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Difficulty: MediumIssue and Redemption of Debentures

On 1st April 2025, Horizon Ltd issued ₦800,000\text{₦}800,000, 12%12\% debentures at a discount of 5%5\%. Interest is payable semi-annually on 30th September and 31st March. What is the total amount of debenture interest (in ₦\text{₦}) to be charged to the Profit and Loss Account for the financial year ended 31st December 2025?

Answer: 72000 ₦

Answer

The total debenture interest to be charged to the Profit and Loss Account for the financial year ended 31st December 2025 is ₦72,000.
Debenture interest is computed at the stated annual rate of 12%12\% on the nominal value of ₦800,000\text{₦}800,000, resulting in an annual interest of ₦96,000\text{₦}96,000. Because the debentures were issued on 1st April 2025 and the financial year ends on 31st December 2025, interest accrued for only 9 months. The total interest charged to the Profit and Loss Account is ₦96,000×912=₦72,000\text{₦}96,000 \times \frac{9}{12} = \text{₦}72,000.

Step-by-Step Solution

1
Calculate annual debenture interest on nominal value.
Annual interest = 12% of ₦800,000 = ₦96,000.
Debenture interest is calculated on nominal (par) value, regardless of whether debentures are issued at par, premium, or discount.
2
Determine the time period between debenture issue date and financial year-end.
From 1st April 2025 to 31st December 2025 is 9 months.
Interest expense must be recognized for the portion of the year the debentures were outstanding.
3
Calculate time-apportioned debenture interest expense.
₦96,000 × (9 / 12) = ₦72,000.
The Profit and Loss Account requires the exact accrued expense for the 9 active months of the accounting period.

Key Concept

Time Apportionment of Debenture Interest on Nominal Value
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Topics

Issue and Redemption of Debentures

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