Page 207 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I Gopika Juneja, Lovely Professional University

Notes Unit 9: Methods of Redemption-II

CONTENTS
Objectives
Introduction

9.1 Redemption by Purchase of Debentures in the Open Market
9.2 Interest on Own Debentures
9.3 Cum-Interest and Ex-Interest Quotations

9.4 Summary
9.5 Keywords
9.6 Review Questions
9.7 Further Readings

Objectives

After studying this unit, you should be able to:

 Know redemption by purchase of debentures in open market
 Explain interest on own debentures

 Understand Cum-interest and Ex-interest Quotations
Introduction

The amount required for the redemption of debentures is usually large and as such unless
adequate provision is made, the company may not have sufficient funds to repay the debentures
at their maturity date.
From the legal point of view, there are no restrictions on the sources of funds for redeeming
debentures – even assets can be sold for the purpose. However, in order to accumulate funds for
redeeming the debentures, prudent companies try to retain sufficient profits. In this case, it is
said that the debentures are redeemed out of the profits and of course, new shares or debentures
may also be issued for carrying out the redemption.
It is therefore necessary to make adequate provisions for additional funds required for the
redemption of debentures. For this purpose, a company may adopt any of the following methods:
(a) Raise fresh capital: A company may issue new shares or debentures and the proceeds of
fresh issue of share capital and/or debentures may be utilized for redeeming the debentures.

(b) Utilise profits: A part of the profits of the company may be withheld from distribution to
the shareholders and are utilized for the purpose of redemption of debentures.
(c) Sale of assets: A company may also utilize the sale proceeds of the fixed assets for redeeming
the debentures
(d) Surplus funds: Apart from the above, a company may also use its surplus profits for the
redemption of debentures.

200 LOVELY PROFESSIONAL UNIVERSITY