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Unit 8: Methods of Redemption–I

Self Assessment Notes

Fill in the blanks:
11. Profit on cancellation of debentures is transferred to .......... account.
12. ……………….. is maintained for the redemption of debentures.

13. Debentures cannot be ……………….. by a company.
14. Loss on issue of debentures is a …………… loss for the company.
15. Profit on cancellation of debentures is transferred to:
(a) Profit and Loss Account
(b) Sinking Fund Account

(c) Capital Reserve

8.4 Summary

 Redemption of debentures means repayment of the amount of debentures to the debenture
holders or discharge of the liability on account of debentures.
 Debentures are normally redeemed at the expiry of the period for which they were
originally issued. But the company may also, if so authorized by the articles of association
and the terms of issue as stated in the prospectus, redeem the debentures before the expiry
of the fixed period either by instalments or by purchasing them in the open market.

 Unlike shares, a company can purchase its own debentures without any conditions and
then cancel them or even sell them again.

 The question of provisioning was earlier left to the discretion of company and many
companies did provisioning routinely, as a matter of financial prudence.
 Now under the SEBI guidelines, the matter is no more a matter of discretion or financial
prudence. SEBI guidelines provide for compulsory provisioning and also restrictions on
the payment of dividends till debentures are redeemed.
 We will first deal with SEBI guidelines before proceeding with the accounting aspects of
creating sinking fund for redemption of debentures.

8.5 Keywords

Redemption of Debentures: It means repayment of the amount of debentures to debenture-
holders or the discharge of the liability of debentures.
Redemption of Debentures by Conversion: When a company redeems its debentures by converting
them into a new class of shares or debentures, this method is called redemption of debentures by
conversion.

8.6 Review Questions

1. Explain the following:

(a) Redemption of Debentures out of Capital.
(b) Redemption of Debentures out of Profit.

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