1 Redemption of Debentures. 2 Redemption of debenture Redeemable debenture will be redeemed on or...
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Transcript of 1 Redemption of Debentures. 2 Redemption of debenture Redeemable debenture will be redeemed on or...
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Redemption of Debentures
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Redemption of debenture
Redeemable debenture will be redeemed on or before a specified date which is stated clearly in the terms of the issue of debentures
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In order to provide the funds to finance the redemption of debentures, the company may use the money from the following resources:
(I) The balance of existing cash and bank account(II) The money received from the fresh issue of shares (III)or debentures for the purpose of the redemption
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Debenture Redemption Reserve
If the company is unable to redeem its debentures by issuing new shares to raise necessary funds, the company should create Debenture Redemption Reserve account for redeeming the debenturesEqual to the cash used in redemption might be voluntarily transferred to a debenture redemption reserve fund from profit and loss account as a matter of financial prudenceThe debenture redemption reserve is then identified as not being available for dividend distributionThe voluntary appropriation of profit to “Debenture Redemption Reserve” ensures that the resources of the company are not disadvantageously reduced
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Premium on Redemption of Debentures
An amount equals “Premium on Redemption” will be transferred from Share Premium account to Debenture Redemption accountIf it is not covered by Share Premium account, the balance will be transferred from Profit and Loss account
Redeemed price
of debentures- Par value
of Debentures = Premium on
Redemption
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Discount on Redemption of Debentures
Redeemed price
of debentures- = Discount on
Redemption
An amount equals “Discount on Redemption” will be transferred from to Debenture Redemption account to Reserve or Profit and loss account
Par value
of Debentures
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Redemption of Debentures without a Sinking Fund
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Out of distributable profits Out of the proceeds of new issue
1. Declaration of redemption Dr. Debentures Cr. Debenture Redemption
1. Declaration of redemption Dr. Debentures Cr. Debenture Redemption
2. Transfer of distributable profit to debenture redemption
reserve Dr. Profit and Loss
Appropriation Cr. Debenture Redemption
Reserve
2. (a) New shares issued at premium Dr. Bank Cr. Share Capital Cr. Share Premium
(b) Transfer to redemption reserve Dr. Profit and Loss Appropriation Cr. Debenture Redemption Reserve
Summary of Procedures
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Out of distributable profit/proceeds of new issue
3. Redemption at a premium a) if the debentures were originally issued at a premium Dr. Share/Debenture Premium Cr. Debenture Redemption
b) if the debentures were not issued at a premium Dr. Profit and Loss Appropriation Cr. Debenture Redemption
c) if the current balance of premium or the premium received on debentures originally issued is less than the premium on redemption Dr. Share/Debenture Premium Dr. Profit and Loss Appropriation Cr. Debenture Redemption
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Out of distributable profit/proceeds of new issue
4. Redemption at a discount Dr. Debenture Redemption Cr. Debenture Redemption Reserve / General Reserve
5. Redemption of debentures Dr. Debenture Redemption Cr. Bank
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Example 1
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Example 1 $1,000 debentures were redeemed at parA new issue of $1,000 ordinary shares at par
Dr. Cr.
1. Bank 1000 Ordinary Shares 1000
Being issue of ordinary shares
2. Debentures 1000 Debenture Redemption 1000
Being declaration of redemption
3. Debenture Redemption 1000 Bank 1000
Being redemption of debentures
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Example 2 $1,000 debentures were redeemed at parwith no new issue of shares
Dr. Cr.
1. Debentures 1000 Debenture Redemption 1000
Being declaration of redemption
2. Profit and Loss Appropriation 1000 Debenture Redemption Reserve 1000
Being transfer to debenture redemption reserve
3. Debenture Redemption 1000 Bank 1000
Being redemption of debentures
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Example 3 $1,000 debentures were redeemed at parRedemption was partly provided for out of the proceeds of a new issue of 800 ordinary shares at par
Dr. Cr.
1. Bank 800 Ordinary Shares 800
Being issue of ordinary shares
3. Debentures 1000 Debenture Redemption 1000Being declaration of redemption
4. Debenture Redemption 1000 Bank 1000
Being redemption of debentures
2. Profit and Loss Appropriation 200 Debenture Redemption Reserve 200
Being transfer to debenture redemption reserve
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Example 4$1,000 debentures were redeemed at a premium of 20%with no new issue of shares
Dr. Cr.
1. Debentures 800 Debenture Redemption 800Being declaration of redemption
2. Profit and Loss Appropriation 1000 Debenture Redemption Reserve 1000
Being transfer to debenture redemption reserve
4. Debenture Redemption 1200 Bank 1200 Being redemption of debentures
3. Profit and Loss Appropriation 200 Debenture Redemption 200
Being premium on redemption
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Example 5
Case 1
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Example 5$1,000 debentures, issued at a premium of 5%Redeemed at a premium of 20%
Case 1: 1,200 $1 ordinary shares at par
Case 1 $
Balance before new issuePremium on new issue Balance after new issueLess: Amount transferred to the
redemption account(should be the lower of the balance after the new issue
or the original premium on the issue)
Balance after redemption
10-
10
10-
1000*5%=50
These balances may not be the same, as some
funds may have been used up in the bonus issue
and redemption
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Dr. Cr.
Bank 1200
Ordinary Share 1200
Being issue of ordinary shares
Debentures 1000
Debenture Redemption 1000Being redemption of debentures
Share Premium 10
Profit and loss 190
Debenture Redemption (1000*20%) 200Being premium on redemption
Debenture Redemption 1200
Bank (1000*1.2) 1200Being amount paid on redemption
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Example 5
Case 2
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Example 5$1,000 debentures, issued at a premium of 5%Redeemed at a premium of 20%
Case 2: 1,000 $1 ordinary shares at a 10% premium
Case 2$
Balance before new issue Premium on new issue Balance after new issueLess: Amount transferred to the
redemption account(should be the lower of the balance after the new issue
or the original premium on the issue)
Balance after redemption
50100150
50100
1000*5%=50
1000*0.1
These balances may not be the same, as some
funds may have been used up in the bonus issue
and redemption
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Dr. Cr.
Bank 1100
Ordinary Share 1000
Share Premium (1000*0.1) 100Being issue of ordinary shares
Debentures 1000
Debenture Redemption 1000Being redemption of debentures
Share Premium 50
Profit & Loss Appropriation 150
Debenture Redemption 200
Being premium on redemption
Debenture Redemption 1200
Bank 1200Being amount paid on redemption
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Example 5
Case 3
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Example 5$1,000 debentures, issued at a premium of 5%Redeemed at a premium of 20%
Case 3: 800 $1 ordinary shares at a 20% premium
Case 3$
Balance before new issue Premium on new issue Balance after new issueLess: Amount transferred to the
redemption account(should be the lower of the balance after the new issue
or the original premium on the issue)
Balance after redemption
5060
210
50
1601000*5%=50
800*0.2
These balances may not be the same, as some
funds may have been used up in the bonus issue
and redemption
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Dr. Cr.
Bank 960
Ordinary Share 800
Share Premium 160Being issue of ordinary shares
Debentures 1000
Debenture Redemption 1000Being redemption of debentures
Profit & Loss Appropriation (1000-800*1.2) 40
Debenture Redemption Res. 40Being part of redemption not covered by new issueShare Premium 50
Profit & Loss Appropriation 150
Debenture Redemption 200Being premium on redemptionDebenture Redemption 1200
Bank 1200Being amount paid on redemption
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Redemption of Debenture by a Sinking Fund
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Descriptions Book-keeping Entries
Set aside an annual appropriation to the Sinking Fund.
The same amount out of cash or bank will be invested in a specific investment under ‘Sinking Fund Investment Account’ to provide sufficient funds for the debenture redemption.
Dr. Profit and Loss Account
Cr. Sinking Fund
Dr. Sinking Fund Cash/Bank
Cr. Cash/Bank
Dr. Sinking Fund Investment
Cr. Sinking Fund Cash/Bank
Any interest or dividend income received from Sinking Fund Investment
Dr. Sinking Fund Cash/Bank
Cr. Sinking Fund
Re-investment of income received (except in the last few months before the redemption)
Dr. Sinking Fund Investment
Cr. Sinking Fund Cash
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Descriptions Book-keeping Entries
Disposal of Sinking Fund Investment
Profit on disposal of Sinking Fund Investment or
Loss on disposal of Sinking Fund Investment
Dr. Sinking Fund Cash/Bank
Cr. Sinking Fund Investment
Dr. Sinking Fund Investment
Cr. Sinking Fund
Dr. Sinking Fund
Cr. Sinking Fund Investment
Transfer the amount of Debentures to be redeemed to Debenture Redemption Account
Dr. Debentures
Cr. Debenture Redemption
Payment on Debenture Redemption Dr. Debenture Redemption
Cr. Sinking Fund Cash/Bank
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Descriptions Book-keeping Entries
Premium on Redemption
“Profit on Redemption” will be transferred from Redemption Account to “Sinking Fund Account”
OR
Discount on Redemption
“Loss on Redemption” will be transferred from Redemption Account to “Sinking Fund Account”
Dr. Debenture Redemption
Cr. Sinking Fund
.
Dr. Sinking Fund
Cr. Debenture Redemption
Transfer of the nominal value of the debentures redeemed at every redemption and the balance of the sinking fund at the final redemption to the general reserve
Dr. Sinking Fund
Cr. Debenture Redemption Reserve
OR
General Capital Reserve
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Example
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Pacific Ltd. Issued $1,000,000 12% debentures at par on 1 January 1987. These wereredeemable at a premium of 10% on 31 December 1997. A sinking fund account wasCreated by the annual appropriation of profits. Investments were made to provideCash to redeem the debentures. All investment income must be reinvested, except forThe final year of redemption.The following balances were extracted from the books at 1 January 1997:
12% Debentures 1,000,000Sinking Fund 800,000Sinking Fund Investment 800,000Sinking Fund Cash 100,000
During 1997, the following transactions took place:Jan 1 Investment income of $10,000 was receivedJan 30 Six month’s interest was paid on the debenturesJuly 1 Investment costing $400,000 was sold for $450,000 to provide funds for the
redemption of some debentures. The company redeemed $400,000 debentures at a discount of 5%
Dec 1 All remaining investments were sold for $600,000Dec 31 The remaining debentures were redeemed at a premium of 10% and the
outstanding interest was paid.
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Sinking Fund Cash
Jan 1 Bal b/f 100,000Jan 1 Sinking Fund 10,000
July 1 Sinking Fund Invest- ment 450,000
July 1 Debenture Redemption 380,000 (400000*0.95)
Dec 31 Debenture Redemption 660,000 (1600000*1.1)
12% Debentures
July 1 Debenture Redempt. ion 400,000
Dec 31 Debenture Redempt- ion 600,000
Jan. 1 Bal b/f 1,000,000
1,000,000 1,000,000
Dec 1 Sinking Fund Invest- ment 600,000
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Sinking Fund
July 1 General Reserve 400,000 (par value)
Dec 31 Debenture Redemption 60,000 (discount)
Dec 31 General Reserve 620,000
Jan 1 Bal. B/f 800,000Jan 1 Sinking Fund Cash 10,000July 1 Sinking Fund Investment 50,000 (profit)July 1 Debenture Redemption 20,000 ( premium)Dec 1 Sinking Fund Investment 200,000
1,080,000 1,080,000
Sinking Fund Investment
July 1 Bal b/f 800000
July 1 Sinking Fund: profit on
sales (450000-400000) 50000
Dec 1 Sinking fund: profit on
sales (660000-400000) 200000
July 1 Sinking fund cash 450000
Dec 1 Sinking fund cash 600000
11050000 11050000
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Debenture Redemption
July 1 Sinking fund cash 380000
July 1 Sinking fund: profit 20000
July 1 12% Debenture 400000
400000 400000
Dec 31 Sinking fund cash 660000 Dec 31 12% Debenture 600000
Dec 31 Sinking fund: discount 60000
660000 660000
Debenture interest
June 30 Bank 60000
(1000000*12%*1/2)
Dec 31 Bank 36000
(600000*12%*1/2)
Dec 31 Profit and loss 96000
96000 96000