In this article we will discuss about the accounting entries for redemption of debentures.
1. Redemption Out of Profits:
When debentures are redeemed out of profit, it is essential that an equal amount to the face value of the debentures redeemed will be transferred to Debenture Redemption Reserve Account. When all the debentures are redeemed, the Debenture Redemption Reserve Account is closed by transferring to General Reserve Account.
The following journal entries will be passed:
A Limited Company has a balance of Rs 1, 00,000 at the credit of Profit and Loss Account. It was resolved to utilise the profits to repay its debentures of Rs 70,000 now redeemable at a premium of 5%. Show the journal entries.
2. Redemption Out of Provision:
The following illustrations further clarify.
Rosy Limited had Rs 3, 00,000 5% debentures outstanding on 1st April, 2003. On that date the Debenture Redemption Fund stood at Rs 2, 50,000 represented by Rs 2, 95,000 3 per cent (2005) loan of the Government of India. The annual instalment added to the Debenture Redemption Fund was Rs 41,150.
On 31st March, 2004 the balance at bank was Rs 70,000. On that date the interest on investments was received, the investments were sold at 83 per cent net and the debentures were paid off.
Show necessary Ledger Accounts for the year ended 31st March, 2004.
3. Redemption by Conversion:
Sometimes debentures are redeemed by conversion i.e. old debentures are exchanged for new debentures or shares. In certain cases, a Company, instead of redeeming their debentures in cash, may offer the Debenture holders fresh debentures or shares in exchange for the old ones. If the terms are attractive, the Debenture holders may agree to the proposal and then the debentures are said to have been redeemed by conversion.
The entry is:
Debit Old Debentures Account
Credit the New Debentures/Shares Account
On January 1, 2004 a company issued 400, 5% debentures of Rs 1,000 each @ Rs 980. Holders of these debentures had an option to convert their holdings into 8% preference shares of Rs 100 each at a premium of Rs 20 per share at any time within five years.
On December 31, 2004 one year’s interest had accrued on the debentures and remained unpaid. A holder of 24 debentures notified his intention to exercise the above option.
Pass the necessary journal entries and show how the items affected would appear in the company’s Balance Sheet.