CHAPTER 8

REDEMPTION OF
DEBENTURES

LEARNING OUTCOMES
 After studying this unit, you will be able to–
 Understand about the redemption of debentures;
 Understand the requirement of creation of Debenture
Redemption Reserve and making investments for the
purpose of redemption of debentures;
 Understand various methods for redemption of debentures;
 Understand the accounting treatment of redemption of
debentures;
 Solve problems based on redemption of debentures.

© The Institute of Chartered Accountants of India

 8.2 ACCOUNTING

CHAPTER OVERVIEW

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 REDEMPTION OF DEBENTURES 8.3

1. INTRODUCTION
A debenture is an instrument issued by a company under its seal, acknowledging
a debt and containing provisions as regards repayment of the principal and
interest.
Under Section 71 (1) of the Companies Act, 2013, a company may issue
debentures with an option to convert such debentures into shares, either wholly
or partly at the time of redemption.
Provided that the issue of debentures with an option to convert such debentures
into shares, wholly or partly, should be approved by a special resolution passed at
a duly convened general meeting.
Section 71 (2) further provides that no company can issue any debentures which
carry any voting rights.
Section 71 (4) provides that where debentures are issued by a company, the
company should 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 should not be utilised by the company for any purpose
other than the redemption of debentures.
Basic provisions
If a charge has been created on any asset or the entire assets of the company,
 the nature of the charge
 the asset(s) charged
are described therein.
• Since the charge is not valid unless registered with the Registrar, his
certificate registering the charge is printed on the bond.
• It is also customary to create a trusteeship in favour of one or more persons
in the case of mortgage debentures. The trustees of debenture holders have
all powers of a mortgage of a property and can act in whatever manner they
think necessary to safeguard the interest of debenture holders.
As per Rule 18(2) of the Companies (Share Capital and Debentures) Rules, 2014,
the company shall appoint debenture trustees as required under sub-section (5)
of section 71 of the Companies Act 2013, after complying with certain conditions
mentioned in that rule.

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 8.4 ACCOUNTING

Note: Issue of debentures has already been discussed in detail at Foundation level.
Students are advised to refer the Foundation study material chapter 10 for
understanding of the requirements relating to issue of debentures.

2. REDEMPTION OF DEBENTURES
Debentures are usually redeemable i.e. either redeemed in cash or convertible
after a time period.
Redeemable debentures may be redeemed:
 after a fixed number of years; or
 any time after a certain number of years has elapsed since their issue; or
 on giving a specified notice; or
 by annual drawing.
A company may also purchase its debentures, as and when convenient, in the
open market and when debentures are quoted at a discount on the Stock
Exchange, it may be profitable for the company to purchase and cancel them.
As per Rule 18 (1) of the Companies (Share Capital and Debentures) Rules, 2014,
the company shall not issue secured debentures, unless it complies with the
following conditions, namely:
a. An issue of secured debentures may be made, provided the date of its
redemption shall not exceed ten years from the date of issue:
Provided that the following classes of companies may issue secured
debentures for a period exceeding ten years but not exceeding thirty years,
(i) Companies engaged in setting up of infrastructure projects;
(ii) Infrastructure Finance Companies' as defined in clause (viia) of sub-
direction (1) of direction 2 of Non-Banking Financial (Non-deposit
Accepting or Holding) Companies Prudential Norms (Reserve Bank)
Directions, 2007;
(iii) Infrastructure Debt Fund Non-Banking Financial Companies' as
defined in clause (b) of direction 3 of Infrastructure Debt Fund Non-
Banking Financial Companies (Reserve Bank) Directions, 2011;
(iv) Companies permitted by a Ministry or Department of the Central
Government or by Reserve Bank of India or by the National Housing

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 REDEMPTION OF DEBENTURES 8.5

Bank or by any other statutory authority to issue debentures for a

period exceeding ten years.
b. such an issue of debentures shall be secured by the creation of a charge on
the properties or assets of the company or its subsidiaries or its holding
company or its associates companies, having a value which is sufficient for
the due repayment of the amount of debentures and interest thereon.
c. the company shall appoint a debenture trustee before the issue of
prospectus or letter of offer for subscription of its debentures and not later
than sixty days after the allotment of the debentures, execute a debenture
trust deed to protect the interest of the debenture holders; and
d. the security for the debentures by way of a charge or mortgage shall be
created in favour of the debenture trustee on-
(i) any specific movable property of the company or its holding company
or subsidiaries or associate companies or otherwise.
(ii) any specific immovable property wherever situate, or any interest
therein:
Provided that in case of a non-banking financial company, the charge or
mortgage under sub-clause (i) may be created on any movable property.
Provided further that in case of any issue of debentures by a Government
company which is fully secured by the guarantee given by the Central
Government or one or more State Government or by both, the requirement for
creation of charge under this sub-rule shall not apply.
Provided also that in case of any loan taken by a subsidiary company from any
bank or financial institution the charge or mortgage under this sub-rule may also
be created on the properties or assets of the holding company.

3. DEBENTURE REDEMPTION RESERVE

A company issuing debentures is required to create a debenture redemption
reserve account out of the profits available for distribution of dividend and
amounts credited to such account cannot be utilised by the company except for
redemption of debentures. Such an arrangement would ensure that the company
will have sufficient liquid funds for the redemption of debentures at the time they
fall due for payment.

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 8.6 ACCOUNTING

An appropriate amount is transferred from profits every year to Debenture

Redemption Reserve and its investment is termed as Debenture Redemption
Reserve Investment. In the last year or at the time of redemption of debentures,
Debenture Redemption Reserve Investments are encashed and the amount so
obtained is used for the redemption of debentures.
3.1 LIABILITY OF THE COMPANY TO CREATE DEBENTURE
REDEMPTION RESERVE
Section 71 of the Companies Act 2013 covers the requirement of creating a
debenture redemption reserve account. Section 71 states as follows:
(1) Where a company issues debentures under this section, it should create a
debenture redemption reserve account out of its profits which are available for
distribution of dividend every year until such debentures are redeemed.
(2) The amounts credited to the debenture redemption reserve should not be
utitlised by the company for any purpose except for the purpose aforesaid.
(3) The company should pay interest and redeem the debentures in accordance
with the terms and conditions of their issue.
(4) Where a company fails to redeem the debentures on the date of maturity or fails
to pay the interest on debentures when they fall due, the Tribunal may, on the
application of any or all the holders of debentures or debenture trustee and, after
hearing the parties concerned, direct, by order, the company to redeem the
debentures forthwith by the payment of principal and interest due thereon.
3.2 BALANCE IN DEBENTURE REDEMPTION RESERVE (DRR)
When the company decides to establish the Debenture Redemption Reserve
Account, the amount indicated by the Debenture Redemption Reserves tables is
credited to the Debenture Redemption Reserve account and debited to profit and
loss account. That shows the intention of the company to set aside sum of
money to build up a fund for redeeming debentures. Immediately, the company
should also purchase outside investments. The entry for the purpose naturally will
be to debit Debenture Redemption Reserve investments and credit bank.
If the debentures are purchased within the interest period, the price would be
inclusive of interest provided these are purchased “Cum-interest”; but if
purchased “Ex-interest”, the interest to the date of purchase would be payable to
the seller additionally. In order to adjust the effect thereof the amount of interest
accrued till the date of purchase, if paid, is debited to the Interest Account

© The Institute of Chartered Accountants of India

 REDEMPTION OF DEBENTURES 8.7

against which the interest for the whole period will be credited. As a result, the
balance in the account would be left equal to the interest for the period for which
the debentures were held by the company.
3.3 ADEQUACY OF DEBENTURE REDEMPTION RESERVE (DRR)
As per Rule 18 (7) of the Companies (Share Capital and Debentures) Rules, 2014,
the company shall create a Debenture Redemption Reserve for the purpose of
redemption of debentures, in accordance with the conditions given below—
a. the Debenture Redemption Reserve shall be created out of the profits of the
company available for payment of dividend;
b. the company shall create Debenture Redemption Reserve (DRR) in accordance
with conditions given in below table:

Adequacy of Debenture
Redemption Reserve (DRR)
(i) For debentures issued by All India No DRR is required
Financial Institutions (AIFIs)
regulated by Reserve Bank of India
and Banking Companies for both
public as well as privately placed
debentures
(ii) For other Financial Institutions DRR will be as applicable to NBFCs
(FIs) within the meaning of clause registered with RBI (as per (iii)
(72) of section 2 of the Companies below)
Act, 2013
(iii) For debentures issued by NBFCs 25% of the value of outstanding
registered with RBI under section debentures issued through public
45-IA of the RBI (Amendment) Act, issue.
1997 and for Housing Finance No DRR is required in the case of
Companies registered with privately placed debentures.
National Housing Bank
(iv) For debentures issued by other 25% of the value of outstanding
companies including manufacturing debentures issued through public
and infrastructure companies issue.
Also 25% DRR is required in the case
of privately placed debentures by

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 8.8 ACCOUNTING

listed companies.
For unlisted companies issuing
debentures on private placement
basis, the DRR will be 25% of the
value of outstanding debentures.
Note:
Where a company intends to redeem its debentures prematurely, it may provide for
transfer of such amount in Debenture Redemption Reserve as is necessary for
redemption of such debentures even it exceeds the limits specified in this sub-rule.
3.4 INVESTMENT OF DEBENTURE REDEMPTION RESERVE (DRR)
AMOUNT
Further, as per Rule 18 (7) of the Companies (Share Capital and Debentures)
Rules, 2014, every company required to create DRR shall on or before the 30th
day of April of each year, deposit or invest, as the case may be, a sum which
should not be less than 15% of the amount of its debentures maturing during the
year ending on the 31st day of March of next year, in any one or more of the
following methods, namely:
(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any State
Government;
(c) in unencumbered securities mentioned in clauses (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 clause (f) of Section 20 of the Indian Trusts Act, 1882.
The amount deposited or invested, as the case may be, above should not be
utilised for any purpose other than for the repayment of debentures maturing
during the year referred to above.
Provided that the amount remaining deposited or invested, as the case may be,
shall not at any time fall below 15% of the amount of debentures maturing during
the 31st day of March of that year.
In case of partly convertible debentures, DRR shall be created in respect of non-
convertible portion of debenture issue in accordance with this sub-rule.
The amount credited to DRR shall not be utilised by the company except for the

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 REDEMPTION OF DEBENTURES 8.9

purpose of redemption of debentures.

Note:
It should be noted that appropriation to DRR can be made any time before
redemption and Investments in specified securities as mentioned above can be
done before 30th April for the debentures maturing that 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 amount of profits (issued if allotment date is not given in
the question). Also in some cases, the date of allotment could be missing, in such
cases the appropriation and investments should be done on the first day of that
year for which ledgers accounts are to be drafted.
3.5 JOURNAL ENTRIES
The necessary journal entries passed in the books of a company are given below:
1. After allotment of debentures
(a) For setting aside the fixed amount of profit for redemption
Profit and Loss A/c Dr.
To Debenture Redemption Reserve A/c
(b) For investing the amount set aside for redemption
Debenture Redemption Reserve Investment A/c Dr.
To Bank A/c
(c) For receipt of interest on Debenture Redemption Reserve Investments
Bank A/c Dr.
To Interest on Debenture Redemption Reserve Investment A/c
(d) For transfer of interest on Debenture Redemption Reserve
Investments (DRRI)
Interest on Debenture Redemption Reserve Investment A/c Dr.
To Profit and loss A/c*
* Considering the fact that interest is received each year through cash/bank
account and it is not re-invested. In the illustrations given in the chapter, the
same has been considered and hence interest on DRR investment is not credited to
DRR A/c but taken to P&L A/c.

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 8.10 ACCOUNTING

2. At the time of redemption of debentures

(a) For encashment of Debenture Redemption Reserve Investments
Bank A/c Dr.
To Debenture Redemption Reserve Investment A/c
(b) For amount due to debentureholders on redemption
Debentures A/c Dr.
To Debentureholders A/c
(c) For payment to debentureholders
Debentureholders A/c Dr.
To Bank A/c
(d) After redemption of debentures, DRR should be transferred to general
reserve
DRR A/c Dr.
To General Reserve
Note: In case, the company purchases its own debentures in the market,
additional set of accounting entries would be passed (refer para 4.3 of this
chapter for the guidance).

4 METHODS OF REDEMPTION OF DEBENTURES

Redemption of debentures must be done according to the terms of issue of
debentures and any deviation therefrom will be treated as a default by the
company.
Redemption by paying off the debt on account of debentures issued can be done
in one of the three methods viz:
4.1 BY PAYMENT IN LUMPSUM
Under payment in lumpsum method, at maturity or at the expiry of a specified
period of debenture the payment of entire debenture is made in one lot or even
before the expiry of the specified period.
4.2 BY PAYMENT IN INSTALMENTS
Under payment in instalments method, the payment of specified portion of

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 REDEMPTION OF DEBENTURES 8.11

debenture is made in instalments at specified intervals.

4.3 PURCHASE OF DEBENTURES IN OPEN MARKET
Debentures sometimes are purchased in open market. In such a case Own
Debenture Account is debited and bank is credited.
Suppose a company has issued 8% debentures for ` 10,00,000, interest being
payable on 31st March and 30th September. The company purchases ` 50,000
debentures at ` 96 on 1st August 20X1. This means that the company will have to
pay ` 48,000 as principal plus ` 1,333 as interest for 4 months.
Entry ` `
Own Debentures (50,000 x 96/ 100) Dr. 48,000
Interest Account (50,000 x 8% x 4/12) Dr. 1,333
To Bank 49,333
It should be noted that even though ` 50,000 debentures have been purchased
for ` 48,000 there is no profit. On purchase of anything, profit does not arise; only
on sale, and in this case on cancellation of debentures, profit could arise.
These debentures are cancelled on same date, the journal entries to be passed will
be the following:

` `

8% Debentures A/c Dr. 50,000

To Own Debentures A/c 48,000
To Profit on cancellation of debentures 2,000
(Cancellation of ` 50,000 Debentures)

Note: Students should refer to Illustration 1 for complete and detailed

understanding of this concept.
Illustration 1
On January 1, Rama Ltd., had 500 Debentures of ` 100 each outstanding in its
books carrying interest at 6% per annum. DRR balance is standing in books at
` 12,500. In accordance with the powers in the deed, the directors acquired
debentures from the open market for immediate cancellation as follows:

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 8.12 ACCOUNTING

March 1 ` 5,000 at ` 98.00 (cum interest)

Aug. 1 ` 10,000 at ` 100.25 (cum interest)
Dec. 15 ` 2,500 at ` 98.50 (ex-interest)
Debenture interest is payable half-yearly, on 30th June and 31st Dec.
Show ledger accounts of Debentures and Debenture interest for the first year,
ignoring income-tax.
Solution
6% Debentures Account
1st Half Year
` ` `
Mar. 1 To Bank-Debentures Jan. 1 By Balance 50,000
b/d
Purchased [(5,000 4,850
x 98/ 100) – 50]
To Profit & Loss on
cancellation of
debenture A/c 150 5,000
(5,000 – 4,850)
June 30 To Balance c/d 45,000
________ ______
50,000 50,000
Debenture Interest Account
` `
Mar. 1 To Bank-Interest for 2 June By Profit & Loss A/c 1,400
months 30
on ` 5,000 50
Debentures @ 6%
June To Debenture-holders 1,350
30 (Interest) A/c (45,000
x 6% x 6/12)
1,400 1,400

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 REDEMPTION OF DEBENTURES 8.13

2nd Half Year

6% Debentures Account

` ` `
Aug. To Bank-Debenture July By Balance 45,000
1 1 b/d
Purchased 9,975
[(10,000 x 100.25/
100) – 50]
To P & L A/c on
Cancellation of 25
debentures
(10,000 – 9,975)
Dec. To Bank-Deb. (2,500 2,462.50
15 x 98.50/ 100)
Purchased
To Profit & Loss
on Cancellation
of Debentures
(2,500 – 2,462.50) 37.50
Dec. To Balance c/d 32,500
31
45,000 45,000
Debenture Interest Account
` `
Aug. To Bank - Interest for Dec. By P & L 1,093.75
1 one month on Account
` 10,000 @ 6% 50.00
Dec. To Bank (2,500 x 6% 68.75
15 x 5.5/ 12)
Dec. To Debenture 975.00
31 holders (32,500 x
6% x 6/12)
1,093.75 1,093.75

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 8.14 ACCOUNTING

Notes:

(i) Profit or loss on redemption of debenture arises only on sale or

cancellation. Adjustments related to own purchases have been made in the
debentures account directly since the cancellation also happened on the
same day. If debentures are straightway cancelled on purchase, the profit or
loss on redemption of debentures will be ascertained by comparing (i) the
nominal value of debentures cancelled, and (ii) the price paid less interest to
the date of purchase (if the transaction is cum-interest).
(ii) Alternatively, Own Debentures Account can be debited on own purchase
and the same can be knocked off against debentures account on
cancellation i.e. Own debentures account will be credited and debenture
Account debited on cancellation. The difference between the nominal value
of the debentures cancelled and the amount standing to the debit on Own
Debentures Account will be profit or loss on redemption of debentures.
(iii) In case the transaction is ex-interest, the interest to the date of transaction
will be paid in addition to the settled price and hence profit on redemption
will be nominal value minus the settled price.
Illustration 2
The following balances appeared in the books of a company as on December 31,
20X1: 6% Mortgage 10,000 debentures of ` 100 each; Debenture Redemption
Reserve (for redemption of debentures) `2,00,000 ; Investments in deposits with a
scheduled bank, free from any charge or lien ` 1,50,000 at interest 4% p.a.
receivable on 31st December every year. Bank balance with the company is
` 9,00,000.
The Interest on debentures had been paid up to December 31, 20X1.
On February 28, 20X2, the investments were realised at par and the debentures
were paid off at 101, together with accrued interest.
Write up the concerned ledger accounts (excluding bank transactions). Ignore taxation.
Solution
6% Mortgage Debentures Account

20X2 ` 20X2 `
Feb. To Debenture- 10,00,000 Jan. By Balance b/d 10,00,000
28 holders A/c 1

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 REDEMPTION OF DEBENTURES 8.15

Premium on Redemption of Debentures Account

20X2 ` 20X2 `
Feb. To Debenture- 10,000 Feb. By Profit and 10,000
28 holders A/c 28 loss A/c
Debentures Redemption Reserve Investment Account

20X2 ` 20X2 `
Jan. 1 To Balance b/d 1,50,000 Feb. By Bank 1,50,000
28
Debenture Interest Account

20X2 ` 20X2 `
Feb. To Bank (10,000 x 10,000 Feb. 28 By Profit & 10,000
28 100 x 6% x 2/12) Loss A/c
Bank A/c

20X2 ` 20X2 `
Jan To Balance b/d 9,00,000 Feb. 28 By Debenture- 10,10,000
01 holders
Feb To Interest on 1,000 (10,000 x 101)
28 Debentures
Redemption
Investments
(1,50,000 x 4% x
2/12)
To Debentures By Deb. Interest A/c 10,000
Redemption
Reserve 1,50,000 By Balance c/d 31,000
investment A/c ________ ________
10,51,000 10,51,000

Debenture Redemption Reserve Account

20X2 ` 20X2 `
Feb Jan.1 By Balance b/d 2,00,000
28
Jan.1 By Profit & Loss (b/f) 50,000

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 8.16 ACCOUNTING

To General 2,50,000
Reserve-
note
2,50,000 2,50,000
Note
Amount to be transferred to DRR before the redemption
2,50,000 = 25 % of (10,000 X 100)
Illustration 3
Sencom Limited issued ` 1,50,000 5% Debentures on 30th September 20X0 on which
interest is payable half yearly on 31st March and 30th September. The company has
power to purchase debentures in the open market for cancellation thereof. The
following purchases were made during the year ended 31st December, 20X2 and
the cancellation were made on the same date. On 31 December 20X0, balance in
the DRR of the company was ` 25,000 and investments made for the purpose of
redemption were ` 20,000.
1st March 20X2 - ` 25,000 nominal value purchased for ` 24,725 ex-interest.
1st September 20X2 - ` 20,000 nominal value purchased for ` 20,125 cum-interest.
You are required to draw up the following accounts up to the date of cancellation:
(i) Debentures Account; and
(ii) Own Debenture (Investment) Account.
Ignore taxation.
Solution
Sencom Limited
Debenture Account

20X2 ` 20X2 `
Mar 1 To Own Debentures 24,725 Jan 1 By Balance 1,50,000
b/d
Mar 1 To Profit on cancellation 275
(25,000-24,725)
Sep 1 To Own Debentures 19,708
(Note 3)

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 REDEMPTION OF DEBENTURES 8.17

Sep 1 To Profit on cancellation 292

(20,000-19,708)
Dec 31 Balance c/d 1,05,000
1,50,000 1,50,000
Own Debenture (Investment) Account
Nominal Interest Cost Nominal Interest Cost
Cost Cost
` ` ` ` ` `

20X2 20X2
Mar 1 To Bank 25,000 521 24,725 Mar 1 By Debentures 25,000 - 24,725
(W.N. 1) A/c

Sep 1 To Bank 20,000 417 19,708 Sep 1 By Debentures 20,000 - 19,708

(W.N. 2 A/c
& 3)
Dec. 31 By P&L A/c 938

45,000 938 44,433 45,000 938 44,433

Working notes:
1. 25,000 x 5% x 5/12 = 521

2. 20,000 x 5% x 5/12 = 417

3. 20,125 – 417 = 19,708

Illustration 4
The following balances appeared in the books of Paradise Ltd as on 1-4-20X1:
(i) 12 % Debentures ` 7,50,000
(ii) Balance of DRR ` 1,00,000
(iii) DRR Investment 1,12,500 represented by 10% ` 1,125 Secured Bonds of the
Government of India of ` 100 each.
Annual contribution to the DRR was made on 31st March every year. On
31-3-20X2, balance at bank was ` 7,50,000 before receipt of interest. The
investment were realised at par for redemption of debentures at a premium of
10% on the above date.

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 8.18 ACCOUNTING

You are required to prepare the following accounts for the year ended 31st
March, 20X2:
(1) Debentures Account
(2) DRR Account
(3) DRR Investment Account
(4) Bank Account
(5) Debenture Holders Account.
Solution
1. 12% Debentures Account
Date Particulars ` Date Particulars `
31st March, To Debenture 7,50,000 1st April, By Balance b/d 7,50,000
20X2 holders A/c 20X1
7,50,000 7,50,000

2. DRR Account
Date Particulars ` Date Particulars `
1st April, By Balance b/d 1,00,000
20X1

31st March, To General reserve 1st April, By Profit and loss 87,500
20X2 A/c note 1 1,87,500 20X1 A/c (Refer Note 1)

1,87,500 1,87,500

3. 10% Secured Bonds of Govt. (DRR Investment) A/c

` `
1 April,
st
To Balance b/d 1,12,500 31 March,
st
By Bank A/c 1,12,500
20X1 20X2
1,12,500 1,12,500

4. Bank A/c

` `
31 st
To Balance b/d 7,50,000 31 st
By 12% Debenture 8,25,000
March, To Interest on DRR 11,250 March,

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 REDEMPTION OF DEBENTURES 8.19

20X2 Investment 20X2

To DRR Investment A/c 1,12,500 By Balance c/d 48,750
8,73,750 8,73,750
5. Debenture holders A/c

` `
31 st
To Bank A/c 8,25,000 31 st
By 12% Debentures 7,50,000
March, March, By Premium on
20X2 20X2 redemption of
debentures @ 10% 75,000
8,25,000 8,25,000

Note 1 –

Calculation of DRR before redemption = 25% of ` 7,50,000 = 1,87,500

Available balance = ` 1,00,000

DRR required = 1,87,500 – 1,00,000 = ` 87,500.

Illustration 5
The Summarized Balance Sheet of BEE Co. Ltd. as on 31st March, 20X1 is as under:

Liabilities ` Assets `
Share Capital : Freehold property 1,15,000
Authorised: Stock 1,35,000
30,000 Equity Shares of ` 10 each 3,00,000 Trade receivables 75,000
Issued and Subscribed: Cash 30,000
20,000 Equity Shares of ` 10 each Balance at Bank 2,00,000
fully paid 2,00,000
Profit and Loss Account 1,20,000
12% Debentures 1,20,000
Trade payables 1,15,000 ________
5,55,000 5,55,000

At the Annual General Meeting, it was resolved:

(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for
every four shares (held prior to the bonus distribution), this option being taken up
by all shareholders.

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 8.20 ACCOUNTING

(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%.
Give the necessary journal entries and the company’s Balance Sheet after these
transactions are completed.
Solution
Journal of BEE Co. Ltd.

Dr. Cr.
` `
Bank A/c Dr. 75,000
To Equity Shareholders A/c 75,000
(Application money received on 5,000 shares @
` 15 per share to be issued as rights shares in the
ratio of 1:4)
Equity Shareholders A/c Dr. 75,000
To Equity Share Capital A/c 50,000
To Securities Premium A/c 25,000
(Share application money on 5,000 shares @ ` 10
per share transferred to Share Capital Account, and
` 5 per share to Securities Premium Account vide
Board’s Resolution dated….)
Securities Premium A/c Dr. 25,000
Profit & Loss A/c Dr. 25,000
To Bonus to Shareholders A/c 50,000
(Amount transferred for issue of bonus shares to
existing shareholders in the ratio of 1:5 vide
General Body’s resolution dated...)
Bonus to Shareholders A/c Dr. 50,000
To Equity Share Capital A/c 50,000
(Issue of bonus shares in the ratio of 1 for 5 vide
Board’s resolution dated....)

© The Institute of Chartered Accountants of India

 REDEMPTION OF DEBENTURES 8.21

Profit and Loss A/c Dr. 30,000

To Debenture Redemption Reserve 30,000
(for DRR created 25% x 1,20,000)
12% Debentures A/c Dr. 1,20,000
Premium Payable on Redemption A/c @ 3% Dr. 3,600
To Debenture holders A/c 1,23,600
(Amount payable to debentures holders)
Profit and loss A/c Dr. 3,600
To Premium Payable on Redemption A/c 3,600
(Premium payable on redemption charged to Profit
& Loss A/c)
Debenture Redemption Reserve A/c Dr. 30,000
To General Reserve 30,000
(for DRR transferred to general reserve)
Debenture holders A/c Dr. 1,23,600
To Bank A/c 1,23,600
(Amount paid to debenture holders on redemption)

Balance Sheet of BEE Co. Ltd. as on...... (after completion of transactions)

Particulars Note No `
I. Equity and liabilities
(1) Shareholder's Funds
(a) Share Capital 1 3,00,000
(b) Reserves and Surplus 2 91,400
(2) Current Liabilities
(a) Trade payables 1,15,000
Total 5,06,400
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment
(i) Tangible Assets 3 1,15,000

© The Institute of Chartered Accountants of India

 8.22 ACCOUNTING

(2) Current assets

(a) Inventories 1,35,000
(b) Trade receivables 75,000
(c) Cash and bank balances 4 1,81,400
Total 5,06,400

Notes to Accounts
`
1. Share Capital
30,000 shares of ` 10 each fully paid (5,000 3,00,000
shares of ` 10 each, fully paid issued as bonus
shares out of securities premium and P&L
Account)
2. Reserve and Surplus
Profit & Loss Account 1,20,000
Less: Premium on redemption of debenture (3,600)
Less: Utilisation for issue of bonus shares (25,000)
Less: DRR created (30,000)
61,400
General Reserve 30,000 91,400
3. Tangible assets
Freehold property 1,15,000
4. Cash and bank balances
Cash at bank (2,00,000 + 75,000 – 1,23,600) 1,51,400
Cash in hand 30,000 1,81,400

Illustration 6
The summarised Balance Sheet of Convertible Limited, as on 30th June, 20X1, stood
as follows:
Liabilities `
Share Capital: 5,00,000 equity shares of ` 10 each fully paid 50,00,000
General Reserve 75,00,000

© The Institute of Chartered Accountants of India

 REDEMPTION OF DEBENTURES 8.23

Profit And loss A/c 10,00,000

Debenture Redemption Reserve 25,00,000
13.5% Convertible Debentures, 1,00,000 Debentures of ` 100 each 1,00,00,000
Other loans 65,00,000
Current Liabilities and Provisions 1,25,00,000
4,50,00,000

Assets :

Fixed Assets (at cost less depreciation) 1,60,00,000

Debenture Redemption Reserve Investments 15,00,000
Cash and bank Balances 75,00,000

Other Current Assets 2,00,00,000

4,50,00,000
The debentures are due for redemption on 1st July, 20X1. The terms of issue of
debentures provided that they were redeemable at a premium of 5% and also
conferred option to the debenture holders to convert 20% of their holdings into equity
shares at a predetermined price of ` 15.75 per share and the payment in cash.
Assuming that:
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest
of them exercised the option for maximum conversion.
(ii) the investments were realised at par on sale; and
(iii) all the transactions are put through, without any lag, on 1st July, 20X1.
Redraft the balance sheet of the company as on 1st July, 20X1 after giving effect to
the redemption. Show your calculations in respect of the number of equity shares to
be allotted and the necessary cash payment.

© The Institute of Chartered Accountants of India

 8.24 ACCOUNTING

Solution
Convertible Limited
Balance Sheet as on July 1, 20X1

Particulars Note No Figures as at the

end of current
reporting period
`
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 60,00,000
(b) Reserves and Surplus 2 1,10,75,000
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans 65,00,000
(3) Current Liabilities
(a) Short-term provisions 1,25,00,000
Total 3,60,75,000
II. Assets
(1) Non-current assets
(a) Property, Plant & Equipment
(i) Tangible assets 1,60,00,000
(2) Current assets
(a) Cash and bank balances (Refer WN (iii)) 75,000
(b) Other current assets 2,00,00,000
Total 3,60,75,000

Notes to Accounts
`
1. Share Capital
6,00,000 Equity Shares (5,00,000 + 1,00,000) of 60,00,000
` 10 each (Refer WN (i))
2. Reserves and Surplus

© The Institute of Chartered Accountants of India

 REDEMPTION OF DEBENTURES 8.25

General Reserve 75,00,000

Profit & Loss 10,00,000
Add: Debenture Redemption Reserve transfer 25,00,000
110,00,000
Less: Premium on redemption of debentures (5,00,000) 1,05,00,000
(1,00,000 debentures x ` 5 per debenture)
Securities Premium
(1,00,000 shares x 5.75) (Refer WN (i)) 5,75,000
1,10,75,000

Working Notes :
(i) Calculation of number of shares to be allotted:
Total number of debentures 1,00,000
Less: Number of debentures for which debentureholders
did not opt for conversion (25,000)
75,000
20% of 75,000 15,000
Redemption value of 15,000 debentures (15,000 x 105) ` 15,75,000
Number of Equity Shares to be allotted :
15,75,000
= = 1,00,000 shares of ` 10 each.
15.75
(ii) Calculation of cash to be paid: `
Total number of debentures 1,00,000
Less : number of debentures to be converted into equity shares (15,000)
Balance 85,000
Redemption value of 85,000 debentures (85,000 × ` 105) ` 89,25,000
(iii) Cash and Bank Balance:
Balance before redemption 75,00,000

© The Institute of Chartered Accountants of India

 8.26 ACCOUNTING

Add : Proceeds of investments sold 15,00,000

90,00,000
Less : Cash paid to debenture holders (89,25,000)
75,000

SUMMARY
 Debenture may create a charge against some or all the assets of the company.
 Charge may be fixed or floating, depends upon the condition of issue.
 Debentures may be redeemed after a fixed number of years or after a certain
period has elapsed.
 For redemption of debentures, a company should maintain Debenture
Redemption Reserve.
 Methods of redemption: lumpsum payment; payment in instalments and purchase
of debentures in open market.

TEST YOUR KNOWLEDGE

MCQ
1. Which of the following statements is true?
(a) A debenture holder is an owner of the company.
(b) A debenture holder can get his money back only on the liquidation of
the company.
(c) A debenture issued at a discount can be redeemed at a premium.
2. Which of the following statements is false?
(a) Debentures can be redeemed by payment in lump sum at the end of a
specified period.
(b) Debentures cannot be redeemed during the life time of the company.
(c) Debentures can be redeemed by payments in annual instalments.
3. For debentures issued by other companies including manufacturing
and infrastructure companies, Debentures Redemption reserve will be
considered adequate if it is:

© The Institute of Chartered Accountants of India

 REDEMPTION OF DEBENTURES 8.27

(a) 20% of the value of debentures issued through public issue.

(b) 25% of the value of debentures issued through public issue.
(c) 30% of the value of debentures issued through public issue.
Theoretical Questions
Question 1
What is meant by redemption of debentures? Explain.
Question 2
Write short note on Debenture Redemption Reserve.
Practical Questions
Question 1
A company had issued 20,000, 13% debentures of ` 100 each on 1st April, 20X1. The
debentures are due for redemption on 1st July, 20X2. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to
the debenture holders to convert 20% of their holding into equity shares (Nominal
value ` 10) at a price of ` 15 per share. Debenture holders holding 2,500 debentures
did not exercise the option. Calculate the number of equity shares to be allotted to the
debenture holders exercising the option to the maximum.
Question 2
Libra Limited recently made a public issue in respect of which the following
information is available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price-
` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6
months from the date of closing of issue.
(c) Date of closure of subscription lists- 1.5.20X1, date of allotment- 1.6.20X1, rate of
interest on debenture- 15% payable from the date of allotment, value of equity
share for the purpose of conversion- ` 60 (Face Value ` 10).
(d) Underwriting Commission- 2%.
(e) No. of debentures applied for- 1,50,000.

© The Institute of Chartered Accountants of India

 8.28 ACCOUNTING

(f) Interest payable on debentures half-yearly on 30th September and 31st

March.
Write relevant journal entries for all transactions arising out of the above during
the year ended 31st March, 20X2 (including cash and bank entries).
Question 3
On 1st April, 20X1, in MK Ltd.’s ledger 9% debentures appeared with a opening
balance of ` 50,00,000 divided into 50,000 fully paid debentures of ` 100 each
issued at par.
Interest on debentures was paid half-yearly on 30th of September and 31st March
every year.
On 31.5.20X1, the company purchased 8,000 debentures of its own @ ` 98 (ex-
interest) per debenture.
On same day it cancelled the debentures acquired.
You are required to prepare necessary ledger accounts (excluding bank A/c).
Question 4
A company had 16,000, 12% debentures of ` 100 each outstanding as on 1st April,
20X1, redeemable on 31st March, 20X2.
On 1 April 20X1, the following balances appeared in the books of accounts-
Investment in 2,000 9% secured Govt. bonds of ` 100 each. DRR is ` 2,50,000.
Interest on investments is received yearly at the end of financial year.
2,000 own debentures were purchased on 31st March 2012 at the average price of
` 99 and cancelled on the same date.
On 31st March, 20X2, the investments were realised at par and the debentures
were redeemed. You are required to write up the following accounts for the year
ended 31st March 20X2:
(1) 12% Debentures Account
(2) Debenture Redemption Reserve Account
(3) Debenture Redemption Investments Account.

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 REDEMPTION OF DEBENTURES 8.29

ANSWERS/ HINTS
MCQ
1. (c) 2. (b) 3. (b)
THEORETICAL QUESTIONS
ANSWER 1
Debentures are usually redeemable i.e. either redeemed in cash or convertible
after a time period.
Redeemable debentures may be redeemed:
 after a fixed number of years; or
 any time after a certain number of years has elapsed since their issue; or
 on giving a specified notice; or
 by annual drawing.
For details, refer para 2 of the chapter.
Answer 2
1. A company issuing debentures is required to create a debenture redemption
reserve account out of the profits available for distribution of dividend and
amounts credited to such account cannot be utilised by the company except
for redemption of debentures. Such an arrangement would ensure that the
company will have sufficient liquid funds for the redemption of debentures at
the time they fall due for payment. For details, refer para 3.1.
PRACTICAL QUESTIONS
Answer 1
Calculation of number of equity shares to be allotted
Number of
debentures
Total number of debentures 20,000
Less: Debenture holders not opted for conversion (2,500)
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500

© The Institute of Chartered Accountants of India

 8.30 ACCOUNTING

Redemption value of 3,500 debentures at a premium of 5%

[3,500 x (100+5)] ` 3,67,500
Equity shares of ` 10 each issued on conversion
[` 3,67,500/ ` 15] 24,500 shares
Answer 2
Journal Entries in the books of Libra Ltd.
Journal Entries

Date Particulars Amount Amount

Dr. Cr.
` `
1.5.20X1 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on
1,50,000 debentures @ ` 100
each)
1.6.20X1 Debenture Application A/c Dr. 1,50,00,000
Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures
to applicants and 50,000
debentures to underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000
(Commission payable to
underwriters @ 2% on
` 2,00,00,000)
Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000
(Amount received from
underwriters in settlement of
account)
01.06.20X1 Profit & Loss A/c Dr. 20,00,000
To Debenture Redemption 20,00,000

© The Institute of Chartered Accountants of India

 REDEMPTION OF DEBENTURES 8.31

Reserve a/c (200,000 X 100 X 25%

X 40%)
(Being Debenture Redemption
Reserve created on non-
convertible debentures)
Debenture Redemption
Investment A/c Dr. 12,00,000
To Bank A/c (200,000 X 100 x
15% X 40%) 12,00,000
(Being Investments made for
redemption purpose)

30.9.20X1 Debenture Interest A/c Dr. 10,00,000

To Bank A/c 10,00,000
(Interest paid on debentures for 4
months @ 15% on ` 2,00,00,000)
31.10.20X1 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures
into shares of ` 60 each with a
face value of ` 10)
31.3.20X2 Debenture Interest A/c Dr. 7,50,000
To Bank A/c 7,50,000
(Interest paid on debentures for
the half year) (refer working note
below)
Working Note :
Calculation of Debenture Interest for the half year ended 31st March, 20X2
On `80,00,000 for 6 months @ 15% = `6,00,000
On `1,20,00,000 for 1 months @ 15% = ` 1,50,000
`7,50,000

© The Institute of Chartered Accountants of India

 8.32 ACCOUNTING

Answer 3
MK Ltd.’s Ledger
(i) Debentures Account

` `
31.5.X1 To Own 7,84,000 1.4.X1 By balance 50,00,000
Debentures b/d
(8,000 X 98)
31.5.X1 To Profit on 16,000
cancellation
31.3.X2 To balance c/d 42,00,000
50,00,000 50,00,000

(ii) Interest on Debentures Account

` `
31.5.X1 To Bank (Interest for 2 12,000 31.3.X2 By Profit and 3,90,000
months on 8,000 Loss A/c
debentures) (b.f.)
30.9.X1 To Bank (Interest for 6
months on 42,000 1,89,000
debentures)
31.3.X2 To Bank (Interest for 6
months on 42,000 1,89,000
debentures)
3,90,000 3,90,000

(iii) Debentures Redemption Reserve A/c

Date Particulars Amount Date Particulars Amount

31 By General 2,00,000 1 To Profit & 12,50,000
May Reserve April Loss A/c
20X1 (8,000 x 100 x 20x1
25%)
31 By Balance c/d 10,50,000
March
20X2 12,50,000 12,50,000

© The Institute of Chartered Accountants of India

 REDEMPTION OF DEBENTURES 8.33

(iv) Debentures Redemption Investments A/c

Date Particulars Amount Date Particulars Amount

1 April To Bank A/c 7,50,000 30 By Bank A/c 1,20,000
20x1 may (8,000 x 100 x
20X1 15%)
31 To Balance 6,30,000
March b/d
20X2

7,50,000 7,50,000

Working Note:

31.5. X1 Acquired 8,000 Debentures @ 98 per debenture `

(ex-interest)
Purchase price of debenture (8,000 × ` 98) = 7,84,000
31.5.X1 Interest for 2 months [` 8,00,000 × 9% × 2/12] = 12,000
30.9. X1 Interest on other debentures
` 42,00,000 × 9% × ½ = 1,89,000

Answer 4
12% Debentures Account

Date Particulars ` Date Particulars `

31 st
To Own 1,98,000 1 April,
st
By Balance 16,00,000
March, debentures 20 X1 b/d
20 X2 A/c
2,000
31st To Profit on
March, cancellation
20 X2

© The Institute of Chartered Accountants of India

 8.34 ACCOUNTING

31st To Bank A/c 14,00,000

March,
20 X2
16,00,000 16,00,000

Debenture Redemption Reserve Account

Date Particulars ` Date Particulars `

1st April, By Balance b/d 2,50,000

20 X1

31st March, To General 4,00,000 1st April, By Profit and loss 1,50,000
20 X2 Reserve A/c 20 X1 A/c (16,00,000 X
25%)
4,00,000 4,00,000

Debenture Redemption Investments A/c

Date Particulars Amount Date Particulars Amount
1 April To Balance b/d 2,00,000 30th March By Bank A/c 30,000
20X1 20X2 (2,000 x 100 x
15%)
1 April To Bank A/c 40,000
20X1
31 March By Bank A/c 2,10,000
20X2
2,40,000 2,40,000

© The Institute of Chartered Accountants of India