Page 186 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 8: Methods of Redemption–I

9. Profit on cancellation of debentures is transferred to Debenture Redemption Fund A/c. Notes
10. Own debentures cannot appear in the asset side of the balance sheet.

8.2.3 Redemption of Debentures Out of Profit

When a company wants to redeem its debenture out of profit, it would accumulate its divisible
profits so that they maybe utilised for the redemption of debentures. For the redemption of
debentures out of profit, an amount equal to that utilised for repayment of debenture-holders is
transferred from the divisible profits to the D.R.R. account so that it may not be utilised for the
distribution of dividend. These retained profits maybe used in the following two methods for
the redemption of debentures.

(A) These accumulated profits can be retained in the business as a source of internal finance.
(B) These accumulated profits can be invested outside in the marketable securities or insurance
policy.
Accounting treatment for first case: (when profit is retained in the business not invested outside):

1. When the amount of debentures becomes due to debenture-holders on redemption:
Debentures Account Dr.
Premium on Redemption of Debentures Account Dr. (if any)

To Debenture-holders Account
2. When profits are transferred for redemption:

Profit and Loss Account Dr.
To Debenture Redemption Reserve Account.
3. When amount is paid to debenture-holders:

Debenture-holders Account Dr.
To Bank Account
4. After redemption of debentures the balance of D.R.R. is transferred to general reserve:

Debenture Redemption Reserve Account Dr.
To General Reserve Account.
Illustration 5 (Redemption Out of Profit)

Raj Shree Industries Limited issued 7,000; 12% Debentures of 100 each on 1st January 2003 at a
discount of 10%, redeemable at a premium of 5% out of profits. Pass journal entries both at the
time of issue and redemption of debentures if (a) the debentures are redeemable at the end of
three years (b) the debentures are redeemable in three annual installments of 1,000, 2,000 and
2,000 debentures, assuming accounting year as a calendar year.

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