Loss on Issue of Debentures Redeemable at Premium: Entries and Write-Off

Imagine borrowing money across a bridge. At one end, the company receives a little less than the debentures’ face value. At the other, it promises to repay a little more. The gap at each end matters. Together, those gaps explain loss on issue of debentures.

This topic can feel tricky because the word loss appears at issue, while part of the extra payment happens much later. Keep the two dates separate and the entries become much easier to understand.

First, separate the three prices

A debenture has a face value, an issue price, and a redemption price. They can all differ.

Suppose a company issues a debenture with a face value of Rs. 100 at a 5% discount and promises to redeem it at a 10% premium.

Question	Calculation	Amount
What is its face value?	Given	Rs. 100
How much does the company receive at issue?	Rs. 100 less 5%	Rs. 95
How much will it repay at redemption?	Rs. 100 plus 10%	Rs. 110

The company receives Rs. 95 but promises Rs. 110. The Rs. 15 difference has two pieces: Rs. 5 discount on issue and Rs. 10 premium on redemption. In this example, both percentages are calculated on the face value, not on the cash received.

The quick calculation map

Let the face value of all debentures be Rs. 1,00,000. They are issued at a 5% discount and redeemable at a 10% premium.

Item	Working	Amount
Face value	1,000 debentures x Rs. 100	Rs. 1,00,000
Discount on issue	5% of Rs. 1,00,000	Rs. 5,000
Cash received	Rs. 1,00,000 less Rs. 5,000	Rs. 95,000
Premium on redemption	10% of Rs. 1,00,000	Rs. 10,000
Amount eventually payable	Rs. 1,00,000 plus Rs. 10,000	Rs. 1,10,000
Loss on issue	Rs. 5,000 plus Rs. 10,000	Rs. 15,000

One useful check is amount payable minus cash received: Rs. 1,10,000 less Rs. 95,000 also gives Rs. 15,000. This check works for these issue and redemption terms; it does not include debenture interest.

Why record the redemption premium at issue?

The company agrees to pay the premium when it issues the debentures. Although cash will leave later, the promise is already part of the terms. That is why the issue entry recognises Premium on Redemption of Debentures A/c as a liability immediately.

The loss account collects the cost of those terms. The liability account records the extra amount owed to debentureholders. They have different jobs, even when both show the same redemption-premium amount in a simple question.

Account	What it tells you
Debentures A/c	Face value the company owes
Premium on Redemption of Debentures A/c	Extra amount promised on repayment
Loss on Issue of Debentures A/c	Cost created by the discount and redemption premium
Bank A/c	Cash actually received or paid

Complete issue entry, step by step

Use the 1,000 debentures in the table above. Assume the entire issue amount is received immediately, so we can focus on the main accounting treatment.

Particulars	Debit	Credit
Bank A/c Dr.	Rs. 95,000
Loss on Issue of Debentures A/c Dr.	Rs. 15,000
To Debentures A/c		Rs. 1,00,000
To Premium on Redemption of Debentures A/c		Rs. 10,000
Total	Rs. 1,10,000	Rs. 1,10,000

Read the entry like a short story. The bank receives Rs. 95,000. The company creates a face-value debt of Rs. 1,00,000 and a further promise of Rs. 10,000. The Rs. 15,000 debit balances the entry because it is the cost of issuing on those terms.

If the question collects application money first and makes allotment due later, use the application and allotment accounts required by that question. The four figures above still control the final issue entry.

What does “write off the loss” mean?

The loss account has a debit balance after issue. Writing it off means transferring that balance to an account that bears the cost. It does not mean paying debentureholders a second time.

In school-level questions, use the available Securities Premium balance first when the question directs that treatment, then charge any remaining amount to the Statement of Profit and Loss. Do not assume an unlimited Securities Premium balance. Read the balance given in the question.

Suppose the company has Rs. 9,000 available in Securities Premium for the Rs. 15,000 loss. The remainder is Rs. 6,000.

Particulars	Debit	Credit
Securities Premium A/c Dr.	Rs. 9,000
Statement of Profit and Loss A/c Dr.	Rs. 6,000
To Loss on Issue of Debentures A/c		Rs. 15,000
Total	Rs. 15,000	Rs. 15,000

The Loss on Issue account is now closed. The premium-on-redemption liability remains until the debentures become due for repayment. Clearing the loss does not clear the promise to debentureholders.

If the problem says the full Rs. 15,000 can be written off against Securities Premium, debit that account with Rs. 15,000. If no Securities Premium is available, debit Statement of Profit and Loss with Rs. 15,000, subject to the instructions in the question.

What happens when redemption becomes due?

Return to our example. When the debentures mature, the company owes Rs. 1,10,000 in total. First make the amount due, then pay it.

Amount due on redemption

Particulars	Debit	Credit
Debentures A/c Dr.	Rs. 1,00,000
Premium on Redemption of Debentures A/c Dr.	Rs. 10,000
To Debentureholders A/c		Rs. 1,10,000

Payment to debentureholders

Particulars	Debit	Credit
Debentureholders A/c Dr.	Rs. 1,10,000
To Bank A/c		Rs. 1,10,000

Notice that Loss on Issue of Debentures A/c does not appear in these redemption entries. It was handled through the write-off. The redemption entries settle the two liabilities created at issue.

For a fuller guide to repayment methods and reserve questions, read Redemption of Debentures in Class 12 Accounts.

Four common combinations

It helps to ask two independent questions: At what price are the debentures issued? At what price are they redeemed?

Terms	Loss on issue to recognise in this lesson
Issued at par, redeemable at par	None
Issued at discount, redeemable at par	Issue discount
Issued at par, redeemable at premium	Redemption premium
Issued at discount, redeemable at premium	Issue discount plus redemption premium

For instance, on a face value of Rs. 2,00,000, an issue at par redeemable at a 5% premium produces a Rs. 10,000 loss on issue. There is no issue discount to add. The issue entry debits Bank Rs. 2,00,000 and Loss on Issue Rs. 10,000, and credits Debentures Rs. 2,00,000 and Premium on Redemption Rs. 10,000.

An issue premium is a different figure from a redemption premium. If debentures are issued above face value, Securities Premium is credited for the excess received. If they are redeemable above face value, Premium on Redemption is credited for the extra amount payable. Keep the two premiums in separate columns of your rough work.

A reverse question: find the discount rate

Sometimes the question gives the change in Securities Premium instead of the issue discount. Work backwards from the total loss.

A company issues 40,000 debentures of Rs. 100 each, redeemable at a 20% premium. Securities Premium falls from Rs. 12,00,000 to Rs. 2,00,000 because loss on issue is written off. Assume the entire Rs. 10,00,000 reduction is used for this loss.

1. Face value = 40,000 x Rs. 100 = Rs. 40,00,000.
2. Loss written off = Rs. 12,00,000 less Rs. 2,00,000 = Rs. 10,00,000.
3. Redemption premium = 20% of Rs. 40,00,000 = Rs. 8,00,000.
4. Issue discount = Rs. 10,00,000 less Rs. 8,00,000 = Rs. 2,00,000.
5. Discount rate = Rs. 2,00,000 / Rs. 40,00,000 x 100 = 5%.

The trap is to call the whole Rs. 10,00,000 the issue discount. It is the combined loss. Remove the redemption premium before finding the discount rate.

Mistakes to catch before you finish

Mistake	Quick correction
Calculating percentages on cash received	Use face value unless the question explicitly says otherwise.
Forgetting the redemption premium in loss on issue	Add it to the discount when both terms apply.
Crediting Debentures A/c with the redemption amount	Credit Debentures A/c with face value; credit Premium on Redemption separately.
Debiting Bank with face value on a discounted issue	Debit Bank with the actual proceeds.
Treating write-off as repayment	Write-off closes Loss on Issue; redemption clears amounts owed.
Debiting Debentures A/c with the premium at redemption	Debit Debentures with face value and Premium on Redemption with the extra amount.
Mixing up interest and loss on issue	Interest is recorded separately under the terms of the debenture.

Try three short questions

1. Debentures of face value Rs. 3,00,000 are issued at a 4% discount and redeemable at a 6% premium. Find the proceeds, premium, and loss on issue.

Answer: Proceeds Rs. 2,88,000; redemption premium Rs. 18,000; loss on issue Rs. 12,000 + Rs. 18,000 = Rs. 30,000.

2. Debentures of face value Rs. 50,000 are issued at par and redeemable at a 10% premium. What is debited to Loss on Issue?

Answer: Rs. 5,000, the premium on redemption. There is no issue discount.

3. A loss on issue of Rs. 24,000 must be written off. Securities Premium available for the purpose is Rs. 15,000. What amount is charged to Statement of Profit and Loss?

Answer: Rs. 9,000. Debit Securities Premium Rs. 15,000 and Statement of Profit and Loss Rs. 9,000; credit Loss on Issue Rs. 24,000.

For further reading, see the official accountancy learning framework, the worked marking scheme on debenture entries and write-off, and the Companies Act provision on uses of Securities Premium.

Frequently asked questions

Is loss on issue the same as discount on issue?

Not always. If debentures are issued at a discount and redeemable at a premium, loss on issue includes both amounts. If there is no redemption premium, the issue discount may be the only component.

Why is premium on redemption recorded before it is paid?

The company makes that promise when it issues the debentures. The liability is recognised at issue and settled when redemption becomes due.

Which amount is credited to Debentures Account at issue?

The face value. Put any redemption premium in Premium on Redemption of Debentures Account.

Does a debenture issued at par have no loss on issue?

It can still have a loss on issue if it is redeemable at a premium. In that case, the redemption premium is the loss amount in the issue entry.

Where does the redemption premium go in the issue entry?

Credit Premium on Redemption of Debentures Account. The corresponding amount is included in the debit to Loss on Issue of Debentures Account.

Is Securities Premium the same as premium on redemption?

No. Securities Premium relates to an amount received above face value on issue. Premium on Redemption is an extra amount the company has promised to pay later.

What if Securities Premium is smaller than the loss?

In the usual school question, use the available amount as directed and charge the balance to Statement of Profit and Loss. Check the question’s instructions and the balance actually available.

Does writing off the loss pay the debentureholders?

No. It closes the Loss on Issue account. Debentureholders are paid later through the redemption entries.

Is debenture interest included in this loss calculation?

No. The issue discount and redemption premium determine the loss discussed here. Interest is accounted for separately.

What is the fastest way to check my issue entry?

Add the debit amounts and credit amounts. In the worked example, Rs. 95,000 cash plus Rs. 15,000 loss equals Rs. 1,10,000; Rs. 1,00,000 debentures plus Rs. 10,000 redemption premium also equals Rs. 1,10,000.