Question

What entries for the redemption of debentures will be done when (a) debentures are redeemed by annual drawings out of profits; (b) debentures are redeemed by drawing a lot out of capital; and (c) debentures are redeemed by purchasing them in the open market when sinking fund for the redemption of debentures is not maintained − (i) when out of profit, and (ii) when out of capital?

Answer 1

Given: What entries for the redemption of debentures will be done when (a) debentures are redeemed by annual drawings out of profits; (b) debentures are redeemed by drawing a lot out of capital; …….

 

Concept :  

DEBENTURE :  

• Debenture is a written acknowledgement of debt taken by the company.
• Debentures can be issued with /without charge on the assets.
• Debentures may be issued at par, at premium or at discount.  
• When a debenture is issued at a price below its nominal value, it is said to be issued at a discount
• Journal entries on issue of debenture are also the same as in case of issue of shares.  The difference is that instead of 'Share capital A/c , a debenture A/c'  is opened in the books of accounts and the rate of interest on debenture is prefixed on the issue of debentures.
• Debentures can be converted into equity shares.
• The debentures can be redeemed in lump sum or in installments.
• Debentures are shown under the head Non current liabilities and subhead long term borrowings.  

REDEMPTION OF DEBENTURE:  

Debentures are part of  liabilities of a company and as it borrowed capital.  Repayment or discharge of liability on account of debentures is called redemption of debentures.

REDEMPTION OUT OF CAPITAL :  

When debentures are redeemed without any arrangement of fund it is to be called redemption out of capital.

For the above the journal entries are in the attachment below :  

 

Hope this answer will help you..

Some more questions of this chapter :  

A. Ltd. issued 4,000, 9% Debentures of Rs 100 each on the following terms Rs 20 on Application; Rs 20 on Allotment; Rs 30 on First call; and Rs 30 on Final call. The public applied for 4,800 Debentures. Applications for 3,600 Debentures were accepted in full. Applications for 800 Debentures were allotted 400 Debentures and applications for 400 Debentures were rejected.

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A.Ltd. issued 50,00,000, 8% Debenture of Rs 100 at a discount of 6% on April 01, 2009 redeemable at premium of 4% by draw of lots as under 20,00,000 Debentures on March, 2011 10,00,000 Debentures on ………...

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