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Redemption of
Debentures:
It refers to repayment of amount
of Debentures to Debentureholders for discharge of its Liability towards
Debentures.
Points to be considered
at the time of Redemption:
Debentures are normally redeemed
on maturity date, However, it can be redeemed before maturity by Draw of
lots, Purchase from Open Market for Cancellation or by Conversion into Shares
or New Debentures; If Article of Association of Company authorises it and if
the terms and conditions of Debentures permit it.
Debentures can be redeemed either
at Par or Premium as per the terms of issue. In case of Purchase from Open
Market for Cancellation, money paid for Purchase of Debentures is the amount
of Redemption.
Sources of Redemption:
1. Out of Capital:
No transfer of adequate Fund to
Debenture Redemption Reserve (DRR). However, Rule 18 (7) of Companies (Share
Capital & Debentures) Rules of Indian Companies Act 2013; Every Company
other than Companies exempted from creating DRR, to transfer
at least 25 % of Nominal Value of total Redeemable Debentures of a
particular Class to DRR out of Surplus available for Payment as Dividend to
Shareholders.
2. Out of Profit:
Redemption solely out of Profits.
100 % Nominal value of total Redeemable
Debentures are transferred to DRR out of Surplus available for Payment as
Dividend to Shareholders.
3. Out of Profit & Capital
Both:
Redemption of Debentures
Partially out of Profit & Partially out of Capital. In this case, Company
is not required to transfer 100 % of Face value of Debentures to DRR. At lesat 25 % is required to be transferred to DRR.
Notes:
Following points
are noteworthy with respect to creation of DRR:
If Question is silent àCreate
DRR of 25 % of Face Value of Debentures
If Redemption is out of Profit à
Transfer 100 % of Face Value of Debentures to DRR.
If amount of DRR is given in the
questionà If less than 25 %, value of
Debentures is given in the Question, Transfer Balance amount in order to make
it 25 %. If more than 25 % is given in the question, transfer that value to
DRR.
Debenture Redemption
Reserve (DRR)
Amount set aside out of amount
available for Payment as Dividend to Shareholders of the Company.
DRR is created on Non Convertible
Debentures or Non Convertible part of Debentures in case of Partially
Converted Debentures.
Adequate Amount is required to be
credited to DRR before Redemption begins.
Exemptions to Create
DRR as Per Indian Companies Act, 2013:
1. All India Financial
Institutions & Other Financial Institutions Controlled by RBI.
2. Banking Companies and
3. National Housing Bank.
Disclosure of DRR in
Balance Sheet:
In Equity & Liability Part of
Balance Sheet under the Head “Shareholders’ Fund” and Sub Head “Reserve &
Surplus”.
Debenture Redemption
Investment (DRI)
Along with DRR, Companies are
required to invest 15 % in Specified Securities on or before 30 April of
Current year, of Total Face value of Debentures to be redeemed by the next
year.
For Example
X LTD is going to redeem 10000
Debentures of Rs 100 by 31 March 2018, then it has to invest 15 % of redeemable value in Specified Securities
on or before 30 April, 2017.
Specified Security means:
Deposits with any Scheduled Bank,
Unencumbered Securities of Central or State Government, Unencumbered Securities
as per Section 20 Of Indian Trust Act. 1882 & Unencumbered Bonds issued
by any other Company as per Section 20 of Indian Trust Act. 1882.
DRI is made by those Companies
who are required to create DRR. Companies exempted to create DRR are also
exempted to make DRI.
Methods of Redemption
of Debentures
1. On Maturity in Lump Sum
2. On Installments by Draw of
Lots
3. By Purchase From Open Market
4. By Conversion
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1. Redemption Of
Debentures in Lump Sum
All Debentures are redeemed on
maturity date either at Par or Premium as per Terms of Issue.
Journal Entries
under this method:
On Creation of DRR:
Balance in P & L A/C……….Dr
To DRR A/C
On Investment made
in Specified Securities:
Debenture Redemption Investment
A/C……Dr
To Bank A/C
On Encashing Investment
before Redemption of Debentures including Interest earned on it:
Bank A/C……….Dr (DRI Amount +
Interest Earned – TDS Receivable)
TDS Receivable …….Dr
To Debenture Redemption
Investment A/C
To Interest Earned A/C
On Interest being
Due on Debentures:
Interest on Debentures A/C……Dr
To Debentureholders A/C
To TDS Payable
On Debentures being
Due For Payment:
Debenture A/C…………….Dr
Premium on Redemption of
Debentures A/c (If redeemed at Premium)
To Debentureholders A/C (Nominal
Value + Premium Value if redeemed at Premium)
On Payment to
Debentureholders including Interest Payment
Debentureholders A/C…………..Dr
TDS Payable A/C ……………….Dr
To Bank A/C
On Transfer of DRR
to General Reserve:
DRR A/C……………..Dr
To General Reserve A/C
Note:
All questions will
not carry Interest entries either On Debenture or DRI. In such cases, exclude
those entries while doing questions.
TDS Payable is
always calculated on TDS Percentage of Interest amount to be paid on
Debentures.
TDS Receivable is
always calculated on TDS Percentage of Interest amount to be received on DRI.
For Example – 10 %
TDS to be payable or Receivable on Interest and Interest amount comes Rs.
100000. In this case TDS will beà 10 % of 100000=
Rs.10000.
For beginning
Entries related to Redemption, Kindly Go through Notes of Accounting For
Issue of Debentures.
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2. Redemption of
Debentures in Installments By Draw of lots
Part of debentures is being
redeemed every year being selected by Draw at Par or premium according to the
terms of Issue.
All entries remain same as we did
for Lump Sum Method.
DRR is created before commencing
Redemption of Debentures and DRI is also made in the way we did for Lump Sum
Method.
Points to be considered while
Doing Questions of Redemption of Debentures in Installments:
Until & Unless Question
specifies, If Redemption of Debenture is done on yearly or Half Yearly Equal
Installment basis, we do not need to write entry of creating DRR and DRI made
every year. We can write Journal entry for DRR & DRI once for all
subsequent years of redemption. In the Last year of Redemption, we can encash
DRI and transfer DRR to General Reserve.
Sometimes Question specifies that
we have to encash DRI each time Debentures will be redeemed. In this case, we
have to write Journal entry for DRI made every year and Encashment of DRI as
and when Debentures are redeemed.
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3. Redemption of
Debentures by Purchase from Open Market
It refers to purchasing own
Debentures from open Market for immediate cancellation or for retaining as
Investment and cancel them at a later date.
Before initiating the Purchase of
debentures for Cancellation, the company must have DRR balance equal to 25 %
of Face value of Outstanding Debentures being cancelled and also have made
DRI equal to 15 % of Face value of Outstanding Debentures being cancelled.
Unless otherwise specified in the
Question, it is assumed that the Company has adequate balance in DRR and DRI
before initiating Purchase for Cancellation of Debentures.
Accounting Entries
For Cancellation of Debentures
Two
Cases:
Case I. When
debentures are purchased from Open Market for Immediate Cancellation and are
Redeemable at Par:
Case II. When Debentures
are purchased from Open Market for immediate Cancellation and Debentures are
redeemable at Premium:
Case I. When debentures
are purchased from Open Market for Immediate Cancellation and are Redeemable
at Par:
Own Debentures can be purchased
at a price which is equal to, less than or greater than Par Value.
A. When Debentures
are purchased at a Price equal to Face Value of Debentures
1. On Purchase of Debentures:
Own Debentures A/C…………Dr
To Bank A/C
2. For Cancellation of Own
Debentures:
Debentures A/C……….Dr
To Own Debentures A/C
B. When Debentures
are purchased at a Price below the Nominal Value of Debentures:
1. On Purchase of Debentures:
Own Debentures A/C…………Dr (With
Purchase Price)
To Bank A/C
2. For Cancellation of Own
Debentures:
Debentures A/C……….Dr
To Own Debentures A/C
To Gain on
Cancellation of Own Debentures A/C (Excess of Face Value over Cost of Own
Debentures cancellation)
Gain on
Cancellation of Debentures is a Capital Profit and, therefore, is transferred
to Capital Reserve. Entry for the same is:
Gain on Cancellation A/C………….Dr
To Capital Reserve A/C
C. When Debentures
are purchased at a price higher than the Nominal Value of Debentures:
1. On Purchase of Debentures:
Own Debentures A/C…………Dr (With
Purchase Price)
To Bank A/C
2. For Cancellation of Own
Debentures:
Debentures A/C……….Dr
Loss on Cancellation of Own Debentures
A/C……..Dr
To Own Debentures A/C
Loss on
Cancellation of Debentures is a Capital Loss and, therefore, is debited to
Capital Reserve. Journal entry for the same is:
Capital Reserve A/C…………………Dr
To Loss on Cancellation of Own
Debentures A/C
In case there is no
balance in Capital Reserve, Loss on Cancellation will be transferred to
Statement of Profit & Loss A/C.
Journal entry for
the same is:
Statement of Profit & Loss
A/C…….Dr
To Loss on Cancellation of Own
Debentures A/C
Case II. When
Debentures are purchased from Open Market for immediate Cancellation and
Debentures are redeemable at Premium:
Premium payable at Redemption of
Debentures has been debited to Loss on Issue of debentures A/C at the time of
issue, will now be credited to Premium on Redemption of Debentures A/c.
Premium on redemption of Debenture A/C is debited at the time of redemption.
Purchase cost of own debentures
from Open Market can be equal to, more than or less than Face Value of
Debentures.
A. when Debentures
are purchased at a Price equal to Face Value:
1. On Purchase of Debentures:
Own Debentures A/C…………Dr
To Bank A/C
2. For Cancellation of Own
Debentures:
Debentures A/C……….Dr
Premium on Redemption of
Debentures A/C……Dr
To Own Debentures A/C
To Gain on Cancellation of Own
Debentures A/C
3. On transfer of Gain to Capital
Reserve
Gain on Cancellation A/C………….Dr
To Capital Reserve A/C
B. when Debentures
are purchased at a Price below Face Value:
1. On Purchase of Debentures:
Own Debentures A/C…………Dr
To Bank A/C
2. For Cancellation of Own
Debentures:
Debentures A/C……….Dr
Premium on Redemption of
Debentures A/C……Dr
To Own Debentures A/C
To Gain on Cancellation of Own
Debentures A/C
Note: Gain on
cancellation in this case will be =Premium amount + Difference between
Purchase Cost & Face value.
3. On transfer of Gain to Capital
Reserve
Gain on Cancellation A/C………….Dr
To Capital Reserve A/C
C. When Debentures
are purchased at a Price Higher than Face Value:
1. On Purchase of Debentures:
Own Debentures A/C…………Dr
To Bank A/C
2. For Cancellation of Own
Debentures:
#. In Case of Gain:
Debentures A/C……….Dr
Premium on Redemption of Debentures
A/C……Dr
To Own Debentures A/C
To Gain on Cancellation of Own
Debentures A/C
Note: Gain on
cancellation in this case will be =Premium amount + Difference between
Purchase Cost & Face value.
On transfer of Gain to Capital
Reserve
Gain on Cancellation A/C………….Dr
To Capital Reserve A/C
#. In Case of Loss:
Debentures A/C……….Dr
Premium on Redemption of
Debentures A/C……Dr
Loss on Cancellation of Own
debentures A/C…..Dr (Purchase Cost – Face value - Premium)
To Own Debentures A/C
Loss on
Cancellation of Debentures is a Capital Loss and, therefore, is debited to
Capital Reserve.
Capital Reserve A/C…………………Dr
To Loss on Cancellation of Own
Debentures A/C
Note:
When Question
includes Expenses on Purchase of Own Debentures the we can modify our Journal
Entries as follows:
1. On Purchase of Debentures:
Own Debentures A/C…………Dr
Expenses on Purchase of Own
Debentures A/C…..Dr
To Bank A/C
2.
On Cancellation of Own Debentures:
2.A.In case of
Profit on Cancellation:
Debenture A/C…….Dr
Premium on Redemption of
Debentures A/C….Dr (if any)
To Own debentures A/C (With Cost of Own Debentures excluding expenses on Purchase)
To Expenses on Purchase of Own
Debentures A/C
To Gain on Cancellation of Own
Debentures A/C
2.B.In case of Gain
on Cancellation:
Debenture A/C…….Dr
Premium on Redemption of
Debentures A/C….Dr (if any)
Loss on Cancellation of Own
Debentures A/C….Dr
To Own debentures A/C (With Cost of Own Debentures excluding expenses on Purchase)
To Expenses on Purchase of Own
Debentures A/C
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4. Redemption of Debentures
by Conversion
It refers to redemption of
Debentures by converting into Shares or New form of Debentures.
Conversion can take place in two
forms:
I. Fully
Convertible Debentures
It means company has issued
Debentures which will be fully convertible into Shares or New form of
Debentures. In this Case, there is no need to
create DRR & DRI.
II. Partly
Convertible Debentures
It means, company has issue
Debentures which is not fully convertible into new Shares or new forms of
Debentures, but part of it will be converted into new Shares or new forms of
Debentures. In this case, DRR & DRI
will be created only for Non Convertible Nominal
Value of Debentures.
I. Accounting
Entries for Fully Convertible Debentures ( Conversion of Debentures into New Shares
after Maturity Case)
1. For Amount
Due to Debentureholders:
Debenture
A/C…….. ……………………………..Dr
Premium on
Redemption of Debenture A/C ………Dr (If Redemption is at Premium)
To
Debentureholders A/C
2. For issuing
Shares or New Debentures:
A.
If Shares or New Debentures issued at Par
Debentureholders
A/C……………….Dr
To Share
Capital A/C or New Debentures A/C
B.
If Shares or New Debentures issued at Premium
Debentureholders
A/C……………….Dr
To Share
Capital A/C or New Debentures A/C
To Security
Premium Reserve A/C
C.
If New Debentures issued at Discount
Debentureholders
A/C……………….Dr
Discount on
Issue of Debentures A/C………Dr
To Share
Capital A/C or New Debentures A/C
II. Accounting
Entries For Partly Convertible Debentures ( Conversion of Debentures into New
Shares after Maturity Case)
In this case,
Convertible part of Debentures is converted into Shares or New Debentures.
Entries for Convertible part of Debentures will be same as discussed above.
Non Convertible part is paid in Cash or by Cheque.
Journal
Entries related to Partly Convertible Debentures:
A.
Creation of DRR for Non Convertible part of Debentures (25 % of value of Non
Convertible part of Debentures or as the case may be):
Statement of
P&L A/C……….Dr
To DRR A/C
B.
For Investment made for Non Convertible part of Debentures (15 % of value
of Non Convertible part of Debentures):
DRI A/C……….Dr
To Bank A/C
C.
For Interest received on DRI & Realisation of DRI:
Bank
A/C………………………….Dr
TDS Collected/
Receivable A/C…….Dr
To DRI A/C
To Interest
Earned A/C
D.
For Amount Due to Debentureholders:
Debenture
A/C…….. ……………………………..Dr (Nominal Value of Debentures)
Premium on
Redemption of Debenture A/C ………Dr (If Redemption is at Premium)
To
Debentureholders A/C (Amount due to Debentureholders)
E.
For issuing Shares or New Debentures and Part Payment in Cash
Shares
or New Debentures can be issued at Par, Premium or Discount.
E. (1) For issuing Shares or New
Debentures at Par and Part Payment in Cash
Debentureholders
A/C……………….Dr
To Share
Capital A/C or New Debentures A/C
To Bank A/C
(Payment for non convertible part of Debentures)
E. (2) For issuing Shares or New
Debentures at Premium and Part Payment in Cash
Debentureholders
A/C……………….Dr
To Share
Capital A/C or New Debentures A/C
To Bank A/C
(Payment for non convertible part of Debentures)
To Security
Premium Reserve A/C (With amount of Premium)
E. (3) For issuing New Debentures
at Discount and Part Payment in Cash
Debentureholders
A/C……………….Dr
Discount on
issue of New Debentures A/C …..Dr
To New
Debentures A/C
To Bank A/C (Payment
for non convertible part of Debentures)
F.
Transfer of DRR to General Reserve
DRR
A/C……………..Dr
To General
Reserve A/C
Note:
There can be cases
where Debentures have been converted into New Shares before Maturity Period:
Debentures can be converted into
New Shares before Maturity Period under two situations:
I. when Debentures are
issued at Par or Premium and redeemable at Par
In this case, Debentureholders
will get New Shares for the amount paid by them at the time of Issue of Debentures.
Premium on Redemption will not be paid to Debentureholders. We can even say
that Redemption Value should be ignored in this case.
For Example:
1. Company Issued
1000 Debentures @ Rs. 10 each at Par redeemable at Par or Premium; amount
payable to Debentureholders will be actual amount paid by them at the time of
Issue à 1000 × Rs. 10 = Rs.
10000. New Shares will be issued to Debentureholders of a value of Rs.10000.
If new share face
Value is Rs. 100 and issued at Par;
Number of New
Shares to be issued = Rs. 10000 ÷100 = 100 New Shares
If new share face
Value is Rs. 100 and issued at Premium of 25 %;
Number of New
Shares to be issued = Rs. 10000 ÷125 = 80 New Shares
2. Company Issued
1000 Debentures @ Rs. 10 each at 25 % Premium redeemable at Par or Premium;
amount payable to Debentureholders will be actual amount paid by them at the
time of Issue à 1000 × Rs. 12.5 = Rs.
12500.
New Shares will be
issued to Debentureholders of a value of Rs.12500.
If new share face
Value is Rs. 100 and issued at Par;
Number of New
Shares to be issued = Rs. 12500 ÷100 = 125 New Shares
If new share face
Value is Rs. 100 and issued at Premium of 25 %;
Number of New
Shares to be issued = Rs. 12500 ÷125 = 100 New Shares
2. When Debentures are
issued at Discount and Redeemable at Par or Premium:
In this case, Debentureholders
will get New Shares for the amount paid by them at the time of Issue of Debentures.
For Example, Company
Issued 1000 Debentures @ Rs. 10 each at 10 % Discount redeemable at Par or
Premium; amount payable to Debentureholders will be actual amount paid by them
at the time of Issueà 1000 × Rs. 9 = Rs. 9000.
New Shares will be
issued to Debentureholders of a value of Rs.9000.
If new share face
Value is Rs. 100 and issued at Par;
Number of New
Shares to be issued = Rs. 9000 ÷100 = 90 New Shares
If new share face
Value is Rs. 100 and issued at Premium of 25 %;
Number of New
Shares to be issued = Rs. 9000 ÷125 = 72 New Shares.
Accounting Treatment
for Discount or loss on Issue of Debentures
·
Discount or
Loss on Issue of Debentures can be written off from Security Premium Reserve
A/C or from P&L A/C.
·
Discount or
Loss on Issue of Debentures is written back to P&L A/C as Other Income
when Debentures are converted into Shares before maturity.
·
Amount of
Discount or Loss not written off appears is shown in Asset side of Balance
Sheet.
·
Amount of
Discount or Loss on Issue of Debentures not written off, is written back to
determine Net amount payable to Debentureholders.
Journal Entries
related to Discount or Loss on Issue of Debentures:
When Discount or Loss on Issue of
Debentures written off from P&L A/C is written back
Debenture A/C…..Dr
Premium on Redemption of
Debentures A/C
To P&L A/C (Other Income) (with
amount written back)
To Debentureholders A/C
OR
When Discount or Loss on Issue of
Debentures written off from Security Premium
Reserve is written back
Debenture A/C…..Dr
Premium on Redemption of
Debentures A/C
To P&L A/C (Other Income) (with
amount written back)
To Discount or Loss on Issue of
Debentures A/C (With Amount not written off)
To Debentureholders A/C
For Example
Company issues 1000
Debentures of Rs. 100 at 10 % Discount and to be redeemable after 5 years at
20 % Premium. Loss on issue is to written off in 5 equal installments over 5
years maturity period.
In this case, Total
Loss to Company on Issue = Rs.10 × 1000 (Discount on Issue) + Rs. 20 ×1000 (Premium
on Redemption) = Rs. 3000.
Suppose Debentures
are converted at the end of 3rd year, then in this case
Amount written off
will be = (3÷5) × Rs. 3000 = Rs.1800(This amount will be written back in
P&L A/C as other Income)
Journal Entry for
the same for writing off Debentures is:
P&L A/C ………….Dr
To Discount on
Issue of Debentures A/C
Amount not written
off will be = (2÷5) × Rs. 3000 = Rs.1200 (This amount will be credited as
Discount or Loss on Issue of Debentures in above Journal entry)
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