Deb Ltd has 100 $1000 face amount 10 year debentures on issue.They were issued on 1 July 20X0 at par with an annual interest rate of 5%.The interest is paid in arrears on 30 June of each year.The terms of the debenture provide that the company can buy back the debentures provided that it pays a penalty of $50 per debenture.If on 30 June 20X3 the company bought back half of these debentures, what is the total expense relating to this debenture issue would be included in the income statement for that financial year?

Question

Quizplus · Accepted Answer

There are 100 debentures with a face value of $1000 each, making the total face value of the debenture issue $100,000 (100 × $1000).

The company bought back half of these debentures, which means they bought back 50 debentures.

To calculate the cost of buying back the debentures, we need to consider the penalty of $50 per debenture.

Therefore, the cost of buying back 50 debentures would be: 
50 debentures × $50 penalty per debenture = $2500

This cost would be included in the income statement as an expense for the financial year in which the debentures were bought back. Therefore, the total expense relating to this debenture issue that would be included in the income statement for that financial year would be $2500.

So, the best choice is D.

Deb Ltd Has 100 $1000 Face Amount 10 Year Debentures