Page 216 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 9: Methods of Redemption-II

And price paid for these 100; 10% Debentures is 96 × 100 = 9,600 Notes
Here, the cost portion in price is 9,600 – 333.33 = 9,266.67
And the revenue portion in price is 333.33
(a) For this cum-interest quotation purchase, the company will pass the following entry:

10% Debentures Account Dr. 10,000
Debenture interest account Dr. 333.33
To Bank Account 9600
To Profit on Redemption of Debenture A/c 733.33

(b) If these debentures are purchased as an investment:
Own Debentures Account Dr. 9266.67
Debenture Interest Account Dr. 333.33
To Bank Account 9600

In future, when these debentures are cancelled, profit on cancellation on these debentures
will be transferred to the capital reserve account.
(ii) Ex-Interest price: It is the price which does not include the interest of expired period. If ex-
interest price is quoted, it means the company has to make extra payment for interest for
expired period in addition to the price paid for debenture. In the previous example, if a
company purchases those debentures at ex-interest quotation, it has to pay 9,600 for
debentures and 333.33 for interest for expired period.

(a) The following journal entry will be passed by the company:
10% Debentures Account Dr. 10,000
Interest on Debentures Account Dr. 333.33
To Bank Account 9,933.33

To Profit on Redemption of Debentures Account 400
(b) If these debentures are purchased as an investment:
Own Debentures Account Dr. 9,600
Debenture Interest Account Dr. 333.33

To Bank Account 9,933.33
The profit on cancellation of these debentures will be transferred to the capital reserve account
at the time of cancellation of these debentures. If a sinking fund is maintained by the company,
profit on cancellation of these debentures will go to the sinking fund.
Illustration 4 (Purchase of Own Debentures at Ex-Interest Quotation, and Interest on Own
Debentures)
st
On 31 December, 2004, the balance sheet of Ranu Limited showed 20,000; 15% Debentures of
100 each outstanding. Interest on debentures is payable on 30 June and 31 December every
th
st
year. On 1 May, 2005, the company purchased 1,000 of its own debentures as investment of 98
st
ex-interest. Pass the necessary journal entries for the following cases:
(a) The company cancelled all its own debentures on 1 December, 2005.
st
(b) The company resells all its own debentures at 108 cum-interest on 1 December, 2005.
st

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