Interest on debentures and discount on issue

The essentials

Interest on debentures is a charge against profit, payable at a fixed rate on the face value, whether the company earns a profit or not. The company deducts tax at source (TDS) at the prescribed rate before paying interest and deposits it with the government. At the year end, total interest is transferred to the Statement of Profit and Loss as a finance cost.

Discount or loss on issue of debentures is a capital loss. It is written off first out of Securities Premium (if available) and the balance from the Statement of Profit and Loss. Any part not yet written off is shown as an asset under other non-current or other current assets.

Key points

• Interest = Face value × Rate × Period.
• Interest due: Debenture Interest A/c Dr; To Debenture Holders A/c; To TDS Payable A/c.
• Payment: Debenture Holders A/c Dr; To Bank A/c.
• Year end: Statement of Profit and Loss Dr; To Debenture Interest A/c.
• Interest is calculated on face value, not on issue price.

Exam tips

Check whether interest is half-yearly; then calculate for six months. Net amount paid = Gross interest − TDS.

Common mistakes

• Calculating interest on the issue price of debentures issued at a discount.
• Treating debenture interest as an appropriation of profit.