Methods of redemption of debentures are explained below
(i) Redemption in lump-sum
This implies that debentures are repaid to debenture holders in lump-sum (at once) after a specified period of time. The company pays the amount to the debenture holders in lump sum as per the terms of issue of such debentures.
Example 1: ABC Ltd. issued 10,000 10% debentures of Rs. 100 each at par. The debentures are redeemable at the end of 5 years out of capital. Pass the journal entry for such redemption.
Example 2: Ravish Ltd. issued 5,000 15% debentures of Rs. 10 each at par. The debentures are redeemable at 10% premium the end of 3 years out of capital. The journal entry for such redemption will be:
(ii) Redemption by payment in instalments:
In this method, the amount is repaid to debenture holders in installments on specific date, throughout the life of the debentures. In order to calculate the amount of installment, the total amount payable to the debenture holders is divided by the total number of years.
- If redeemed out of profits
(a) Statement of Profit & Loss A/c Dr.
To Debenture Redemption Reserve A/c
(Being DRR transferred to P&L A/c)
(b) Debentures A/c Dr.
To Debenture holders A/c
(Being amount payable to debenture holders)
(c) Debentureholders A/c Dr.
To Bank A/c
(Being amount paid to debenture holders)
- If redeemed out of capital
(a) Debentures A/c Dr.
To Debentureholders A/c
(Being amount payable to debenture holders)
(b) Debentureholders A/c Dr.
To Bank A/c
(Being amount paid to debenture holders)
Example 3: XYZ Ltd. issued 6,000, 15% debentures of Rs. 100 each at par on January 1, 2015. The due date for payment of interest on these debentures is December 31 every year. The debentures are redeemable at par in three equal installments, beginning from the end of 3rd year. Prepare 15% Debentures Account & Debenture Interest Account.
(iii) Purchase in open market
Sometimes the company purchases its own debentures from the market for the purpose of cancellation. Such an act of purchasing and cancellation of own debentures by the company is known as redemption of debentures by way of purchase in the open market.
Example 4: Kayaan Ltd. purchased its own debentures of Rs 100 each of the face value of Rs. 70,000 from the open market for cancellation at Rs 95. Record necessary journal entries.
(iv) Conversion into shares or new debentures
In this method, debentures are redeemed by converting them into shares or debentures of other class, as per the terms of issue. The debenture holders who holds convertible debentures only get this option to redeem their debenture by way of conversion into shares or debentures.
Example 5: AB&D Ltd redeemed 5,000 15% Debentures of Rs 10 each at a premium of 10 % on 31st March 2018. Debenture holders were given equity shares of Rs 10 each at premium of Rs 10 per share. Journal entries in the books of Anil Ltd will be:
Amount of Debenture due for payment = Total number of Debentures X Value of per Debenture
= 5,000 X 10
= 50,000
Amount of premium on redemption of per Debenture = 10 X \cfrac{10}{100}= 1
Total amount of premium payable = No of Debenture to be redeemed X Amount of premium on redemption of per Debenture
= 5,000 X 1
= 5,000
Total number of shares to be issued =
Total amount due to Debenture holders = 50,000 + 5,000
= 55,000
Issue price of share = 10 + 10
Issue price of share = 20
= \cfrac{ 50,000 \quad +\quad 5,000}{\quad 20}
= 2,750
Entry for amount due to Debentureholders on conversion of 5,000 15 % Debentures will be:
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