Purchase in the Open Market

• A company may redeem its debentures prior to maturity.

• The company may purchase its own debentures from
stock market either: (i) for immediate cancellation, or (ii)
as an investment (to be cancelled when required).
• Generally, the company is interested to purchase its own
debentures when the interest rate on the debentures is
considerably higher than the current market interest
rate.
 (a) When debentures are purchased
Debentures Redemption Account Dr. [Quoted price x No. of debentures purchased]
To Bank Account

(b) When debentures are cancelled

Debentures Account Dr. [Face value]
To Debentures Redemption Account [Purchase price]
To Profit on Cancellation of Debentures Account [Profit]
(ii) If there is a loss on cancellation, it is transferred to Statement of
Profit and Loss.
Statement of Profit and Loss Dr. [Loss]
To Debentures Redemption Account

(c) When profit on cancellation of debentures is transferred to Capital

Reserve
Profit on Cancellation of Debentures Account Dr.
To Capital Reserve Account*
*Profit on cancellation is a capital profit, it should be transferred to
capital reserve.
(d) When face value of debentures is transferred to General Reserve
Statement of Profit and Loss Dr.
To General Reserve Account
2. Where there is Sinking Fund / Debenture
Redemption Reserve Fund
When debentures are redeemed, the company requires
a huge amount of money to pay the debentureholders.
If proper planning is not done, there will be strain on
working capital and the company may face liquidity
crisis because of outflow of huge cash.
• To avoid such a situation many companies may prefer to
create a Debenture Redemption Reserve Fund / Sinking
Fund.
• Every year an adequate amount is transferred to DRRF /
Sinking fund by deducting from profits after tax.
• The amount so deducted / appropriated is invested outside
the business in risk-free high return instruments.
• At the time of need, these investments are realised and the
money is used for the redemption of the debentures.
• In the Balance Sheet Debenture Redemption Reserve Fund /
Sinking Fund is shown under ‘Reserve and Surplus’ in the
Equity and Liabilities section.
• Debenture Redemption Reserve Fund Investment / Sinking
Fund Investment is shown under the main heading ‘Non-
current Asset’ and sub-heading ‘Non-current Investment’.
• Other things remaining the same, balance in these two
accounts should be equal.
• After redemption, the balance of Debenture Redemption
Reserve Fund / Sinking Fund Account is transferred to Capital
Reserve Account.
Accounting Entries for Creation of Sinking
Fund / Debenture Redemption Reserve Fund