Practical Ltd issued $100,000 in 4-year,6 per cent annual debentures for Theoretical Ltd on 1 July 2002.The market required rate of return on the debentures at the time of issue was 8 per cent.Theoretical Ltd decides to forgive the debt on 1 July 2004.Any premium or discount is amortised straight-line.What is the entry in the books of Theoretical Ltd to record the forgiveness of the debt?
E) None of the given answers.

Question

Quizplus · Accepted Answer

When a debt is forgiven, the entry in the books of the creditor (in this case Theoretical Ltd) would be to cancel the remaining balance of the debt. Since any premium or discount on the debt was amortised straight-line, there would be no balance left to write off. Thus, the entry would simply be to debit (reduce) the debenture account and credit (reduce) the liability account. The correct entry is:
Debenture account - $100,000
Liability account - $100,000

Practical Ltd Issued $100,000 in 4-Year,6 Per Cent Annual Debentures