Redemption of debentures-Notes

NOTES

CHAPTER 10: Redemption of Debentures

Depending upon the terms and conditions of issue and redemption of debentures, the following six situations are commonly found in practice.

  1. Issued at par and redeemable at par
  2. Issued at discount and redeemable at par
  3. Issued at a premium and redeemable at par
  4. Issued at par and redeemable at a premium
  5. Issued at a discount and redeemable at a premium
  6. Issued at a premium and redeemable at a premium
1. Issue at par and redeemable at par
 (a) Bank A/c Dr.
    To Debenture Application & Allotment A/c
 (b) Debenture Application & Allotment A/c Dr.
    To Debentures A/c (Allotment of debentures)
2. Issue at a discount and redeemable at par
 (a) Bank A/c Dr.
    To Debenture Application & Allotment A/c
 (b) Debenture Application & Allotment A/c Dr.
    Discount on Issue of Debentures A/c Dr.
    To Debentures A/c (Allotment of debentures at a discount)
3. Issue at premium and redemption at par
 (a) Bank A/c Dr.
    To Debenture Application & Allotment A/c
 (b) Debenture Application & Allotment A/c Dr.
    To Debentures A/c
    To Securities Premium A/c (Allotment of debentures at a premium)
4. Issue at par and redeemable at premium
 (a) Bank A/c Dr.
    To Debenture Application & Allotment A/c
 (b) Debenture Application & Allotment A/c Dr.
    Loss on Issue of Debentures A/c Dr.
    To Debentures A/c
    To Premium on Redemption of Debenture A/c
    (Allotment of debentures at par and redeemable at a premium)
5. Issue at discount and redemption at premium
 (a) Bank A/c Dr.
    To Debenture Application & Allotment A/c
 (b) Debenture Application & Allotment A/c Dr.
    Loss on Issue of Debentures A/c Dr.
    To Debentures A/c
    To Premium on Redemption of Debentures A/c
6. Issued at a premium and redeemable at premium
 (a) Bank A/c Dr.
    To Debenture Application & Allotment A/c
 (b) Loss on Issue of Debentures A/c Dr.
    To Debentures A/c (with nominal value of debenture)
    To Securities Premium A/c (with premium on issue)
    To Premium on Redemption of Debentures A/c

Example 1:

Give Journal entries for the following:

  1. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par and redeemable at par.
  2. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium of 5% but redeemable at par.
  3. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5% repayable at par.
  4. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par but repayable at a premium of 5%.
  5. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5% but redeemable at premium of 5%.
  6. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium of 5% and redeemable at premium of 5%.

Solution:

Date Particulars L.F. Debit Credit
1. Bank A/c Dr.
 To 9% Debenture Application & Allotment A/c
(Debentures Application money received)
  
 1,00,000
  
1,00,000
 
 Debenture Application & Allotment A/c Dr.
 To 9% Debentures A/c
(Application money transferred to Debentures Account)
  
 1,00,000
  
1,00,000
2. Bank A/c Dr.
 To 9% Debenture Application & Allotment A/c
(Debentures application money received)
  
 1,05,000
  
1,05,000
 
 Debenture Application & Allotment A/c Dr.
 To 9% Debentures A/c
 To Securities Premium A/c
(Debentures application money transferred to Debentures & Securities Premium account)
  
 1,05,000
  
1,00,000
5,000
3. Bank A/c Dr.
 To 9% Debenture Application & Allotment A/c
(Debentures application money received)
  
 95,000
  
95,000
 
 9% Debenture Application & Allotment A/c Dr.
Discount on Issue of Debentures A/c Dr.
 To 9% Debentures A/c
(Debentures application money transferred to Debentures account)
  
 95,000
5,000
  
 
1,00,000
4. Bank A/c Dr.
 To 9% Debenture Application & Allotment A/c
(Debentures Application money received)
  
 1,00,000
  
1,00,000
 
 Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.
 To 9% Debentures A/c
 To Premium on Redemption of Debentures A/c
(Debentures Application money transferred to Debentures account)
  
 1,00,000
5,000
  
 
1,00,000
5,000
5. Bank A/c Dr.
 To 9% Debenture Application & Allotment A/c
(Debentures Application money received)
  
 95,000
  
95,000
 
 Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.
 To 9% Debentures A/c
 To Premium on Redemption of Debentures A/c
(Debentures application money transferred to debentures and Premium on debenture account)
  
 95,000
10,000
  
 
1,00,000
5,000
6. Bank A/c Dr.
 To 9% Debenture Application & Allotment A/c
(Debentures Application money received)
  
 1,05,000
  
1,05,000
 
 Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.
 To 9% Debenture A/c
 To Premium on Redemption of Debentures A/c
 To Securities Premium A/c
(Debenture application money transferred to debentures account)
  
 1,05,000
5,000
  
 
1,00,000
5,000
5,000

Interest on debentures

Example 2:

A Ltd. issued 5000 10% debentures of 100 each at the discount of 10% redeemable at a premium of 10%. Give journal entries relating to the issue of debentures and debentures interest for the period ending 31st march 2017 assuming that interest was paid half yearly on June 30 and December 31 and tax deducted at source is 10%.

Solution:

Date Particulars L.F. Debit Credit
2017
Jan 01
 Bank A/c Dr.
 To 10% debenture application & allotment A/c
  
  
  
 
 10% debenture application & allotment A/c Dr.
Loss on issue of debentures
 To 10% debenture
 To premium on redemption of debenture
  
  
  
June 30
 10% debenture interest A/c Dr.
 To debenture holders A/c
 To income tax payable A/c
  
  
  
 
 10% debentures holders A/c Dr.
 To bank A/c
  
  
  
Dec 31
 10% debenture interest A/c Dr.
 To debenture holders A/c
 To income tax payable A/c
  
  
  
 
 10% debenture holders A/c Dr.
 To bank A/c
  
  
  
 
 Income tax payable A/c Dr.
 To bank A/c
  
  
  
 
 Profit & loss A/c Dr.
 To debenture interest A/c
  
  
  

Example 3:

A Ltd. decided to redeem Rs. 2,12,500 12% debentures. It purchased Rs. 1,70,000 debentures in the open market at Rs. 98.50 each the expenses being Rs. 100 and redeemed the balance of Rs. 42,500 debentures by draw of lots.

Solution:

Journal
Date Particulars L.F. Debit Credit
 
 12% debentures A/c Dr.
 To Bank A/c
 To profit on redemption of debentures
  
 1,70,000
  
1,68,300
1,700
 
 12%  debentures A/c Dr.
 To bank A/c
  
 42,500
  
42,500
 
 Profit on redemption of debenture A/c Dr.
 To capital reserve
  
 1,700
  
1,700
 
 Profit & loss appropriation A/c Dr.
 To debenture redemption reserve  A/c
  
 2,12,500
  
2,12,500