When debentures are issued at a discount:
A) the discount represents the cost of attracting the funds and should be recognised as an expense.
B) no further entries are required because the discount is calculated prior to receipt of the funds and therefore will not be recorded.
C) the effect interest method is used to calculate the amortised cost of the financial liability.
D) the discount amount can be used to offset any gains shown when debentures have been issued at a premium.

Question

Quizplus · Accepted Answer

When debentures are issued at a discount, the effect interest method is used to calculate the amortised cost of the financial liability. This involves recording the discount as a separate liability initially and then gradually reducing it over the term of the debenture. This ensures that the actual interest cost is recognised over the life of the debenture and not just at the time of payment. Options A, B, and D are incorrect as they do not accurately reflect the accounting treatment for discounts on debentures.

When Debentures Are Issued at a Discount