A company has 5% debentures worth ₦500 000 ordinary share capital ₦2 000 000, and preference shares ₦1500 000. if the company made a profit of ₦1 000 000, t...

Assessment: JAMB UTME - Principles of Accounts - 1997 Subject: Financial Accounting

Question 1 Report

A company has 5% debentures worth ₦500 000 ordinary share capital ₦2 000 000, and preference shares ₦1500 000. if the company made a profit of ₦1 000 000, the debenture interest would amount to
Answer Details
Debentures are a form of long-term borrowing where the company issues bonds to investors and pays them interest at a fixed rate. In this case, the company has ₦500,000 worth of 5% debentures. This means that the company will pay ₦500,000 x 5% = ₦25,000 in interest to debenture holders. Note that the profit made by the company is not relevant to the calculation of debenture interest. The company has a legal obligation to pay interest on its debentures regardless of whether it makes a profit or not. Therefore, the correct answer is ₦25,000.
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