class 12 chapter company Accounts Redemption of debentures
Redemption of debenture class 12
Meaning of redemption of debentures
Redemption of debentures: means discharging the liability on account of debenture issued bi a a company by making repayment to the debenture holders
debenture are are normally redeemed on the due date or earlier as per the terms of issue debentures maybe redeemed in installment by a drew of lost or or by purchase from the open market for cancellation or by conversion into shares or new debentures
all the time of redemption, following should be kept in mind,
- Time of Redemption of debentures: debentures are normally readymade on the due date accompany e e e main authorised by the terms of issue redeem The debentures debentures before the due date in installment by drew of lost and if authorised buy it articles of of association or by purchase from open market for cancellation
- amount of redemption of debentures: amount payable on redemption of debentures at the time of their redemption thus, if the debentures are redeemed on maturity by payment of amount or by drew of lost, the amount payable is as per the of issue, i;e at par or at premium,
- sources of redemption of debentures: the sources of redemption of debentures many be any of the following:
- out of capital: it means redemption of debentures without transfer of any profit from surplus, i;e balance in statement of profit and loss to debentures redemption Reserve (DRR) for redemption of debentures Redemption only out of capital is not possible under the present law because the companies act, 2013 prescribes companies, other than those exempted from creating debentures redemption reserve to transfer amount of profits available for distribution as dividend as specified in rule 18(7) b of the companies (share capital and debentures ) rules, 2014 (discussed later in detail)
- out of profit: it means redemption of debentures only out of profits, in this case companies, transfer 100 percent of nominal (face) value of total redeemable debentures to debentures redemption reserve out of the surplus available for payment as dividend to the shareholders,
- out of profit and capital: it means redemption of debentures partially out of profit and partially out of capital where the company does not transfer 100 percent of nominal (face) value of outstanding debentures redemption reserve out of the surplus available, for payment as dividend to the shareholders, it is known as
Methods of redemption of debentures
- In lump sum on maturity
- in instalments by draw of lots
- by purchase from open market, or
- by conversion,
| please not that the Redemption by purchases from open market and conversion of debentures are not is syllabus, hence they have not been discussed |
Each of the above methods of redemption, is discussed below,
1.Redemption of debentures in lump sum on maturity, under this methods all the debentures are redeemed on the date specified in the terms of issue, i;e on their maturity the debentures may be redeemed at par or at premium the journal entries passed are:
For the Amount due to debentureholders on redemption
(i) if the debentures are Redeemable at par:
%Debenture a/c ——–Dr [with nominal value ]
To Debentureholders A/c
(ii) if the debenture are Redeemable at premium:
% Debentures A/c —–Dr [with nominal value with the amount of premium with nominal value +premium
premium on Redemption of debentures a/c –Dr
To debentureholders A/c
(iii) for payment to debentureholders:
debentureholders A/c —–Dr [with the amount paid]
To bank A/c
Accounting Entries
the journal entries passed are :
(i) on transfer of amount to debentures redemption Reserve (DRR)
surplus, i;e balance in statement of profit and loss A/c —-Dr
To debentures Redemption Reserve A/c
(ii) on investment or depositing in specified securities
Debenture redemption investment A/c ——Dr
To bank A/c
(iii) on Realising Investment before redemption of debentures:
bank A/c ——Dr
To debentures redemption Investment A/c
(iv) On the amount being due to debentureholders on redemption
(a) if the debentures are Redemption at par:
%debentures A/c —Dr
To debentureholders A/c
(b) if the debentures are redemption at premium:
%debentures A/c
premium on redemption of debentures A/c –Dr
To debentureholders A/c
(v) on payment to debentureholders
debentureholders A/c —-Dr
To bank A/c
(vi) on transfer of amount from DRR to general Reserve :
debentures redemption Reserve A/c —-Dr
To general reserve A/c
Example:1(Investment or deposit to be made for redemption of debentures).
x.Ltd had issued on 1st april, 2015, 20,000, 9% debentures of Rs, 100 each redeemable by drew of lots as under:
- during the year ending on 31st march, 2017-15%
- during the year ending on 31st march, 2018-25%
- during the year ending on 31st march ,2019-15%
- during the year ending on 31st march,2020-25%
- during the year ending on 31st march 2021-20%
what is the minimum investment or deposit that should be made by X Ltd,as per the companies act, 2013 before redemption of debentures and when?
solution: Table showing Investment or deposit to be made by X Ltd,
| Redemption during the year ending | Time of Investment | Amount of debentures being redeemed | minimum Investment or deposit or DRI |
| (i)31st march, 2017 | on or before 30th april, 2016 | 15% of 20,00,000=Rs, 3,00,000 | 15% of Rs 3,00,000=Rs, 45,000 |
| (ii) 31st march, 2018 | on or before 30th april, 2017 | 25% of Rs 20,00,000=Rs, 5,00,000 | 15% of Rs 5,00,000=Rs, 75,000 |
| (iii) 31st march, 2019 | on or before 30th april, 2018 | 15% of Rs, 20,00,000=Rs, 3,00,000 | 15% of Rs 3,00,000=Rs, 45,000 |
| (iv) 31st march, 2020 | on or before 30th april, 2019 | 25% of Rs, 2,00,000=Rs, 5,00,000 | 15% of Rs 5,00,000 =Rs, 75,000 |
| (v)31sth march, 2021 | on or before 30th april, 2020 | 20% of Rs, 2,00,000=Rs, 4,00,000 | 15%of Rs, 4,00,000 = Rs, 60,000 |
Redemption of debenture class 12
Example:2 (Issue and Redemption of debentures)
Y Ltd issued 50,000, 10% debentures of Rs, 10 each on 1st april, 2017 redeemable at par on 30th june 2018, the company received applications for 55,000 debentures and the allotment was made to the applicants on pro rata, the debentures were redeemed on due date, assume that required investment was made on 1st april of the financial year in which redemption is due pass journal entries for issue and redemption of debentures, DRR and investment, ignoring interest on debentures,
solution
JOURNAL OF Y LTD
| date | particulars | L.F | Dr (amount ) | Cr, (amount ) |
| 2017 April 1 | bank A/c –Dr To debentures application and allotment A/c (being the receipt of application money) | 5,50,000 | 5,50,000 | |
| April 1 | Debentures application and allotment A/c —-Dr | 5,50,000 | ||
| To 10% Debentures A/c | 5,00,000 | |||
| To bank A/c (being the debentures allotted and debentures application money adjusted ) | 50,000 | |||
| 2018 March 31 | surplus, i;e balance in statement of profit and loss A/c —Dr To debentures redemption reserve A/c (being the DRR created of amount equal ton25% of the value of debentures) | 1,25,000 | 1,25,000 | |
| April 1 | debentures redemption Investment A/c —Dr To bank A/c being : the Investment made of 15% of Rs, 5,00,000, nominal (face value ) of debentures to be redeemed ) | 75,000 | 75,000 | |
| june 30 | bank A/c —–Dr To debentures Redemption investment A/c being : the investment realised on redemption of debentures, ) | 75,000 | 75,000 | |
| june 30 | 10% debentures A/c —-Dr To debentureholders A/c (being : the payment on redemption of debentures due to debentureholders) | 5,00,000 | 5,00,000 | |
| june 30 | debentureholders A/c ——Dr To bank A/c (being: the payment due to debentureholders discharged ) | 5,00,000 | 5,00,000 | |
| june 30 | debentures redemption reserve A/c ——Dr To general Reserve A/c (being : the transfer of DRR to general Reserve ) | 1,25,000 | 1,25,000 |
Redemption of debenture class 12
Example:3 SRCC Ltd, has 20,000, 9% debentures of Rs, 100 each outstanding as on 31st march, 2017 these debentures are due for redemption on 31st march, 2018 at a premium of 10% the company had a credit balance of Rs, 22,00,000 in its surplus, i;e balance in statement of profit and loss instead of declaring a dividend it decided to redeem the debentures, pass the necessary journal entries in the books of the company for the redemption of debentures,
solution
JOURNAL SRCC LTD,
| date | particulars | L.F | Dr Amount | Cr. Amount |
| 2017 march 31 | surplus, i;e balance in statement of profit and loss A/c –Dr To debentures Redemption Reserve A/c (being : the transfer of profit and DRR ) | 20,00,000 | 20,00,000 | |
| April 1 | debentures Redemption Investment A/c —-Dr To bank A/c (being : the investment made @15% of nominal (face) value of debentures to be redeemed ) | 3,00,000 | 3,00,000 | |
| 2018 march 31 | bank A/c —-Dr To debentures redemption investment A/c (being : the investment realised ) | 3,00,000 | 3,00,000 | |
| march 31 | 9% debentures A/c —Dr premium on redemption of debentures A/c–Dr To debentureholders A/c (being : the amount due to redemption ) | 20,00,000 2,00,000 | 22,00,000 | |
| march 31 | debentures A/c —-Dr To bank A/c (being : the payment made to debentureholders ) | 22,00,000 | 22,00,000 | |
| march 31 | debenturesholders A/c -Dr To general Reserve A/c (being : the transfer of DRR to general Reserve ) | 20,00,000 | 20,00,000 |
NOTE
- instead of declaring a dividend, the company decided to redeem the debentures means the debentures are redeemed fully out of profit, so an equal to the nominal (face) value of debentures to be redeemed , i;e Rs, 20,00,000, is transferred to DRR
- In the absence of the information regarding the date of investment in specified securities, it is presumed that investment in specified securities, is made on 1st april, 2017
Example:4 X Ltd, has 40,000, 9% debentures of Rs, 100 each outstanding as on 31st march 2017 these debentures are due for redemption on 31st march 2018 debentures of redemption Reserve has a balance of Rs, 5,00,000 on 31st march, 2018. pass journal entries at the time of redemption of debentures,
Solution
JOURNAL OF X LTD.
| date | particulars | L.F | Dr amount | Cr, amount |
| 2017 march 31 | surplus, i;e balance in statement of profit and loss A/c –Dr To debentures redemption Reserve A/c (being: the required amount transferred to DRR note) | 5,00,000 | 5,00,000 | |
| April 30 | debentures redemption Investment A/c —Dr To bank A/c (being: the investment made of 15% of nominal (face) value of debentures to be redeemed, i;e Rs, 40,00,000) | 6,00,000 | 6,00,000 | |
| 2018 march 31 | bank A/c —Dr To debentures redemption Investment A/c (being ; the investment realised ) | 6,00,000 | 6,00,000 | |
| march 31 | 9% debentures A/c ——–Dr To debentureholders A/c (being: the amount due to debentureholders on redemption ) | 40,00,000 | 40,00,000 | |
| march 31 | debentures A/c —Dr To bank A/c (being: the amount due to debentureholders paid) | 40,00,000 | 40,00,000 | |
| march 31 | debentureholders A/c —Dr To bank A/c | 10,00,000 | 10,00,000 |
Redemption of debenture class 12
Note
| debentures Redemption Reserve required (25% of Rs, 40,00,000) = Rs, 10,00,000 less: Existing balance in DRR —————————————-=Rs 5,00,000 Amount transferred to debentures Redemption Reserve ———-=Rs, 5,00,000 |
Redemption of debenture class 12
Example:5 ABC Ltd, issued, 2,000, 10% debentures of Rs, 1,000 each at par on 1st april , 2014 redeemable in equal annual drawing by draw of lots in 2 years on 31st march, 2016 and 31st march 2017 the company decided to transfer to debentures Redemption Reserve amount as prescribed in law on 31st march, 2015 Investment was made in specified securities on 1st april , 2015 and 2016 respectively .
pass the necessary journal entries for DRR , DRI and redemption of debentures assuming the investment was realised each time the debentures were redeemed, (Ignore interest )
Solution :
JOURNAL OF ABC LTD.
| date | particulars | L.F | Dr amount | Cr., amount |
| 2015 march 31 | surplus, i;e balance statement of profit and loss A/c –Dr To debentures Redemption Reserve A/c (being : 25% of nominal (face) value of the debentures outstanding transferred to DRR) | 5,00,000 | 5,00,000 | |
| April 1 | debentures redemption Investment A/c (Rs, 10,00,000×15/100)–Dr To bank A/c (being: the Investment equal to 15% of the amount of debentures to be redemed during the year ended, 31st march, 2016) | 1,50,000 | 1,50,000 | |
| 2016 march 31 | bank A/c —Dr To debentures Redemption Investment A/c (being: the Investment realised before redemption of first lot of debentures) | 1,50,000 | 1,50,000 | |
| march 31 | 10% debenture A/c ————–Dr To debentureholder A/c (being: 1,000 debentures became due for redemption ) | 10,00,000 | 10,00,000 | |
| debenturesholders, A/c –Dr To bank A/c (being : the amount paid to debentureholders ) | 10,00,000 | 10,00,000 | ||
| march 31 | debentures Redemption Reserve A/c ——Dr To general Reserve A/c (being; the proportionate amount of DRR transferred to general Reserve on redemption of 1,000 debentures) | 2,50,000 | 2,50,000 | |
| April 1 | debentures Redemption Investment A/c ———–Dr To bank A/c (being: the investment made of amount equal to 15% of Rs, 10,00,000) | 1,50,000 | 1,50,000 | |
| 2017 march 31 | bank A/c ———-Dr To debentures Redemption investment A/c (being: the investment realised ) | 1,50,000 | 1,50,000 |