Debenture Application & Allotment A/c Dr. 95,000

Loss on Issue of Debentures A/c Dr. 10,000

To 9% Debenture A/c 1,00,000

To Premium on Redemption of Debentures A/c 5,000

On the basis of the above entry, determine the rate of discount at which Rs. 1,00,000, 9% debentures of Rs. 100 each were issued if they were to be redeemed at a premium of 5%.

The correct option is 5%.

Let us analyze the given journal entry step-by-step to determine the rate of discount on the issue of debentures:

1. 9% Debentures Account: The nominal (face) value of the debentures issued is credited to this account. From the entry, this is:
Nominal Value = Rs. 1,00,000.
Since each debenture is of Rs. 100, the number of debentures issued is:
$$\frac{\mathrm{1,00,000}}{100}=\mathrm{1,000}\text{ debentures}$$

2. Premium on Redemption of Debentures Account: The debentures are to be redeemed at a premium of 5%. This is verified as:
5% of Rs. 1,00,000 = Rs. 5,000.
This premium on redemption is credited to the Premium on Redemption of Debentures Account (Rs. 5,000).

3. Loss on Issue of Debentures Account: When debentures are issued at a discount and redeemable at a premium, the total loss (i.e., Discount on Issue + Premium on Redemption) is debited to the Loss on Issue of Debentures Account.
From the entry, we have:
Loss on Issue of Debentures = Rs. 10,000.
We know that:
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption.
Substituting the known values:
Rs. 10,000 = Discount on Issue + Rs. 5,000.
Therefore:
Discount on Issue = Rs. 10,000 - Rs. 5,000 = Rs. 5,000.

4. Rate of Discount: The rate of discount is calculated on the nominal value (face value) of the debentures:
$$\text{Rate of Discount}=\frac{\text{Discount on Issue}}{\text{Nominal Value}}\times 100$$
$$\text{Rate of Discount}=\frac{\mathrm{5,000}}{\mathrm{1,00,000}}\times 100=5\%$$

Thus, the rate of discount at which the debentures were issued is 5%.