Page 210 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 9: Methods of Redemption-II

Loss on Redemption of Debentures Account Dr. (any loss) Notes
To Own Debentures Account (Book value of debentures
to be cancelled)

To Profit on Redemption of Debentures Account (any profit)
If there is any loss or profit on redemption of debentures, that will be transferred to sinking fund
account. An amount equal to the nominal value of debentures cancelled will be transferred from
the divisible profit to the general reserve in case of no sinking fund is maintained. And in case
sinking fund is maintained, this transfer will be from the sinking fund to the general reserve.

Illustration 1 (Redemption of Debentures by Purchase from Open Market)
st
On 1 January, 2004 Surjeet Company Limited made an issue of 5,000; 12% Debentures of 500
each at 5% discount. The terms of issue provided for the redemption of 50,000 debentures every
year commencing from the end of 2005, either by purchase or by drawings at par at the company’s
discretion. 25,000 was also written off the debenture discount account in each of the years, 2004
and 2005.
st
On 31 December 2005 the company purchased for cancellation, debentures of the face value of
20,000 at 450 per debenture and of 38,000 at 400 per debenture, the brokerage being 2%.
Journalize the above transactions and show how the profit on redemption would be treated,
ignoring the interest on debentures.

Solution:
Journal
Date Particulars L.F.
2004
Jan. 1 Bank Account Dr. 23,75,000
Discount on Issue of Debentures A/c Dr. 1,25,000
To 12% Debentures Account 25,00,000
(Being issue of 12% debentures at discount)
Dec. 31 Profit and Loss account Dr. 25,000
To Discount on Issue of Debentures Account 25,000
(Being discount on debentures written off from P & L account)
2005
Dec. 31 12% Debentures Account Dr. 20,000
To Bank Account 18,000
To Profit on Redemption of Debentures Account 2,000
(Being cancellation of 40 debentures by purchasing them
@ 450 per debenture)
Profit on Redemption of Debenture Account Dr. 2,000
To Capital Reserve Account 2,000
(Being profit on redemption of debentures transferred to capital
reserve account)
12% Debentures Account Dr. 30,000
To Bank Account 24,000
To Profit on Redemption of Debentures Account 6,000
(Being cancellation of 60 debentures)
Profit on Redemption of Debenture Account Dr. 6,000
To Capital Reserve Account 6,000
(Being transfer of profit on cancellation of debentures)
Own Debentures Account Dr. 8,000
Contd...
To Bank Account 8,000
(Being own debenture purchased as own debentures
(38,000 – 30,000)
50,000
Dr.
Profit & Loss Account LOVELY PROFESSIONAL UNIVERSITY 203
To General Reserve Account 50,000
(An equal amount to nominal value of debentures redeemed
transferred to general reserve)
Profit and Loss Account Dr. 20,000
To Discount on Issue of Debentures Account 20,000
(Being discount on issue of debentures written off against profits)