium payable on redemption
Premium on Redemption = 4%×₦500,000=₦20,0004\% \times \text{₦}500,000 = \text{₦}20,000
Redeeming at a 4%4\% premium requires paying ₦20,000\text{₦}20,000 above nominal value at maturity.
4
Calculate the total loss on issue of debentures
Total Loss = Discount on Issue + Premium on Redemption = ₦30,000+₦20,000=₦50,000\text{₦}30,000 + \text{₦}20,000 = \text{₦}50,000
Both the discount granted at issue and the obligation to pay a premium on redemption constitute total capital losses arising from the debenture issue.

Key Concept

Accounting for loss on issue of debentures issued at a discount and redeemable at a premium.
Estimated Time:1m 30s
Rate this question

Topics

Issue and Redemption of Debentures

More questions from this topic