1. 1 Redemption of Debentures

2. 2 Redemption of debenture Redeemable debenture will be redeemed on or before a specified date which is stated clearly in the terms of the issue of debentures

3. 3 In order to provide the funds to finance the redemption of debentures, the company may use the money from the following resources: (I) The balance of existing cash and bank account (II)The money received from the fresh issue of shares (III)or debentures for the purpose of the redemption

4. 4 Debenture Redemption Reserve If the company is unable to redeem its debentures by issuing new shares to raise necessary funds, the company should create Debenture Redemption Reserve account for redeeming the debentures Equal to the cash used in redemption might be voluntarily transferred to a debenture redemption reserve fund from profit and loss account as a matter of financial prudence The debenture redemption reserve is then identified as not being available for dividend distribution The voluntary appropriation of profit to “Debenture Redemption Reserve” ensures that the resources of the company are not disadvantageously reduced

5. 5 Premium on Redemption of Debentures An amount equals “Premium on Redemption” will be transferred from Share Premium account to Debenture Redemption account If it is not covered by Share Premium account, the balance will be transferred from Profit and Loss account Redeemed price of debentures - Par value of Debentures = Premium on Redemption

6. 6 Discount on Redemption of Debentures Redeemed price of debentures - = Discount on Redemption An amount equals “Discount on Redemption” will be transferred from to Debenture Redemption account to Reserve or Profit and loss account Par value of Debentures

7. 7 Redemption of Debentures without a Sinking Fund

8. 8 Out of distributable profitsOut of the proceeds of new issue 1. Declaration of redemption Dr. Debentures Cr. Debenture Redemption 1. Declaration of redemption Dr. Debentures Cr. Debenture Redemption 2. Transfer of distributable profit to debenture redemption reserve Dr. Profit and Loss Appropriation Cr. Debenture Redemption Reserve 2. (a) New shares issued at premium Dr. Bank Cr. Share Capital Cr. Share Premium (b) Transfer to redemption reserve Dr. Profit and Loss Appropriation Cr. Debenture Redemption Reserve Summary of Procedures

9. 9 Out of distributable profit/proceeds of new issue 3. Redemption at a premium a) if the debentures were originally issued at a premium Dr. Share/Debenture Premium Cr. Debenture Redemption b) if the debentures were not issued at a premium Dr. Profit and Loss Appropriation Cr. Debenture Redemption c) if the current balance of premium or the premium received on debentures originally issued is less than the premium on redemption Dr. Share/Debenture Premium Dr. Profit and Loss Appropriation Cr. Debenture Redemption

10. 10 Out of distributable profit/proceeds of new issue 4. Redemption at a discount Dr. Debenture Redemption Cr. Debenture Redemption Reserve / General Reserve 5. Redemption of debentures Dr. Debenture Redemption Cr. Bank

11. 11 Example 1

12. 12 Example 1 $1,000 debentures were redeemed at par A new issue of $1,000 ordinary shares at par Dr.Cr. 1. Bank 1000 Ordinary Shares 1000 Being issue of ordinary shares 2. Debentures 1000 Debenture Redemption 1000 Being declaration of redemption 3. Debenture Redemption 1000 Bank 1000 Being redemption of debentures

13. 13 Example 2 $1,000 debentures were redeemed at par with no new issue of shares Dr.Cr. 1. Debentures 1000 Debenture Redemption 1000 Being declaration of redemption 2. Profit and Loss Appropriation 1000 Debenture Redemption Reserve 1000 Being transfer to debenture redemption reserve 3. Debenture Redemption 1000 Bank 1000 Being redemption of debentures

14. 14 Example 3 $1,000 debentures were redeemed at par Redemption was partly provided for out of the proceeds of a new issue of 800 ordinary shares at par Dr.Cr. 1.Bank 800 Ordinary Shares 800 Being issue of ordinary shares 3. Debentures 1000 Debenture Redemption 1000 Being declaration of redemption 4. Debenture Redemption 1000 Bank 1000 Being redemption of debentures 2. Profit and Loss Appropriation 200 Debenture Redemption Reserve 200 Being transfer to debenture redemption reserve

15. 15 Example 4 $1,000 debentures were redeemed at a premium of 20% with no new issue of shares Dr. Cr. 1. Debentures 800 Debenture Redemption 800 Being declaration of redemption 2.Profit and Loss Appropriation 1000 Debenture Redemption Reserve 1000 Being transfer to debenture redemption reserve 4. Debenture Redemption 1200 Bank 1200 Being redemption of debentures 3. Profit and Loss Appropriation 200 Debenture Redemption 200 Being premium on redemption

16. 16 Example 5 Case 1

17. 17 Example 5 $1,000 debentures, issued at a premium of 5% Redeemed at a premium of 20% Case 1: 1,200 $1 ordinary shares at par Case 1 $ Balance before new issue Premium on new issue Balance after new issue Less: Amount transferred to the redemption account (should be the lower of the balance after the new issue or the original premium on the issue) Balance after redemption 10 - - 1000*5%=50 These balances may not be the same, as some funds may have been used up in the bonus issue and redemption

18. 18 Dr. Cr. Bank 1200 Ordinary Share 1200 Being issue of ordinary shares Debentures 1000 Debenture Redemption 1000 Being redemption of debentures Share Premium 10 Profit and loss 190 Debenture Redemption (1000*20%) 200 Being premium on redemption Debenture Redemption 1200 Bank (1000*1.2) 1200 Being amount paid on redemption

19. 19 Example 5 Case 2

20. 20 Example 5 $1,000 debentures, issued at a premium of 5% Redeemed at a premium of 20% Case 2: 1,000 $1 ordinary shares at a 10% premium Case 2 $ Balance before new issue Premium on new issue Balance after new issue Less: Amount transferred to the redemption account (should be the lower of the balance after the new issue or the original premium on the issue) Balance after redemption 50 100 150 50 100 1000*5%=50 1000*0.1 These balances may not be the same, as some funds may have been used up in the bonus issue and redemption

21. 21 Dr. Cr. Bank 1100 Ordinary Share 1000 Share Premium (1000*0.1) 100 Being issue of ordinary shares Debentures 1000 Debenture Redemption 1000 Being redemption of debentures Share Premium 50 Profit & Loss Appropriation 150 Debenture Redemption 200 Being premium on redemption Debenture Redemption 1200 Bank 1200 Being amount paid on redemption

22. 22 Example 5 Case 3

23. 23 Example 5 $1,000 debentures, issued at a premium of 5% Redeemed at a premium of 20% Case 3: 800 $1 ordinary shares at a 20% premium Case 3 $ Balance before new issue Premium on new issue Balance after new issue Less: Amount transferred to the redemption account (should be the lower of the balance after the new issue or the original premium on the issue) Balance after redemption 50 60 210 50 160 1000*5%=50 800*0.2 These balances may not be the same, as some funds may have been used up in the bonus issue and redemption

24. 24 Dr. Cr. Bank 960 Ordinary Share 800 Share Premium 160 Being issue of ordinary shares Debentures 1000 Debenture Redemption 1000 Being redemption of debentures Profit & Loss Appropriation (1000-800*1.2) 40 Debenture Redemption Res. 40 Being part of redemption not covered by new issue Share Premium 50 Profit & Loss Appropriation 150 Debenture Redemption 200 Being premium on redemption Debenture Redemption 1200 Bank 1200 Being amount paid on redemption

25. 25 Redemption of Debenture by a Sinking Fund

26. 26 DescriptionsBook-keeping Entries Set aside an annual appropriation to the Sinking Fund. The same amount out of cash or bank will be invested in a specific investment under ‘Sinking Fund Investment Account’ to provide sufficient funds for the debenture redemption. Dr. Profit and Loss Account Cr. Sinking Fund Dr. Sinking Fund Cash/Bank Cr. Cash/Bank Dr. Sinking Fund Investment Cr. Sinking Fund Cash/Bank Any interest or dividend income received from Sinking Fund Investment Dr. Sinking Fund Cash/Bank Cr. Sinking Fund Re-investment of income received (except in the last few months before the redemption) Dr. Sinking Fund Investment Cr. Sinking Fund Cash

27. 27 DescriptionsBook-keeping Entries Disposal of Sinking Fund Investment Profit on disposal of Sinking Fund Investment or Loss on disposal of Sinking Fund Investment Dr. Sinking Fund Cash/Bank Cr. Sinking Fund Investment Dr. Sinking Fund Investment Cr. Sinking Fund Dr. Sinking Fund Cr. Sinking Fund Investment Transfer the amount of Debentures to be redeemed to Debenture Redemption Account Dr. Debentures Cr. Debenture Redemption Payment on Debenture RedemptionDr. Debenture Redemption Cr. Sinking Fund Cash/Bank

28. 28 DescriptionsBook-keeping Entries Premium on Redemption “Profit on Redemption” will be transferred from Redemption Account to “Sinking Fund Account” OR Discount on Redemption “Loss on Redemption” will be transferred from Redemption Account to “Sinking Fund Account” Dr. Debenture Redemption Cr. Sinking Fund. Dr. Sinking Fund Cr. Debenture Redemption Transfer of the nominal value of the debentures redeemed at every redemption and the balance of the sinking fund at the final redemption to the general reserve Dr. Sinking Fund Cr. Debenture Redemption Reserve OR General Capital Reserve

29. 29 Example

30. 30 Pacific Ltd. Issued $1,000,000 12% debentures at par on 1 January 1987. These were redeemable at a premium of 10% on 31 December 1997. A sinking fund account was Created by the annual appropriation of profits. Investments were made to provide Cash to redeem the debentures. All investment income must be reinvested, except for The final year of redemption. The following balances were extracted from the books at 1 January 1997: 12% Debentures1,000,000 Sinking Fund 800,000 Sinking Fund Investment 800,000 Sinking Fund Cash 100,000 During 1997, the following transactions took place: Jan 1Investment income of $10,000 was received Jan 30Six month’s interest was paid on the debentures July 1Investment costing $400,000 was sold for $450,000 to provide funds for the redemption of some debentures. The company redeemed $400,000 debentures at a discount of 5% Dec 1All remaining investments were sold for $600,000 Dec 31The remaining debentures were redeemed at a premium of 10% and the outstanding interest was paid.

31. 31 Sinking Fund Cash Jan 1Bal b/f 100,000 Jan 1Sinking Fund 10,000 July 1Sinking Fund Invest- ment 450,000 July 1Debenture Redemption 380,000 (400000*0.95) Dec 31Debenture Redemption660,000 (1600000*1.1) 12% Debentures July 1Debenture Redempt. ion 400,000 Dec 31Debenture Redempt- ion 600,000 Jan. 1Bal b/f 1,000,000 1,000,000 Dec 1Sinking Fund Invest- ment 600,000

32. 32 Sinking Fund July 1General Reserve 400,000 (par value) Dec 31Debenture Redemption 60,000 (discount) Dec 31General Reserve 620,000 Jan 1Bal. B/f800,000 Jan 1Sinking Fund Cash 10,000 July 1Sinking Fund Investment 50,000 (profit) July 1Debenture Redemption 20,000 ( premium) Dec 1Sinking Fund Investment200,000 1,080,000 Sinking Fund Investment July 1 Bal b/f 800000 July 1 Sinking Fund: profit on sales (450000-400000) 50000 Dec 1 Sinking fund: profit on sales (660000-400000) 200000 July 1 Sinking fund cash 450000 Dec 1 Sinking fund cash 600000 11050000

33. 33 Debenture Redemption July 1 Sinking fund cash 380000 July 1 Sinking fund: profit 20000 July 1 12% Debenture 400000 400000 Dec 31 Sinking fund cash 660000 Dec 31 12% Debenture 600000 Dec 31 Sinking fund: discount 60000 660000 Debenture interest June 30 Bank 60000 (1000000*12%*1/2) Dec 31 Bank 36000 (600000*12%*1/2) Dec 31 Profit and loss 96000 96000