Debenture Redemption Fund Insurance Policy (Journal Entries)

In this article we will discuss about the Journal Entries on Debenture Redemption Fund Insurance Policy.

To get money for the redemption of debentures after a specified period of time, a company may take an insurance policy.

It is called Debenture Redemption Fund Insurance Policy. Entries will be passed as follows:—

Illustration 1:

On 1st April, 2011 the following balances appeared in the books of Fairdeal Co. Ltd.:—

On 1st April, 2011, the company paid the annual premium of Rs 79,600. On 31st March, 2012, the policy amount of Rs 10,00,000 was received and all the debentures were redeemed at par. Show the abovementioned three ledger accounts for the year ended 31st March, 2012.

Illustration 2:

The following was the balance sheet of Adarsh Trading Co. Ltd. as on 31st March, 2012:

On 1st April, 2012, the company offered to its preference shareholders and debenture-holders the option to get their holdings converted into equity shares of Rs 10 each to be considered as worth Rs 20 each. One-half of the preference shareholders and one-third of the debenture-holders in value exercised their option in favour of conversion.

The company sold all the investments for Rs 2,76,000, allotted 20,000 equity shares of Rs 10 each at a premium of 100% to the public for cash and redeemed at par all remaining debentures and preference shares. It then issued to its equity shareholders one fully paid equity share of Rs 10 by way of bonus for every two shares held using revenue reserves to the minimum possible extent.

Pass journal entries for all the above mentioned transactions and prepare the balance sheet as it would appear after the completion of these transactions. Figures of the previous balance sheet are not required in the new balance sheet.

Illustration 3:

The terms of an issue of Rs 10,00,000 14% Debentures of Rs 10 each included the following:

(a) Interest payable half-yearly on 31st March and 30th September.

(b) Twenty five per cent of the profits of any year to be applied in redeeming debentures and, upon being redeemed, they are to be cancelled.

(c) The company may purchase its debentures in the open market without limitation to the amount redeemable as above; those to be redeemed, if not obtained by purchase, being drawn by lot and surrendered at Rs 10.50.

(d) Any debentures purchased in excess of the obligatory amount may, entirely at the option of the company, be cancelled or kept alive for reissue.

(e) Upon giving three months’ notice, the company can redeem the debentures outstanding at Rs 11.

On 1st October, 2011,

(i) Rs 4,82,000 debentures had been redeemed and cancelled.

(ii) The profits for the year to date were Rs 4,20,000.

(iii) The company held Rs 2,82,000 of its live debentures (cost Rs 2,53,800).

On the above date the debentures to be redeemed and cancelled were appropriated out of the company’s holding, and three months’ notice to redeem the outside debentures was given.

The redemption was duly completed on 1st January, 2012, and the interest for three months duly paid.

On 31st March, 2012 it was resolved that the remaining debentures should be cancelled.

Show journal entries and ledger accounts ignoring income tax and SEBI guidelines on creation of Capital Redemption Revenue. (Adapted from C.A. Final)

Solution:

It should be noted that out of Rs 10,00,000 debentures, Rs 4,82,000 debentures have already been cancelled. Hence, the amount outstanding on 1st October, 2011, is Rs 5,18,000. Out of this latter sum, debentures worth Rs 2,82,000 (cost Rs. 2,53,800) are held by the company alive. Outside debentures are, therefore, Rs 2,36,000, i.e., Rs 5,18,000 – Rs 2,82,000.

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