Treatment of Unamortized Debenture Discount or Premium

The treatment of unamortized debenture discount or premium is an essential aspect of corporate accounting. When a company issues debentures at a discount or premium, it does not recognize the entire amount as an immediate expense or income. Instead, it amortizes the discount or premium over the life of the debenture. This ensures that the expense or income is systematically allocated to different accounting periods.

Meaning of Unamortized Debenture Discount and Premium

When a company issues debentures:

• At a Discount: The company receives less than the face value but repays the full value at maturity. The difference is recorded as a loss and amortized over the debenture’s life.

• At a Premium: The company receives more than the face value. The excess amount is recorded as a gain and amortized over time.

Any portion of the discount or premium that has not yet been written off is called the unamortized amount.

Accounting Treatment of Unamortized Debenture Discount:

A. Initial Recognition of Debenture Discount

When debentures are issued at a discount, the company records the discount as a loss under a separate account called the Debenture Discount Account. The entry is:

Bank A/c Dr. (Amount received)
Discount on Issue of Debentures A/c Dr. (Discount amount)
To Debentures A/c (Face value of debentures)

The discount is treated as a capital loss and appears as an asset under “Miscellaneous Expenditures” in the Balance Sheet.

B. Amortization of Debenture Discount

Instead of charging the entire discount to the Profit & Loss Account immediately, the company writes it off periodically using the straight-line method or the effective interest method. The journal entry is:

Profit & Loss A/c Dr.
To Discount on Issue of Debentures A/c

The discount is proportionately transferred to expenses every year, ensuring that the cost is allocated across the debenture’s tenure.

C. Impact on Financial Statements

• Profit & Loss Account shows an annual amortization expense.

• Balance Sheet reflects the unamortized discount under assets.

At the time of redemption, any remaining unamortized discount must be fully written off to ensure accurate accounting.

Accounting Treatment of Unamortized Debenture Premium:

A. Initial Recognition of Debenture Premium

When debentures are issued at a premium, the company records the premium as a gain under the Securities Premium Reserve Account. The journal entry is:

Bank A/c Dr. (Total amount received)
To Debentures A/c (Face value of debentures)
To Securities Premium Reserve A/c (Premium amount)

The Securities Premium Reserve is treated as a capital reserve and can be used only for specific purposes under Company Law, such as:

• Issuing bonus shares

• Writing off preliminary expenses

• Writing off debenture discounts

B. Amortization of Debenture Premium

Since the premium received is an income, companies may choose to amortize it over the life of the debentures rather than recognizing it immediately. The entry is:

Securities Premium Reserve A/c Dr.
To Profit & Loss A/c

This ensures that the premium is recognized gradually, matching income with the period of the debenture’s tenure.

C. Impact on Financial Statements

• The Profit & Loss Account may show an annual transfer of premium as income.

• The Balance Sheet reflects unamortized premium under the reserves and surplus section.

At the time of redemption, any remaining unamortized premium may be adjusted against reserves.

Early Redemption and Its Impact on Unamortized Discount or Premium:

When a company redeems debentures before maturity, it must adjust any unamortized discount or premium as follows:

A. Unamortized Discount

• The remaining discount is fully written off in the Profit & Loss Account.

• The journal entry is:

Profit & Loss A/c Dr.
To Discount on Issue of Debentures A/c

This ensures that all associated costs are accounted for before debenture repayment.

B. Unamortized Premium

• If the premium has not been fully amortized, it is transferred to General Reserve or used to write off redemption losses.

• The journal entry is:

Securities Premium Reserve A/c Dr.

To General Reserve A/c

This ensures that the premium is correctly adjusted before the final redemption.

Regulatory and Tax Implications:

A. Regulatory Guidelines

• Companies must comply with accounting standards (AS-16 or Ind-AS 32) when amortizing discounts and premiums.

• The Companies Act, 2013 restricts the use of Securities Premium Reserve and mandates specific uses.

B. Tax Considerations

• Discount on debentures is treated as a business expense and can be deducted for tax purposes.

• Premium on debentures is not taxable upfront but may be taxed when transferred to reserves.