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Accounting for Companies-I

Notes

Notes 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).

Self Assessment

Fill in the blanks:
6. The amount required for the ………………… 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.

7. ………………… purchased by a company, if not cancelled immediately, are retained as
investment (popularly known as own debentures).
8. If the debentures are purchased exactly on the date of payment of interest by a
…………………, interest of the previous period is paid to the former debenture-holder.
9. If the interest for ………………… period is included in the price of debenture, that will be
the capital portion. If some extra payment is made towards the interest for expired period
in addition to the price of debentures to the debenture-holder, that will be the revenue
portion.
10. If the Articles of Association of a company ………………… the directors, they can purchase
the company’s own debentures from the open market.

11. From the ………………… point of view, there are no restrictions on the sources of funds
for redeeming debentures – even assets can be sold for the purpose.

9.3 Cum-Interest and Ex-Interest Quotations

If the debentures are purchased exactly on the date of payment of interest by a company, interest
of the previous period is paid to the former debenture-holder. If the debentures are purchased
by the company between interest dates, it is necessary to find out whether the price paid for such
debentures includes the interest of expired period or not. If the interest for expired period is
included in the price of debenture, that will be the capital portion. If some extra payment is
made towards the interest for expired period in addition to the price of debentures to the
debenture-holder, that will be the revenue portion. The price paid depends upon the quotation.
There can be two types of quotations:
(i) Cum-interest price
(ii) Ex-interest price

(i) Cum-interest price: It is the price of the debenture which includes the interest of the
expired period. If cum-interest price is quoted, it means that no extra payment is to be
made for interest of expired period by the company to the debenture-holder. But the
interest has to be calculated from the last date of payment of interest to the date of purchase
of debentures. This can be understood properly with an example. If a company buys its 100
ow n 10% D ebentures of 100 each on 1 May, 2005 at 96 cum-interest and the dates of
st
th
st
interest are 30 June and 31 December. Here, the expired period is four months (Jan., Feb.,
March & April).

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