Chapter-3REDEMPTION OF DEBENTURES

Learning outcomes:

1.Meaning of redemption of debentures;

2.Redemption out of capital;

3.Redeption out of profits;

4.Investment of profits outside the business;

5.Redemption by conversion

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:1.By drawing lots;2.By payment in lump sum;3.By converting existing debentures into new shares/debentures;4.By purchase in the open market

Sources of redemption

The various sources of out of which the debentures can be redeemed are as under:1.Out of capital;2.Out of accumulated profits;3.Redemption by conversion;4.Redemption by purchase of debentures in the open market.

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.

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.

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:1.Sinking Fund Method;2.Insurance Policy Method.

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.

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.

Proforma journal entries for redemption of debentures

1. When debentures are issued:Bank Account Dr. XXXXXDebenture A/C Cr. XXXXXX(Being the debentures issued for cash)2. When the amount becomes due on the debentures on redemption:(a) If the debentures are redeemed at par:Debenture Account Dr. XXXXXXDebenture holders Account Cr. XXXXXX

(b) If the debentures are to be redeemed at premium:Debenture Account Dr. XXXXXXPremium on Redemption AC. Dr. XXXXXXDebenture holders Account Cr. XXXXXX

(c) If the debentures are to be redeemed at a discount:Debentures Account Dr. XXXXXXDebenture Holders Ac. Cr. XXXXXProfit on Debentures Ac Cr. XXXXX

2. When the amount is paid:Debentureholders Acccount Dr. XXXXXXBank Account Cr. XXXXXX