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Redemption means repayment. Debenture is basically loan capital and has to be repaid as
terms agreed at the time of issue. According to sec. 80A of the Companies Act debentures
issued by a company have to be redeemed within 10 years after issue. Debentures are
normally redeemed after expiry of a specified period. However, the company may redeem
debentures before expiry of a specified period; if articles of association & debenture deed
permit it. Even companies are allowed to purchase it own debentures in open market such
own debentures may be kept by company as investment or it may be redeemed own
debentures by cancellation.
a) At Par:
Debentures are redeemed par i.e. at face value; face value of the debentures will be repaid
on redemption.
b) At Premium:
The debentures may be redeemable at premium. In such case at time of redemption
debenture hold will be paid face value of debentures plus premium on redemption of
debentures. For example, a debenture of face value of Rs.100 may be redeemable at
Rs.110 such premium payable on redemption is a capital loss for the company. Such
premium on redemption must be provided as a liability at the time of issue of debenture.
c) At discount:
At the time of redemption of debentures, the debenture-holders are paid something less
than the face value of the debenture practically such debenture are not issued by any
company. However the company may purchased it own debentures in open market when
debentures are traded at less than face value, and redeemed own debentures at discount.
The amount to be paid to debentures holders depends upon the terms of issue. According
to the terms of issue, the debentures may be redeemable fully in:
1. one lump sum at a given time or
2. in installment or
3. by drawing lots.
REDEMPTION OUT OF CAPITAL
Under this method the company holds a part of divisible profit, for redeeming the
debentures. The amount of profit is reduced to the extent of debentures to be redeemed
and hence not available for distribution by way of dividend among the shareholders. The
existing liquid resources are not affected by redemption of debenture. For redemption of
debentures out of profit; adequate amount is appropriated from profit and loss
appropriation A/c and it is transferred to Debenture Redemption Reserve A/c every year till
debenture redeemed. Sec. 117 C under the Companies' Act deals with the liability of a
company to create "Debenture redemption reserve A/c" (DRR). DRR represents the
retention out of profits made for the purpose of redeeming debentures. As it is created for
a specific purpose out of revenue profits, it may be called as a "Specific Revenue Reserve".
The amount of divisible profits withheld by the company may be retained in the business
itself as a source of internal finance. i.e. DRR amount not invested outside business to
provide cash for redemption.
In most cases, the debentures are redeemable in lump sum on a specified date. Therefore
it is necessary to make an arrangement for the amount required to redeem debentures.
Sinking fund/Debenture redemption fund is created by setting aside a fixed sum of profit
every year. The amount of annual appropriation should be such amount which required for
payment on redemption, debenture holders. Such accumulate a fixed amount at the expiry
of given period of time and at given rate of interest. For calculating annual appropriation
towards Sinking fund, Sinking fund table can be used. The same amount is invested in
readily marketable securities. Income from such Investment (S.F. Investment) is credited to
Sinking fund and along with annual appropriation. It is invested every year; till debenture,
become due for redemption. When debentures become due for redemption, Sinking fund
investment is realized. Any profit OR loss on sale of S.F. investment is transferred to
Sinking fund A/c again any profit or loss on redemption of debenture is also transferred to
Sinking fund. After redemption of debenture, balance in Sinking fund is free reserve;
therefore it is transferred to general reserve, and in case of partial redemption of
debenture to the extent nominal value of debentures redeemed should be transferred to
general reserve.
Note: 3
i. No investment should be made in last year
ii. This method assures the availability of profit and sufficient cash for purchasing
investment.
iii. Where only part of the debentures redeemed it must be ensured that the balance in
Sinking fund is equal to 50% of the amount of debentures issue on the date of
redemptions is obligatory. However, a company may create more reserve if it so desires.
Face value of debenture - Discount on issue of debenture ÷ Face value of one share
Q.1 On 1st January 2010, S Ltd. issued 2000, 10% debentures of Rs.100 each @ 5%
premiums, redeemable at par. The company decided to set aside every year a sum of
Rs.63, 440 to be invested in 5% Govt. securities. The investments were sold at Rs.
1, 30,200 at the end of third year and debentures were redeemed. Give journal entries in
the books of S Ltd.
Q.3 M Ltd. issued 10,000, 10% debentures of Rs.1000 each at Rs.50 discount
redeemable after seven years. The company gave an option to the debenture holders to
get their debentures converted into equity share of Rs.10 each at any time after expiry of
two years. A holding 240 debentures, informed the company in 4th year that he wanted to
exercise the option of conversion of debentures into equity shares. Ascertain no. of shares
to be issued.
Q.2 Prime Ltd. issued 50,000 9% debentures of Rs.100 each, at a discount of 6%,
redeemable at 4% premium. These debentures are to be redeemed equally, spread over 5
annual instalments. As a matter of prudence the Company decided to write off loss on
issue of Debentures in proportion of the amount of debenture finance usage over the
various years. You are required to:
1. Prepare a statement showing the loss on issue of debentures to be written off over
the various years.
2. Draft a set of journal entries to be passed for the first three accounting years for:
a. Money due on redemption paid off to debenture holders.
b. Loss on issue of debentures written off.
(Note: loss on issue of debentures consists of discount on issue of debentures and
premium payable on redemption of debentures.)
Q.3 Erudite Ltd. issued 10,000; 9% debentures of Rs.100 each, at a discount of 3%,
redeemable at 5% premium. These debentures are to be redeemed equally, spread over 4
annual instalments. As a matter of prudence, the Company decided to write off loss on
issue of Debentures in proportion of the amount of debenture finance usage over the
various years. You are required to:
1.Prepare a statement showing the loss on issue of debentures to be written off over
the various years.
2.Draft necessary journal entries to be passed for the first accounting year
(Note: loss on issue of debentures consists of discount on issue of debentures and
premium payable on redemption of debentures.)
Q.4 A company gave notice of its intension to redeem its outstanding 25,000 9%
debentures of Rs.100 each a premium of 5% and offered the debenture holders the
following options.
A. To accept 10% preference shares of Rs.100 each at par.
B. To accept 12% debentures of Rs.100 each at Rs. 95.
C. To accept equity shares of Rs.20 @ Rs.40 per shares.
D. To have their holdings redeemed for cash, accordingly.
i. 4200 debenture holders accepted the proposal (a)
ii. 9975 debenture holders accepted the proposal (b)
iii. 8400 debenture holders accepted the proposal (c)
iv. Remaining debenture holders accepted the proposal (d)
Q.5 Choice Ltd. gave notice of its intension to redeem its outstanding 10,000; 9%
debentures of Rs.100 each a premium of 5% and offered the debenture holders the
following two options.
A. To accept 10% preference shares of Rs.100 each at par.
B. To have their holdings redeemed for cash.
C. To accept equity shares of Rs.10 at Rs.15 per share
Debenture holders holding 4,000 debentures accepted the proposal (A); Debenture
holders holding 3,000 debentures accepted the proposal (B) and remaining debenture
holders accepted the proposal (C). You are required to pass the necessary journal entries
for the redemption of debentures excluding journal entries required for complying with
statutory provisions.
Q.6 To redeem its outstanding 50,000; 12% debentures of Rs.100 each at a premium of
5%, Variety Ltd. offered its debenture holders the following options.
A. To accept 10% preference shares of Rs.100 each at par.
B. To accept 9% debentures of Rs.100 each at Rs.95.
C. To accept equity shares of Rs.20 at Rs.40 per share.
D. To have their holdings redeemed for cash, accordingly.
i. 9,500 debenture holders accepted the proposal (a)
ii. 19,950 debenture holders accepted the proposal (b)
iii. 12,000 debenture holders accepted the proposal (c)
iv. Remaining debenture holders accepted the proposal (d)
You are required to pass the necessary journal entries for the redemption of debentures.
Q.7 On 31st December 2020 Plasto-craft Ltd. redeemed 5,000, 9% debentures of Rs 100
each by converting them into equity shares of Rs.10 each at a premium of Rs.2.50 per
share. On the same date the company also redeemed 2,500, 12% debentures of Rs. 100
each in cash. Company complied with the necessary statutory provisions in such a manner
so as to utilize profits and funds of the company to the minimum possible extent. Give the
necessary journal entries.
Q.9 Aura Ltd. has 15,000, 9% Debentures of Rs.100 each due for redemption at 5%
premium on 30th Sept. 2018. Under the Reserves and Surplus the Company had following
balances:
• Capital Redemption Reserve Rs.5,00,000
• Debenture Redemption Reserve Rs.2,00,000
• General Reserve Rs.4,50,000
For the purpose of redemption of debentures, the Company complied with the necessary
statutory provisions in such a manner so as to utilize profits and funds of the company to
the minimum possible extent. Pass the necessary journal entries for the redemption of
debentures.
Q.10 Imperial Export Ltd. redeemed 25,000; 9% Debentures of Rs.100 each on 31st
March 2018 fully out of profits. Under the Reserves and Surplus the Company had
following balances:
• Capital Redemption Reserve Rs.5,00,000
• Debenture Redemption Reserve Rs.10,00,000
• General Reserve Rs.15,00,000
The debentures are due for redemption at Rs.5 per debenture.
Pass the necessary journal entries for the redemption of debentures.
Solution: Q.5A
Journal entries in the books of Plasto-craft Ltd.
Date Particulars Debit Credit Marks
30 Debenture Redemption investment A/c 37,500 01
April To Bank A/c 37,500
(Being investment made for 12% debentures due for red.
during year)
2018 9% Debentures A/c 5,00,000 01
Dec 31 To Debenture holders A/c 5,00,000
(Being 9% Debentures due for redemption)
Dec 31 Debenture holders A/c 5,00,000 01
To Equity Share Capital A/c 4,00,000
To Securities Premium A/c 1,00,000
(Being 9% Debentures redeemed by converting them into
equity shares of Rs.10 each at a premium of Rs.2.50 per
share
Dec 31 Profit & loss A/c 62,500 01
To Debentures Redemption Reserve A/c 62,500
(Being minimum required DRR i.e. 25% created for 12%
debentures due for red. during year)
Dec 31 12% Debentures A/c 2,50,000 01
To Debenture holders A/c 2,50,000
(Being 12% Debentures due for redemption)
Dec 31 Bank A/c 37,500 01
To Deb. Red. Investment A/c 37,500
(Being investments encashed for redemption of 12%
Debentures)
Dec 31 Debenture holders A/c 2,50,000 01
To Bank A/c 2,50,000
(Being redemption money due to 12% Debenture holders
paid off)
Dec 31 Debentures Redemption Reserve A/c 62,500 01
To General Reserve A/c 62,500
(Being bal. in DRR transferred to Gen Res. after red. of
12% Deb.)
Solution Q.4
Journal entries in the books of Prudence Ltd.
Date Particulars Debit Credit Marks
April 30 Debenture Redemption investment A/c 7,50,000 03
To Bank A/c 7,50,000
(Being minimum investment made at 15 % of
nominal value of redeemable debentures during the
year)
50,00,000 x 15% = 7.50,000
Sept 30 Profit & loss A/c 40,00.000 03
2018 To Debenture Red. Reserve A/c 40,00.000
(Being balance in DRR increased up to 100% of
nominal value of debentures due for redemption
fully out of profits)
50,00,000-10,00,00 = 40,00,000
Sept 30 12% Debentures A/c 50,00,000 03
2018 Premium on Red. of Debentures A/c 2,50,000
To Debenture holders A/c 52,50,000
(Being 12% Debentures due for redemption @ 5%
premium)
50,00,000 x 5% = 2,50,000
Sept 30 Bank A/c 7,50,000 02
2018 To Deb. Red. Investment A/c 7,50,000
(Being investments encashed for the purpose of
redemption)
Sept 30 Debenture holders A/c 52,50,000 02
2018 To Bank A/c 52,50,000
(Being redemption money due to Debenture holders
fully paid off)
Sept 30 Debentures Redemption Reserve A/c 50,00,000 02
2018 To General Reserve A/c 50,00,000
(Being bal. in DRR transferred to General Reserve
after redemption)