Chapter-3 REDEMPTION OF DEBENTURES

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Chapter-3REDEMPTION OF DEBENTURES

• Learning outcomes
• Meaning of redemption of debentures
• Redemption out of capital
• Redeption out of profits
• Investment of profits outside the business
• Redemption by conversion

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Meaning of redemption of Debentures

• Redemption of debentures means discharge of
  liability on account of debentures by repayment
  made to the debenture holders. The various
  methods of redemption of debentures are as under
• By drawing lots
• By payment in lump sum
• By converting existing debentures into new
  shares/debentures
• By purchase in the open market

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Sources of redemption

• The various sources of out of which the
  debentures can be redeemed are as under
• Out of capital
• Out of accumulated profits
• Redemption by conversion
• Redemption by purchase of debentures in the open
  market.

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Redemption out of capital

• When adequate profits are not transferred from
  profit and loss appropriation account to the
  Debenture Redemption Reserve Account at the time
  of redemption of debentures, such redemption is
  said to be out of capital.

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Redemption out of profits

• When adequate profits are transfered from profit
  and Loss Appropriation Account to the Debenture
  Redemption Reserve Account at the time of
  redemption of debentures, such redemption is said
  to be out of profits.

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Investment of profits outside the business

• To ensure the availability of sufficient cash to
  redeem the debentures at the end of specified
  period, a part of divisible profits is set aside
  and is invested outside the business. For
  investing the funds outside the business, the
  company may adopt any one of the following
  methods
• Sinking Fund Method
• Insurance Policy Method.

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Redemption by conversion

• Redemption by conversion means redeeming the
  debentures by converting them into new class of
  debentures or shares. However, the
  debentureholders would exercise their right of
  conversion only when they find it benefited from
  their viewpoint or as agreed as per terms of
  issue. The new shares or debentures can be issued
  at par, premium or discount.

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Redemption by purchase in the open market

• When a company purchases its own debentures in
  the open market for the purposes of cancellation,
  such an act of purchasing and cancelling the
  debentures constitutes redemption by purchase in
  the open market.

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Proforma journal entries for redemption of
debentures

• When debentures are issued
• Bank Account Dr. XXXXX
• Debenture A/C Cr. XXXXXX
• (Being the debentures issued for cash)
• 2. When the amount becomes due on the debentures
  on redemption
• If the debentures are redeemed at par
• Debenture Account Dr.
  XXXXXX
• Debenture holders Account Cr.
  XXXXXX
• If the debentures are to be redeemed at premium
• Debenture Account Dr.
  XXXXXX
• Premium on Redemption AC. Dr. XXXXXX
• Debenture holders Account Cr.
  XXXXXX

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• (c) If the debentures are to be redeemed at a
  discount
• Debentures Account Dr. XXXXXX
• Debenture Holders Ac. Cr.
  XXXXX
• Profit on Debentures Ac Cr.
  XXXXX
• 2. When the amount is paid
• Debentureholders Acccount Dr. XXXXXX
• Bank Account Cr.
  XXXXXX