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Difficulty: MediumIssue and Redemption of Debentures

Vanguard Nigeria Plc issued ₦400,000\text{₦}400,000, 10%10\% debentures at a discount of 5%5\%. Which of the following journal entries correctly records this transaction?

  1. Debit Bank Account ₦380,000\text{₦}380,000, Debit Discount on Issue of Debentures Account ₦20,000\text{₦}20,000; Credit 10%10\% Debentures Account ₦400,000\text{₦}400,000Answer
  2. B
    Debit Bank Account ₦400,000\text{₦}400,000; Credit 10%10\% Debentures Account ₦380,000\text{₦}380,000, Credit Discount on Issue of Debentures Account ₦20,000\text{₦}20,000
  3. C
    Debit Bank Account ₦420,000\text{₦}420,000; Credit 10%10\% Debentures Account ₦400,000\text{₦}400,000, Credit Premium on Issue of Debentures Account ₦20,000\text{₦}20,000
  4. D
    Debit Purchases Account ₦380,000\text{₦}380,000, Debit Discount Account ₦20,000\text{₦}20,000; Credit 10%10\% Debentures Account ₦400,000\text{₦}400,000

Answer

Debit Bank Account ₦380,000\text{₦}380,000, Debit Discount on Issue of Debentures Account ₦20,000\text{₦}20,000; Credit 10%10\% Debentures Account ₦400,000\text{₦}400,000
When debentures are issued at a discount, the cash received equals Nominal Value minus Discount (400,000−20,000=380,000400,000 - 20,000 = 380,000). The Bank Account is debited with 380,000380,000, Discount on Issue of Debentures is debited with 20,00020,000, and the 10%10\% Debentures Account is credited with the nominal value of 400,000400,000.

Step-by-Step Solution

1
Calculate the amount of discount on issue
\text{Discount} = 5\% \times \text{₦}400,000 = \text{₦}20,000$
Discount is given as a percentage of the nominal value.
2
Calculate the net cash received in the bank
\text{Net Bank Proceeds} = \text{₦}400,000 - \text{₦}20,000 = \text{₦}380,000$
The company receives the nominal amount minus the discount allowed.
3
Formulate double entry postings
Debit Bank Account (₦380,000\text{₦}380,000), Debit Discount on Issue of Debentures (₦20,000\text{₦}20,000), Credit 10%10\% Debentures Account (₦400,000\text{₦}400,000)
Assets (Bank) increase on debit, losses/expenses (Discount) are debited, and liabilities (Debentures) increase on credit at full nominal value.

Key Concept

Accounting entries for the issue of debentures at a discount
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Topics

Issue and Redemption of Debentures

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