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Unit 9: Methods of Redemption-II

5. The following entry is passed in the books of a company: Notes
12% Debentures Account Dr. 70,000
Premium on Redemption of Debentures Account Dr. 1,400
To Bank Account 63,000

To Profit on Cancellation of Debenture A/c 8,400
Here, debentures are redeemed:
(a) 90
(b) 91.2

(c) At discount

9.2 Interest on Own Debentures

Debentures purchased by a company, if not cancelled immediately, are retained as investment
(popularly known as own debentures). These are deemed to be outstanding. Interest will be due
on the total debentures (including the retained debentures by the company as investment).
However, interest will be paid only on those debentures that are held by outsiders and interest
on own debentures will be retained by the company itself and will be transferred to interest on
own debentures account.
Accounting Treatment: The following journal entries will be passed to record the interest on
own debentures:
1. When interest on debentures become due—
Debenture Interest Account Dr.
To Debenture-holders’ Account
To Interest on Own Debentures Account
If any income tax is deducted at source from interest on debentures belonging to outsiders,
that (income tax payable) will be credited and the balance will be given to debenture-
holders.
2. When interest is paid to debenture-holders—
Debenture-holders Account Dr.
To Bank Account
3. When interest on debentures is transferred to Profit and Loss Account—
Profit and Loss Account Dr.
To Debenture Interest Account
4. There can be any one of the following treatment regarding interest on own debentures:
(a) If the sinking fund account is not maintained by the company, it will be transferred
to profit and loss Account.
Interest on Own Debentures A/c Dr.
To Profit and Loss Account.
(b) If the sinking fund account is maintained by the company, interest on own debenture
will be transferred to sinking fund account.
Interest on Own Debentures Account Dr.
To Sinking Fund Account

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