Page 188 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Particulars
2003
Dr.
Jan. 1
Dr.
Loss on Issue of Debentures Account

1,05,000

To 12% Debentures Account

35,000

To Premium on Redemption of Debentures Account

(Being issue of debentures at discount and redeemable at premium)

Dec. 31 12% Debentures Account
Dr.
1,00,000

Premium on Redemption of Debentures Account
Dr.
5,000
1,05,000

To Debenture-holders Account

(Being amount payable to debenture-holders on redemption)

Dr.
Profit and Loss Account

1,00,000

1,00,000
To Debenture Redemption Reserve Account

Date Bank Account L.F. 6,30,000 7,00,000
(Being transfer of profits to debenture redemption reserve)
Debenture-holders Account Dr. 1,05,000
To Bank Account 1,05,000
(Being payment made to debenture-holders)
2004
Dec. 31 12% Debentures Account Dr. 2,00,000 Unit 8: Methods of Redemption–I
Premium on Redemption of Debentures Account Dr. 10,000
To Debenture-holders Account 2,10,000
(Being amount due to debenture-holders on redemption)
Profit and Loss Account Dr. 2,00,000 Notes
To Debenture Redemption Reserve Account 2,00,000
(Being transfer of profits to debenture redemption reserve)
Debenture-holders Account Dr. 2,10,000
To Bank Account 2,10,000
(Being payment made to debenture-holders)
2005
Dec. 31 12% Debentures Account Dr. 2,00,000
Premium on Redemptions of Debentures Account Dr. 10,000
To Debenture-holders Account 2,10,000
(Being amount due to debenture-holder on redemption)
Profit & Loss Account Dr. 2,00,000
To Debenture Redemption Reserve Account 2,00,000
(Being transfer of profit to debenture redemption reserve)
Debenture-holders Account Dr. 2,10,000
To Bank Account 2,10,000
(Being payment made to debenture-holders)
Debenture Redemption Reserve Account Dr. 7,00,000
To General Reserve Account 7,00,000
(Being the balance of DRR transferred to general reserve)
Accounting Treatment for Second Case: (when profits are invested outside in marketable securities
or insurance policy)
Sinking Fund or Debenture Redemption Fund Method: A fund is created by a charge against
profits of the company to redeem the debentures after a specified period. This fund is invested
in some safe securities and the interest thereon is also invested. And at the end, when debentures
are to be redeemed, all these investments are sold in order to enable the company to redeem the
debentures without disturbing its working capital. Such a fund is called Debenture Redemption
Reserve Fund/Sinking Fund Account or Cumulative S.F. Account. Here the word ‘fund’ indicates
that the amount is invested in outside securities. The amount of annual instalment that is invested
in safe securities every year by setting aside out of profits, is calculated with the help of Annuity
Table or Sinking Fund Table. Sinking fund account is shown in the liability side of the balance
sheet while the amount of sinking fund invested in safe securities (sinking fund investment) is
shown in the assets side of the balance sheet. Sinking fund investment is the replacement of
liquid assets, while sinking fund is the replacement of profits of the company.
Accounting treatment: Journal entries for making Sinking Fund/Debenture Redemption Reserve
Fund for the redemption of debentures would be as under:
1. At the end of first year—
(a) When a fixed instalment of amount is set aside from profits—
Profit and Loss Appropriation Account Dr.
To Debenture Redemption Fund Account.
The fixed annual instalment is determined with the help of Annuity Table/Sinking
Fund Table and total amount payable on redemption.
(b) When the amount set aside from profits is invested in safe securities—
Debenture Redemption Fund Investments Account Dr.
To Bank Account
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