REDEMPTION OF DEBENTURES Prof. Asit Ghosh

Debentures : Debenture is a tool used by a company for long term borrowing. Features : 1) It is a certificate issued for a fixed amount. 2)It bears the seal of the company. 3)It guarantees the repayment of the principle amount on a specific date. 4)It also guarantees the payment of interest at a fixed rate. 5)It may or may not have a charge on the assets of the company.

Redemption of Debenture means repayment of debenture holders claim as per the terms of issues of such debenture. Redemption of debenture may be made: # At par(i.e. at face value) # At a premium(i.e. at above the face value) # At a discount(i.e. below the face value)

The modes of Redemption Lump sum method Out of profits Through Sinking Fund Through Insurance Policy Annual DrawingConversion Method Conversion into equity shares Conversion into preference shares Conversion into debentures Purchase of own debenture For immediate cancellation For holding as investment

Debenture Redemption Reserve  Create a debenture redemption reserve account out of profit every year during the tenure of the debenture. Journal entry: Profit &loss account (appropriation) A/C ………..Dr To, Debenture redemption reserve A/C  When the Debenture have been redeemed, the balance of DDR is transferred to General Reserve. Journal entry: Debenture Redemption reserve A/C…………Dr To, General Reserve A/C

Sinking Fund When a company issued debentures, it puts itself to a committed liability to redeem the amount after the term of debenture. So to have the amount, a fixed amount is set aside every year out of profits. This is called Sinking Fund. Journal Entry: Profit & Loss A/C…….Dr To, Sinking Fund A/C

Sinking Fund Investment An equivalent sum (S.F) is invested outside the business in securities and interest earned on the investment being re-invested. When the debentures become due to redemption the investments are sold out. The money realised from such sale is used to repay the debenture debts.

Illustration On S Ltd issued 8% Debentures of Rs 6,00,000 to be Redeemed after 3 years at a premium of 10%. It also has decided to set aside an equivalent amount every year and to 5% Govt stock. S.F table- Rs at 5% compound interest in 3 years would become Re 1. Solotion:  Amount Payable on redemption : Rs 6,00, % (premium) = 6,60,000  Amount of contribution p.a: Rs 6,60,000 * = Rs 2,09,418