Interest and writing off the loss

Debenture interest is worked out on the face value, at the fixed (coupon) rate, usually every six months. It is a charge on profit.

The entries:

• Interest due: Debenture Interest Dr. To Debentureholders (the net amount), To Income Tax Payable (the tax deducted at source, TDS).
• Paid: Debentureholders Dr. To Bank.
• TDS paid to the government: Income Tax Payable Dr. To Bank. The company does not keep the tax.
• Year end: Statement of Profit and Loss Dr. To Debenture Interest.

Example: half a year's interest on 4,00,000 of 9% debentures is 18,000. With 10% TDS, 1,800 goes to Income Tax Payable and the holders get 16,200.

Discount or loss on issue is a capital loss. It is written off in the year of issue, first from the Securities Premium (as Section 52(2) allows), and any remainder from the Statement of Profit and Loss:

Securities Premium Dr., Statement of Profit and Loss Dr. To Discount (or Loss) on Issue of Debentures.