Redemption of Debentures Out of Capital and Out of Profit
Arjun EP
Methods for Redemption of Debentures
Redeemable debenture has specific time for expire.
This time is known as maturity period.
The terms and condition of redemption is mentioned in the Articles of Association and prospectus.
After maturity period, these debentures should be redeemed.
At the time repayment, principal amount and arrear interest is paid to debenture holders
Debentures can be redeemed at par, discount or premium.
The main methods of redemption of debentures:
(1) Redemption of debentures in lump-sum at maturity (a) sinking fund method; (b) Insurance policy method
(2) Redemption of debentures by draw of lots (partial or installments)
(3) Redemption of debentures by purchasing them in the open market
(4) Redemption of debentures by conversion
Guidelines of Company Act
(a) Every company shall create debenture redemption reserve (DRR) in case of issue of debentures redeemable after a period of more than 18 months from the date of issue.
(b) If company issues non-convertible debentures and non-convertible portion of partly convertible debentures, the creation of DRR is obligatory.
(c) A company shall create DRR equivalent to 50% of issued debentures’ face value before starting the redemption of debenture.
(d) Drawal from DRR is permissible only after 10% of the debenture liability has already been redeemed by the company.
Sources of funds for redemption of debentures
Generally, company has two sources of funds for the redemption of debentures.
(1) Redemption of debentures out of capital
(2) Redemption of debentures out of profits
REDEMPTION OF DEBENTURES OUT OF CAPITAL
Redemption of debentures out of capital is a very unusual source of finance and is rarely followed.
Under this method, debentures are redeemed out of working capital.
If working capital is not sufficient, company can sells fixed assets also.
It reduces assets of the company and effects working capital of the company
It does not need any debenture redemption reserve (DDR) if company is related to infrastructure and company issues debentures upto 18 months.
Journal Entries
|
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
|
Debentures transfer to debenture holders |
|
|
|
|
|
|
9% Debentures account Premium on redemption of debentures account To Debenture holders account To Discount on debentures redemption (Being- debentures transfer to debenture holders with …… either premium or discount any one#) |
Dr Dr |
|
xxxx xxxx#
|
xxxx xxxx# |
|
|
Payment made to debenture holders |
|
|
|
|
|
|
Debenture holders account To Bank account (Being- final payment made to debenture holders) |
Dr
|
|
xxxx |
xxxx |
|
|
Premium on redemption transfer to profit and loss |
|
|
|
|
|
|
Profit and loss account To Premium on redemption account (Being- premium transfer to profit and loss account) |
Dr
|
|
xxxx |
xxxx |
PROBLEM: 10
Tarushi Company Ltd has following extracted information:
|
9% Debentures of Rs 100 Premium on redemption of debentures Working capital |
20,00,000 10% 25,00,000 |
|
There are no arrears of interest.
Required: Journal entries
Journal Entries
In the book of Tarushi Company Ltd
|
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
|
Debentures transfer to debenture holders |
|
|
|
|
|
|
9% Debentures account Premium on redemption of debentures account To Debenture Holders Account (Being- debentures transfer to debenture holders with premium) |
Dr Dr |
|
20,00,000 2,00,000
|
22,00,000 |
|
|
Payment made to debenture holders |
|
|
|
|
|
|
Debenture holders account To Bank account (Being- final payment made to debenture holders) |
Dr
|
|
22,00,000
|
22,00,000 |
|
|
Premium on redemption transfer to profit and loss |
|
|
|
|
|
|
Profit and loss account To Premium on redemption account (Being- premium (loss) transfer to profit and loss account) |
Dr
|
|
2,00,000 |
2,00,000 |
#####
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#####
REDEMPTION OF DEBENTURES OUT OF PROFIT
Under this method, profit transferred to debentures redemption reserve account annually through profit and loss appropriation account.
When there is sufficient amount, debentures are redeemed.
Redemption may be at par, discount or premium.
After redemption of debentures, debentures redemption fund account transferred to general reserve account.
Journal Entries
|
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
|
Profit transfer to debentures redemption reserve |
|
|
|
|
|
|
Profit and loss appropriation account Discount on debentures redemption account To Debentures redemption reserve account To Premium on redemption of debentures A/c (Being- profit transfer to debentures redemption reserve) |
Dr Dr
|
|
xxxx xxxx
|
xxxx xxxx |
|
|
Debentures transfer to debenture holders |
|
|
|
|
|
|
..% Debentures account Premium on debentures of redemption account To Debenture holders account To Discount on debentures redemption (Being- debentures transfer to debenture holders with ……..) |
Dr Dr
|
|
xxxx xxxx
|
xxxx xxxx |
|
|
Payment made to debenture holders |
|
|
|
|
|
|
Debenture holders account To Bank account (Being- final payment made to debenture holders) |
Dr
|
|
xxxx |
xxxx |
|
|
Debentures redemption reserve transfer to general reserve |
|
|
|
|
|
|
Debentures redemption reserve account To General reserve account (Being- debentures redemption reserve transfer to general reserve) |
Dr
|
|
xxxx |
xxxx |
PROBLEM: 11
NEEK Corporation Ltd has following extracted information:
|
8% Debentures of Rs 100 Premium on redemption of debentures Profit and loss (Cr) |
15,00,000 10% 20,00,000 |
|
There are no arrears of interest.
Required: Journal entries
SOLUTION
Journal Entries
In the book of NEEK Corporation Ltd
|
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
|
|
Profit transfer to debentures redemption reserve |
|
|
|
|
|
|
Profit and loss appropriation account To Debentures redemption reserve account To Premium on redemption of debentures A/c (Being- profit transfer to debentures redemption reserve value Rs 15,00,000 with 10% premium) |
Dr
|
|
16,50,000
|
15,00,000 1,50,000 |
|
|
Debentures transfer to debenture holders |
|
|
|
|
|
|
8% Debentures account Premium on debentures of redemption To Debenture holders account (Being- debentures transfer to debenture holders with premium) |
Dr Dr
|
|
15,00,000 1,50,000
|
16,50,000 |
|
|
Payment made to debenture holders |
|
|
|
|
|
|
Debenture holders account To Bank account (Being- final payment made to debenture holders) |
Dr
|
|
16,50,000 |
16,50,000 |
***********
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