Page 190 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 8: Methods of Redemption–I

Or Notes
If investments are sold at a loss—
Bank Account Dr.
Debenture Redemption Fund Account Dr. (Loss on sale of investments)

To Debenture Redemption Fund Investments Account.
(e) When amount is due to debenture-holders for redemption—
Debentures Account Dr.
To Debenture-holders’ Account

(f) When payment is made to debenture-holders—
Debenture-holders Account Dr
To Bank Account
(g) When the balance of Debenture Redemption Fund Account, after the redemption of
all debentures, is transferred to General Reverse—
Debenture Redemption Fund Account Dr.
To General Reserve Account.

Some important points relating to debenture redemption fund for redemption of debentures:
1. If the debentures are redeemable at premium as per the terms of issue of debentures, total
amount to be accumulated by the means of Debenture Redemption Fund must include the
amount of premium payable on redemption.
2. Amount of profit to be set aside will be calculated as under:
Amount of profit to be set aside = Amount of redeemable debentures × Present value of
1 for a given number including premium payable on redemption of years at a prescribed
rate of interest.

3. Interest on investment will be calculated on the nominal value of investments not on the
purchase price of investments.
4. In the last year no investment is made for another one year, because the redemption is to
be made in this year.
5. If all the debentures have been repaid, the balance of Debenture Redemptions Fund should
be transferred to General Reserve, because the purpose of its creation is solved by the
redemption of debentures and its corresponding investments are also sold.
6. The profits on sale of investment and profit on cancellation of debentures are of capital
nature. If these profits have been transferred to Debenture Redemption Fund, these should
be transferred to capital reserve by the following journal entry:

Debenture Redemption Fund Account Dr.
To Capital Reserve Account
and the balance should be transferred to general reserve.
7. If only some of the debentures are redeemed, only the face value of the debentures redeemed
(plus any premium payable on redemption) should be transferred from Debenture
Redemption Fund to General Reserve.

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