Page 179 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 3. Redemption of debentures out of profit.
4. Redemption by purchase in the open market.

8.2.1 Redemption Out of Capital

When the redemption of debentures is made out of capital, no amount is transferred from Profit and
Loss Account to the Debenture Redemption Reserve Account (DRR). Its effect will be that credit
balance of Profit and Loss Account will not be reduced. This might result in the payment of dividends
sometime in the future. It will also indicate that redemption is being done out of that money which
is not earned during the course of business. Therefore, such redemption is out of capital.
But in the SEBI guidelines, the Controller of Capital Issue has placed restrictions on this method
indirectly. Every company has to create a Debenture Redemption Reserve (DRR) equivalent to
50% of the amount of debentures issue before commencement of redemption on 14.1.1987. Now
it is doubtful if the debentures could be redeemed purely out of capital.

Did u know? In order to avoid financial difficulties when debentures become due for
redemption, it is necessary to make arrangements for the accumulation of addition funds
for the purpose of redemption?

Accounting Treatment

The following journal entries are made to record the redemption of debentures out of capital:

1. When the amount of debentures becomes due:
(a) If the debentures are redeemable at par
Debentures Account Dr.

To Debenture-holders’ Account.
(b) If the debentures are redeemable at discount:
Debentures Account Dr.
To Debentures Account
To Profit on Redemption Account

(c) If the debentures are redeemable at premium:
Debentures Account Dr.
Premium on Redemption of Debentures Account Dr.

To Debenture-holders’ Account
2. When payment is made to debenture-holders:
Debenture-holders’ Account Dr.
To Bank Account
Illustration 1 (Redemption Out of Capital)

Seema Ltd. issued 2000, 12% Debentures of 100 each on 1st January, 2001 at a discount of 10%
redeemable at a premium of 5% out of capital. Pass journal entries both at the time of issue and
redemption of debentures if (a) the Debentures are redeemable in lump sum at the end of the

172 LOVELY PROFESSIONAL UNIVERSITY