Company Accounts - Redemption of Debentures

 

Company Accounts

Redemption of Debentures

 

 

  After studying this article, you will be able to:

1	Understand about the redemption of debentures
2	Understand the requirement of creation of a Debenture Redemption Reserve (DRR) and creation of Debenture Redemption Fund (i.e. making investments for the purpose of redemption of debentures)
3	Understand various methods of redemption of debentures
4	Understand the accounting treatment of redemption of debentures
5	Solve problems based on redemption of debentures

 

Moreover, in this article you will find ten solved illustrations explaining different aspects related to the redemption of debentures.

 

Part A

Introduction

In the case of a limited company, debenture is the most common form of loan capital which is made available by the investors on a long term basis. When a company borrows money from its investors, it issues certificates which are stamped with the official seal of the company. These certificates are called “Debentures”. Debenture is a document containing details of a fixed interest-bearing loan taken by a company from an investor. Thus, a debenture is a document which evidences a loan.

 

   Important features of a debenture are:

1	It is a document which evidences a loan made to a company.
2	It is a fixed interest-bearing security where interest falls due on specific dates (usually, twice an accounting year).
3	Interest is payable at a predetermined fixed rate per annum, regardless of the level of profit.
4	The original sum is repaid at a specified future date or it is converted into shares or other debentures.
5	It may or may not create a charge on the assets of the company as security.
6	It can generally be bought or sold through the stock exchanges at a market price which may be above or below its face value.
7	Under Section 44 of The Companies Act, 2013 it is a movable property transferable in the manner provided by the articles of the company.
8	Under Section 71 of The Companies Act, 2013 no company can issue any debentures carrying any voting rights.

 

 

Redemption of Debentures

Redemption is the process of regaining possession of something in exchange for payment, or clearing a debt usually at a prearranged date. Redemption of debentures implies the process of regaining the debentures from the debenture holders by repaying them the amounts of their investments in the form of purchase of the debentures from the company. Terms of redemption are mentioned in the debenture certificate itself when it is issued. The terms may include:

 

a)	Maturity period of the debentures
b)	Method of redemption of the debentures
c)	Rate of interest payable to the debenture holders
d)	Frequency at which annual interest is payable to the debenture holders
e)	Amount payable to the debenture holders at the time of redemption, etc.

 

Provisions on Creation of Debenture Redemption Reserve (DRR)

Under Section 71(4) of The Companies Act, 2013 where debentures are issued by a company, the company shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the purpose of redemption of debentures.

 

As per Rule 18(7) of the Companies (Share Capital and Debentures) Amendment Rules, 2019 the company shall comply with the requirements of the Rule with regard to the creation of Debenture Redemption Reserve (DRR) Account and investment or deposit of sum in respect of debentures maturing during the year ending on the 31^st March of next year, in accordance with the conditions given below:

(a) Debenture Redemption Reserve shall be created out of profits of the company available for payment of dividend;

 

(b) The limits with respect to adequacy of Debenture Redemption Reserve and investment or deposits, as the case may be, shall be as under:

 

          

Please click on the link given below for the details of adequacy of debenture redemption reserve (DRR) in PDF:

Adequacy of Debenture Redemption Reserve (DRR) in PDF

 

Further, as per Rule 18(7) of the Companies (Share Capital and Debentures) Amendment Rules, 2019, following companies

1	All listed NBFCs
2	All listed HFCs
3	All other listed companies (other than AIFIs, Banking Companies and other FIs)
4	All unlisted companies which are not NBFCs and HFCs

shall on or before the 30th day of April in each year, in respect of debentures issued by the company, invest or deposit, as the case may be, a sum which shall not be less than 15% of the amount of its debentures maturing during the year ending on the 31st day of March of the next year in any one or more of the following methods of investments or deposits, namely:

A)	In deposits with any scheduled bank, free from any charge or lien
B)	In unencumbered securities of the Central Government or any State Government
C)	In unencumbered securities mentioned in sub-clause (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882
D)	In unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882

 

Provided that, the amount remaining invested or deposited, as the case may be, shall not at any time fall below 15% of the amount of the debentures maturing during the year, ending on 31st day of March of that year.

 

Provided that, the amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above.

 

(c) In case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of non-convertible portion of debenture issue in accordance with this sub-rule.

 

(d) The amount credited to Debenture Redemption Reserve shall not be utilized by the company except for the purpose of redemption of debentures.

 

Note:

It should be noted that appropriation to DRR can be made any time before redemption and investment in specified securities as mentioned above can be made on or before the 30^th April in each year for the debentures maturing during the year ending on the 31^st March of the next year. However, for the sake of simplicity and ease, it is advisable to make the appropriation and investment immediately after the debentures are allotted assuming that the company has sufficient profits.

 

If the date of allotment of debentures is not given in the question, the appropriation and investment should be made on the first day of the year for which ledger accounts are to be drafted.

 

Methods of redemption of debentures

Debentures may be redeemed in any of the following four methods:

1	Redemption by payment in lump sum at the end of the specified redemption period
2	Redemption by payment in instalments at specified intervals
3	Redemption by purchasing own debentures in the open market
4	Redemption by conversion into shares or other debentures

 

Redemption by payment in lump sum at the end of the specified redemption period

 

Journal entries:

   A. After allotment of debentures

	Particulars		Dr (Rs)	Cr (Rs)
1	For appropriation of profit for redemption of debentures:
	Profit and Loss A/c	Dr
	To DRR A/c
2	For making investment:
	DRRI A/c	Dr
	To Bank A/c
3	For receipt of interest on DRRI:
	Bank A/c	Dr
	To Interest on DRRI A/c
4	For transfer of interest on DRRI to Profit and Loss A/c:
	Interest on DRRI A/c	Dr
	To Profit and Loss A/c

 

   B. At the time of redemption of debentures

 

   If debentures are redeemed at par

	Particulars		Dr (Rs)	Cr (Rs)
1	For encashment of DRRI:
	Bank A/c	Dr
	To DRRI A/c
2	For amount due to debenture holders on redemption:
	Debentures A/c	Dr
	To Debenture holders A/c
3	For payment to debenture holders:
	Debenture holders A/c	Dr
	To Bank A/c
4	For transfer of DRR to General Reserve:
	DRR A/c	Dr
	To General Reserve

 

   If debentures are redeemed at premium

	Particulars		Dr (Rs)	Cr (Rs)
1	For encashment of DRRI:
	Bank A/c	Dr
	To DRRI A/c
2	For amount due to debenture holders on redemption:
	Debentures A/c	Dr
	Premium on redemption of debentures A/c	Dr
	To Debenture holders A/c
3	For payment to debenture holders:
	Debenture holders A/c	Dr
	To Bank A/c
4	For transfer of DRR to General Reserve:
	DRR A/c	Dr
	To General Reserve

 

 

Redemption by payment in instalments at specified intervals

 

Journal entries:

Same journal entries are made under this method as in the case of Redemption by payment in lump sum at the end of the specified redemption period

 

 

Redemption by purchasing own debentures in the open market

 

A company may redeem its debentures by purchasing them in the open market. The company may purchase its own debentures from the stock market for the following two purposes:

(i)	For immediate cancellation, or
(ii)	As an investment (to be cancelled when required)

 

When debentures are not listed on a stock exchange and issued privately, the company may negotiate a price with the debenture holders to buy back the debentures for cancellation.

 

Accounting entries will be different for two different purposes of purchasing own debentures. Again, own debentures may be purchased on the date of interest or on a date which is not the interest date. For this also accounting entries will be different in accordance with the two different dates of purchase.

 

 

Purchase of own debentures for immediate cancellation

− On the date of interest

A company may purchase its own debentures at any date for immediate cancellation. If the date of purchase of debentures and the date for payment of interest on debentures are same, interest up to the date of purchase will be paid to the (old) debenture holders.

 

Journal entries:

	Particulars		Dr (Rs)	Cr (Rs)
1	When debentures are purchased
	Debentures redemption A/c [Quoted price x No. of debentures purchased]	Dr
	To Bank A/c
2	When debentures are cancelled
	A. If Purchase price < Face value:
(i)	Debentures A/c [Face value]	Dr
	To Debentures redemption A/c [Purchase price]
	To Profit on cancellation of debentures A/c [Profit]
(ii)	Profit on cancellation of debentures A/c	Dr
	To Capital reserve A/c
	B. If Purchase price > Face value:
(i)	Debentures A/c [Face value]	Dr
	Loss on cancellation of debentures A/c                [Loss]	Dr
	To Debentures redemption A/c [Purchase price]
(ii)	Profit and loss A/c	Dr
	To Loss on cancellation of debentures A/c

 

 

Purchase of own debentures as an investment (To be cancelled when required)

− On the date of interest

A company may purchase its own debentures as investment. Such debentures are kept alive till they are cancelled in the future, when required. Of course, these debentures can be sold in the market again. When own debentures are purchased as investment, an account called “Investment in own debentures A/c” or simply, “Own debentures A/c” is debited with the quotation price and “Bank A/c” is credited with the same amount. “Own debentures A/c” is shown on the assets side of the balance sheet under the heading “Investment”.

 

Interest on own debentures of the post-purchase period is credited to the profit and loss account just like any other income from other investments. Debenture interest account is debited with the total interest (payable to outside debenture holders + interest on own debentures held as investment).

 

Journal entries:

	Particulars		Dr (Rs)	Cr (Rs)
1	When debentures are purchased
	Investment in own deb. A/c [Quoted price x No. of debentures purchased]	Dr
	To Bank A/c
2	When interest on debentures is due and paid
	Debenture interest A/c [Total interest]	Dr
	To Bank A/c [Int. paid to outside debenture holders]
	To Interest on own deb. A/c [Interest on own debentures]
3	When debentures are cancelled
	A. If Purchase price < Face value:
(i)	Debentures A/c [Face value]	Dr
	To Investment in own deb. A/c [Purchase price]
	To Profit on cancellation of debentures A/c [Profit]
(ii)	Profit on cancellation of debentures A/c	Dr
	To Capital reserve A/c
	B. If Purchase price > Face value:
(i)	Debentures A/c [Face value]	Dr
	Loss on cancellation of debentures A/c [Loss]	Dr
	To Investment in own deb. A/c [Purchase price]
(ii)	Profit and loss A/c	Dr
	To Loss on cancellation of debentures A/c
4	When Debentures are sold without cancelling
	A. If Cost of the debentures < Sale value:
(i)	Bank A/c   [Sale proceeds]	Dr
	To Investment in own deb. A/c [Cost of the debentures]
	To Profit on sale of own deb. A/c [Profit]
(ii)	Profit on sale of own deb. A/c	Dr
	To Profit and loss A/c
	B. If Cost of the debentures > Sale value:
(i)	Bank A/c   [Sale proceeds]	Dr
	Loss on sale of own deb. A/c    [Loss]	Dr
	To Investment in own deb. A/c [Cost of the debentures]
(ii)	Profit and loss A/c	Dr
	To Loss on sale of own deb. A/c
5	When Total debenture interest is transferred to Profit and Loss A/c
	Profit and loss A/c	Dr
	To Debenture interest A/c
6	When interest on own debentures is transferred to Profit and Loss A/c
	Interest on own debentures A/c	Dr
	To Profit and loss A/c

 

Note: It should be noted that profit on cancellation of debentures is transferred to Capital Reserve A/c whereas profit on sale of own debentures is transferred to Profit and Loss A/c.

 

 

Purchase of own debentures for immediate cancellation

− Not on the date of interest

In this case, debentures to be purchased from the market may be quoted ex-interest or cum-interest. Ex-interest quotation means the price quotation by the debenture holder excluding the interest for the period after the last interest date during which he was holding the debentures without receiving the said interest. Cum-interest quotation means the price quotation by the debenture holder including the interest for the period after the last interest date during which he was holding the debentures without receiving the said interest.

 

Regardless of the price quoted by the debenture holders, ex-interest or cum-interest, the company has to pay the interest for the period from the last interest date to the date of purchase (i.e. accrued interest) to the debenture holders at the time of purchase of the debentures along with the cost of the debentures. In other words, the total amount paid for purchasing the debentures always includes cost of the debentures and accrued interest, if the debentures are purchased from the market before the date of interest.

 

Therefore, in the light of above, it can be stated that,

a)	When the price quoted is ex-interest –
	Total payment = Quoted price (which is the cost of the debentures) + Accrued interest
b)	When the price quoted is cum-interest –
	Total payment = Quoted price (where, quoted price = cost of the debentures + accrued interest)

 

Journal entries:

Journal entries are the same for both ex-interest and cum-interest quotation of the debentures.

 

	Particulars		Dr (Rs)	Cr (Rs)
1	When debentures are purchased
	Debentures redemption A/c [Cost of the debentures]	Dr
	Debenture interest A/c [Accrued interest]	Dr
	To Bank A/c [Total payment]
2	When debentures are cancelled
	A. If Cost of debentures < Face value:
(i)	Debentures A/c [Face value]	Dr
	To Debentures redemption A/c [Cost of the debentures]
	To Profit on cancellation of debentures A/c [Profit]
(ii)	Profit on cancellation of debentures A/c	Dr
	To Capital reserve A/c
	B. If Cost of debentures > Face value:
(i)	Debentures A/c [Face value]	Dr
	Loss on cancellation of debentures A/c                [Loss]	Dr
	To Debentures redemption A/c [Cost of the debentures]
(ii)	Profit and loss A/c	Dr
	To Loss on cancellation of debentures A/c

  

 

Purchase of own debentures as an investment (To be cancelled when required)

− Not on the date of interest

In this case also, the cost of debentures purchased and the total amount paid would be calculated in the same manner as is done in the case of purchase of own debentures before the date of payment of interest for immediate cancellation.

 

Journal entries:

Journal entries are the same for both ex-interest and cum-interest quotation of the debentures.

 

	Particulars		Dr (Rs)	Cr (Rs)
1	When debentures are purchased
	Investment in own deb. A/c [Cost of the debentures]	Dr
	Debenture interest A/c [Accrued interest]	Dr
	To Bank A/c [Total payment]
2	When interest on debentures is due and paid
	Debenture interest A/c [Total Int. – Int. paid during purchase of debentures]	Dr
	To Bank A/c [Int. paid to outside debenture holders]
	To Int. on own deb. A/c [Int. on own debentures]
3	When debentures are cancelled
	A. If Cost of debentures < Face value:
(i)	Debentures A/c [Face value]	Dr
	To   Investment in own deb. A/c [Cost of the debentures]
	To Profit on cancellation of debentures A/c [Profit]
(ii)	Profit on cancellation of debentures A/c	Dr
	To Capital reserve A/c
	B. If Cost of debentures > Face value:
(i)	Debentures A/c [Face value]	Dr
	Loss on cancellation of debentures A/c  [Loss]	Dr
	To Investment in own deb. A/c [Cost of the debentures]
(ii)	Profit and loss A/c	Dr
	To Loss on cancellation of debentures A/c
4	When debentures are sold without cancellation
	A. If Cost of debentures < Face value:
(i)	Bank A/c [Sale proceeds]	Dr
	To Inv. in own deb. A/c [Cost of the debentures]
	To Profit on sale of own deb. [Profit]
(ii)	Profit on sale of own deb. A/c	Dr
	To Profit and loss A/c
	B. If Cost of debentures > Face value:
(i)	Bank A/c [Sale proceeds]	Dr
	Loss on sale of own deb. A/c [Loss]	Dr
	To Inv. in own deb. A/c [Cost of the debentures]
(ii)	Profit and loss A/c	Dr
	To Loss on sale of own deb. A/c
5	When total debenture interest (paid to outsiders + int. on own deb.) is transferred to P/L A/c
	Profit and loss A/c	Dr
	To Debenture interest A/c
6	When interest on own debentures is transferred to P/L A/c
	Int. on own deb. A/c	Dr
	To Profit and loss A/c

 

 

GENERAL NOTE:

1	In respect of Government securities and debentures, the price quoted is ex-interest unless otherwise stated in the problem; and
2	In respect of Non-Government securities and debentures, the price quoted is cum-interest unless otherwise stated in the problem.

 

 

Redemption by conversion into shares

When debentures are redeemed by converting them into shares, there will be no cash outflow in the process. The important thing to remember in this case is that when debentures are converted into shares, the conversion should be at par or at above the nominal value of the shares. It means the shares to be issued in exchange of debentures to be redeemed cannot be so issued at discount.

 

Journal entries:

	Particulars		Dr (Rs)	Cr (Rs)
A	When debentures are converted into shares issued at par
	Debentures A/c	Dr
	To Equity/Pref. share capital A/c
B	When debentures are converted into shares issued at premium
	Debentures A/c	Dr
	To Equity/Pref. share capital A/c
	To Securities premium A/c

 

  

Redemption of Debentures by creating Sinking Fund

Under this method, the company sets aside every year a part of divisible profits and invests the same in outside securities. The investment is made in such a manner that cash required for redemption will be equal to the amount of debentures. The amount is made available by selling the investments.

 

Journal entries:

	Particulars		Dr (Rs)	Cr (Rs)
1	For setting aside every year a part of divisible profits for Sinking Fund
	Profit & Loss Appropriation A/c	Dr
	To Sinking Fund A/c
2	For investing in the securities at the end of each year (except last year)
	Sinking Fund Investment A/c	Dr
	To Bank A/c
3	For recording receipt of interest at the end of each year
	Bank A/c	Dr
	To Sinking fund A/c
4	For recording sale of investment in the year of redemption
	Bank A/c	Dr
	To Sinking Fund Inv. A/c
5	For profit on sale of Sinking Fund Investment
	Sinking Fund Investment A/c	Dr
	To Sinking Fund A/c
6	For loss on sale of Sinking Fund Investment
	Sinking fund A/c	Dr
	To Sinking Fund Inv. A/c
7	For transferring Premium on Redemption of Debentures to Sinking Fund A/c
	Sinking fund A/c	Dr
	To Premium on Redemption of Debentures A/c
8	For transferring Loss on Redemption of Debentures (on Cancellation) to Sinking Fund A/c
	Sinking fund A/c	Dr
	To Loss on cancellation of debentures A/c
9	For transferring Profit on Redemption of Debentures (on Cancellation) to Sinking Fund A/c
	Profit on Cancellation of Debentures A/c	Dr
	To Sinking fund A/c
10	For transferring the balance in the Sinking Fund A/c to General Reserve A/c after all the debentures are redeemed
	Sinking fund A/c	Dr
	To General reserves A/c

 

Important notes:

Note: 1

Entry No. 1 will be repeated each year. Entry No. 2 will be repeated each year except the last year. Entry No. 3 will be repeated each year.

 

Note: 2

If all the debentures are not redeemed, the amount equal to the face value of the debentures redeemed will be transferred to General Reserve from the Sinking Fund.

 

 

Summary note on redemption of debentures where there is sinking fund

Sinking fund created for redemption of debentures is also called ‘Debenture Redemption Fund (in short DRF)’. DRF is created by annual contribution of a fixed amount from Profit and Loss Appropriation Account. The annual contribution is made by debiting Profit and Loss Appropriation Account and crediting DRF Account every year with a fixed amount of annuity. The amount of annuity is determined in such a way that, if invested, it accumulates to the required amount for redemption, after certain fixed number of years at a certain fixed rate of compound interest. The same amount is actually invested (along with interest received on earlier investment) every year outside the business in certain securities by debiting Debenture Redemption Fund Investment Account (in short DRFI Account) and crediting Bank Account. The investments accumulate to the required amount for the purpose of redemption after specified number of years at a specified rate of compound interest. When interest on investment is received, Bank Account is debited and DRF Account is credited. At the end of the last year, all the investments are sold away, and for this, Bank Account is debited and DRFI Account is credited. The proceeds are utilised for redemption of debentures. The profit or loss on sale of investment is transferred to DRF Account. In the last year, entries for annual contribution and interest on investment will be made as usual, but no amount will be invested in any outside securities. Moreover, in the last year, other regular entries for redemption will also be made as usual with the only exception that the profit (or discount) or loss (or premium) on redemption will be transferred to DRF Account instead of Capital Reserve or, as the case may be, Profit and Loss Account. Finally, the amount equal to the face value of the debentures redeemed will be transferred to General Reserve by debiting DRF Account instead of Profit and Loss Account. [If all the debentures are redeemed, the entire balance in DRF Account will be transferred to General Reserve.]

 

How is the amount of annual contribution determined?

The amount of annual contribution to be debited to Profit and Loss Appropriation Account every year can be determined by any of the following two methods:

 

METHOD: 1

Required amount of annual contribution  = Amount required after ‘n’ years for redemption of debentures ÷ FVIFA _{(k, n)}

 

Where, FVIFA _{(k, n)} =  Future value interest factor for an annuity of Rs 1 at the rate of ‘k%’ p.a. compound interest for ‘n’ years.

 

METHOD: 2

Required amount of annual contribution  =    [Amount required after ‘n’ years for redemption of debentures × (k ÷ 100)] ÷ [{1 + (k ÷ 100)} ⁿ – 1]

Part B

Company Accounts

Redemption of Debentures

Selected Problems and Solutions

 

Illustration: 1

The following balances appeared in the books of Advantage Ltd. (unlisted company other than AIFI, banking company, NBFC and HFC) as on 31.12.2021:

1)	10,000 6% Mortgage Debentures of Rs 100 each;
2)	Debenture Redemption Reserve (for redemption of debenture) Rs 50,000;
3)	Investments in deposits with a Scheduled Bank (free from any charge or lien) Rs 1, 50,000 at interest 4% p.a. receivable on 31st December every year;
4)	Bank balance of the company Rs 9, 00,000.

 

The interest on debentures had been paid up to 31.12.2021. On 28.02.2022 the investments were realized at par and the debentures were paid off at Rs 101 each, together with accrued interest.

 

Write up the concerned ledger accounts. Ignore taxation.

Solution: 1

Illustration: 2

The following balances appeared in the books of Paradise Ltd. (unlisted company other than AIFI, banking company, NBFC and HFC) as on 01.04.2021:

i)	12% Debentures Rs 7,50,000;
ii)	Balance of DRR Rs 25,000;
iii)	DRR Investment Rs 1, 12,500 represented by 10% 1,125 Secured Bonds of Government of India of Rs 100 each.

 

Annual contribution to the DRR was made on 31^st March every year. On 31.03.2022 balance at bank was Rs 7, 50,000 before receipt of interest. The investments were realised at par for redemption of debentures at a premium of 10% on the above date.

 

You are required to prepare the following accounts for the year ended 31.03.2022:

         1)        12% Debentures Account,

         2)        DRR Account,

         3)        DRR Investment Account,

         4)        Bank Account, and

         5)        Debenture Holders’ Account.

 

 Solution: 2

 

Illustration: 3

XYZ Ltd. has issued 1,000 12% Convertible Debentures at Rs 100 each redeemable after a period of five years. According to the terms and conditions of the issue, these debentures were redeemable at a premium of 5%. As per the terms and conditions of the issue, the debenture holders also had the option at the time of redemption to convert 20% of their holdings into equity shares of Rs 10 each at a price of Rs 20 per share and to receive the balance in cash. Debenture holders amounting to Rs 20,000 opted to get their debentures converted into equity shares as per the terms of the issue.

 

You are required to calculate the number of shares issued and cash paid to the debenture holders who opted to get their debentures converted into equity shares.

 

Solution: 3

Illustration: 4

The Balance Sheet of Brainstorm Ltd. (unlisted company other than AIFI, banking company, NBFC and HFC) as at 31.03.2021 is as under:

	Particulars			Note No.	Rs
I	Equity and liability
	1	Shareholders’ Fund
		(a)	Share capital	1	2,00,000
		(b)	Reserves and surplus	2	1,20,000
	2	Non-current liabilities
		(a)	Long-term borrowings	3	1,20,000
	3	Current liabilities
		(a)	Trade payables		1,15,000
			Total		5,55,000
II	Assets
	1	Non-current assets
		(a)	Property, plant and equipment	4	1,15,000
	2	Current assets
		(a)	Inventories		1,35,000
		(b)	Trade receivables		75,000
		(c)	Cash and bank balances	5	2,30,000
			Total		5,55,000

 

  Notes to accounts:

Note No.	Particulars	Rs	Rs
1	Share capital
	Authorised share capital (30,000 shares of Rs 10 each)		3,00,000
	Issued and subscribed share capital (20,000 shares of Rs 10 each)		2,00,000
2	Reserves and surplus
	Profit and loss account		1,20,000
3	Long-term borrowings
	12% Debentures		1,20,000
4	Property, plant and equipment
	Freehold property		1,15,000
5	Cash and bank balances
	Cash at bank	2,00,000
	Cash in hand	30,000	2,30,000

 

At the Annual General Meeting, it was resolved:

(a)	To give existing shareholders the option to purchase one Rs 10 share at Rs 15 for every four shares (held prior to the bonus distribution). This option was taken up by all the shareholders.
(b)	To issue one bonus share for every five shares held.
(c)	To repay the debenture holders at a premium of 3%. The DRR Investments realised at par as per existing Book Value.

 

Give the necessary journal entries for these transactions.

 

Solution: 4

Illustration: 5

Aryan Limited purchased 2000 12% debentures on 30^th September, 2021 at Rs 97 each ex-interest for immediate cancellation. Debenture interest is payable twice a year on 30^th June and 31^st December. Make journal entries.

 

Solution: 5

Illustration: 6

JD Limited purchased 3000 12% debentures on 31^st May, 2021 at Rs 104 each cum-interest for immediate cancellation. Debenture interest is payable twice a year on 30^th June and 31^st December. Make journal entries.

 

Solution: 6

Illustration: 7

Draft journal entries in respect of the following since 1^st March, 2021:

In 2014 XYZ Ltd. had issued 5,000, 7.5% Debentures of Rs 100 each. On 1^st March, 2021, the company purchased 500 of its own 7.5% Debentures at Rs 47,500 cum-interest.

 

The debentures were held as investment until 30^th June, 2021 when it was decided to cancel them. Interest is payable half-yearly on 30^th June and 31^st December and the books are closed on 30^th June each year. Assume absence of sinking fund.

 

Solution: 7

Illustration: 8

Xcellant Ltd. has Rs 1, 50,000 6% Debentures on 1.1.2021. There is no sinking fund for redemption of debentures. Interest is payable on 31^st December each year. On 1.4.2021 Rs 10,000 own debentures are purchased at Rs 94 by the company and immediately cancelled. On 1.6.2021 Rs 25,000 own debentures are purchased at Rs 95 and held as investment. On 1.10.2021 Rs 30,000 own debentures are purchased at    Rs 96 and held as investment. On 31.12.2021 own debentures kept as investment are cancelled.

 

Show the relevant journal entries in the books of the company. Date of closing is 31^st December.

 

Solution: 8

Illustration: 9

On 1^st July 2020, HP Ltd. issued 2,000, 6% Debentures of Rs 100 each. The interest is payable on 30^th June and 31^st December every year. The company is allowed to purchase its own debentures which may be cancelled or kept or re-issued at the company’s option. The company made the following purchases by cheque in the open market:

(a)	On 31st May 2021, 200 debentures @ Rs 98 ex-interest.
(b)	On 30th September 2022, 100 debentures @ Rs 97 cum-interest.

 

The debentures, which were purchased on 31^st May 2021, were cancelled on 31^st December 2022. All payments were made on due dates.

 

Pass necessary journal entries to record the above transactions.

 

Solution: 9

Illustration: 10

On 1.1.2021 Jingle Bell Ltd. issued 2,000, 15% Debentures of Rs 100 each at 6% discount. Holders of these debentures have an option to convert their holdings into 18% Preference Shares of Rs 100 each at Rs 125 each at any time within 3 years. On 31.12.2021, yearly interest had accrued on the debentures and remained outstanding and a holder of 50 debentures notified his decision to exercise his option.

 

Pass necessary journal entries.

Solution: 10