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Debentures which are issued at a value less than its face value (nominal value) is said to be issued at discount. There is no restriction on companies for issuing debentures on discount.
The following treatment is done when discount is applied on issue of debentures
There are two methods that are applicable when debentures are redeemed in installments.
1. Fixed Installment Method: Also known as equal installment method. This method is used when debentures are redeemed in lump sum and after a specific time period. In this method an equal amount of discount or loss is written off till the debenture is not paid off. The formulae used to calculate the discount amount is given below
2. Variable Instalment Method: This method is also known as Fluctuating or Reducing Instalment Method or Proportion Method. In this method debentures are paid in annual drawings or instalments. The amount of discount that is written off every year should be in proportion to debentures that are outstanding at the beginning of each year. Therefore the amount of discount will vary each year, and it will be more in the initial years and will subsequently reduce at the end of redemption.