How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘discount in the issue of debentures’ when the debentures are to be redeemed in instalments?

— Kishore V, SME and ACW at Edumarz

Debentures are said to be issued at a discount when they are issued at a price lower than their par value or face value. 

A capital loss is defined as the difference between the issuance price and the debenture’s face value. 

Discount on Issue of Debentures is indicated in the Notes to Accounts in accordance with the Revised Schedule VI of the Companies Act:
1. The amount that must be written off within 12 months of the Balance Sheet’s date – is shown under Other Current Assets
2. Under Other Non-Current Assets Accounting Treatment, the amount that will be written off after 12 months from the date of the Balance Sheet is shown.

For example, suppose a corporation has issued Rs 6,00,000 in 10% debentures at a 5% discount, redeemable each year for Rs 2,00,000. The total reduction on Rs 6,00,000 debentures discounted at 5% is Rs 30,000 (6,00,000 5/100 = Rs 30,000). If a discount on the issuing of debentures is to be wiped off in five years, the accounting procedure is Year 1: Amount must be written off each year = 30,000 15=6,000 – as shown on the income statement
Amount to be written off in the coming year = 6,000 – shown under Current Assets as Other Current Asset.
Remaining Amount to be Written-Off After Next Year = 30,000 – 6,000 – 6,000= 18,000 – Shown under Non-Current Assets as Other Non-Current Asset.

NOTES TO ACCOUNTS

Year 2: Amount to be written-off = 30,000 15=6,000 – Shown in Profit and Loss Statement
Amount to be written off in the coming year = 6,000 – shown under Current Assets as Other Current Asset.
Other Non-Current Assets = 18,000 – 6,000 = 12,000 – Shown as Other Non-Current Asset under Non-Current Assets.
The amount of discount on debenture issues will be totally wiped off at the conclusion of Year 5.