Page 218 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 9: Methods of Redemption-II

Illustration 5 (Purchase of Own Debentures at Cum-interest Quotation by Sale of D.R.F. Notes
Investments)
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Purohit Limited furnishes you the following information on 1 January 2005:
12% Debentures of 100 each 4,00,000
Debenture Redemption Fund 1,50,000
Debenture Redemption Fund Investment 1,50,000
(in 8% IDBI Bonds of the face value of 1,80,000)

th
Interest on debentures was payable on 30 June and 31 December every year and interest on
st
IDBI Bonds was also receivable on the same dates.
On March 1, 2005, the company purchased for immediate cancellation 480 debentures in the
open market at 98 each cum-interest. The amount required for this was raised by selling 8%
IDBI Bonds of the face value of 54,000.

On 31 December, 2005, 40,000 was appropriated for the Debenture Redemption Fund and on
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the same date, 8% IDBI Bonds were purchased for the amount plus the interest on investments.
The face value of the 8% IDBI Bonds purchased was 60,000.
You are required to show the journal entries in the books of the company to record the above
mentioned transactions.

Solution:
Journal Entries
2005 Particulars L.F.
March 1 12% Debentures Account Dr. 48,000
Debenture Interest Account Dr. 960
To Bank Account (480 × 98) 47,040
To Profit on Cancellation of Debentures Account 1,920
(Being 480 debentures purchased cum-interest at 98 for
immediate cancellation).
March 1 Profit on Cancellation of Debentures Account Dr. 1,920
To debenture redemption fund account 1,920
(Being profit on cancellation of debentures transferred to D.R. fund)
Bank Account Dr. 47,040
To Debenture Redemption Fund Investment Account 46,320
To Interest on D.R. Fund Investment A/c 720
(Being D.R.F. investments sold)
Debenture Redemption Fund Investment Account Dr. 1,320
To Debenture Redemption Fund A/c 1,320
(Being transfer of profit on sale of investment)
Profit and Loss Account Dr. 48,000
To Debenture Redemption Fund Account 48,000
(Being profit transferred to debenture redemption fund for redemption
of debentures)
June 30 Debenture Interest Account Dr. 21,120
To Bank Account 21,120
(Being payment of interest on 3,520 debentures for 6 months)
Bank Account Dr. 5,040
To Interest on D.R. Fund Investment Account 5,040
(Being interest received on investment of 1,26,000 @ 8% for
6 months)
Dec. 31 Debenture Interest Account Dr. 21,120
Contd...
To Bank Account 21,120
(Being payment of interest on 3,520 debentures for 6 months)
Bank Account Dr. 5,040
To Interest on D.R. Fund Investment A/c 5,040
LOVELY PROFESSIONAL UNIVERSITY 211
(Being interest received on investment of 1,26,000 @ 8% for
6 months)
Interest on D.R. Fund Investment Account Dr. 10,800
To D.R. Fund Account 10,800
(Interest on D.R.F. investment transferred to D.R. Fund account i.e.,
720 + 5,040 + 5,040)
Profit and Loss Account Dr. 40,000
To D.R. Fund Account 40,000
(Being annual profit transferred to D.R. Fund account)
Debenture Redemption Fund Investment Account Dr. 41,800
To Bank Account 41,800
(Being 8% IDBI Bonds purchased with the amount of annual profits
and interest i.e., 40,000 + 1,800)
Profit and Loss Account Dr. 43,200
To Debenture Interest Account 43,200
(Being interest on debentures transferred to P/L account i.e.,
21,120 + 21,120 + 960)
Debenture Redemption Fund Account Dr. 48,000
To General Reserve Account 48,000
(Being an amount equal to the nominal value of debentures
redeemed transferred from D.R. Fund to General Reserve)