Paper 5 Advance Accounting Chapter 4 Unit 3

C.A S.K Chhabra

Introduction

Sources for Redemption

Methods of Redemption • With Journal entries

Sinking fund • Steps involved • Journal entries

Ex and cum interest

Practical Problems from past exams

Redemption of debentures

means repayment of the amount of debentures to

debenture holders

Meaning

• Companies Act and SEBI require creation of Debenture redemption reserve at least 50% of amount of debentures issued before redemption

Redemption from profits

• Now its not possible to redeem debentures purely out of capital Redemption

from capital

• If maturity period of debentures is up to 18 months

• Infrastructure companies

Exceptions to creation of

DRR

Lump sum at the end

Redeem in lots

Conversion into shares

Purchase of debentures

in open market

Company redeems whole of debentures in one lump sum at the expiry of period. DRR

is to be made u/s 117C of the Companies act

at least 50%

On transfer of profits from P/L App A/c • P/L App A/c Dr • To Debenture Redemption Reserve

On redemption of debentures • Debentures A/c Dr

• To bank

When all debentures are redeemed • Debenture Redemption Reserve A/c Dr

• To General Reserve

When amount of DRR is invested outside the business, then it may be known as Sinking fund or Debenture redemption fund

• When sinking fund Or Debenture Redemption fund is made then no need for creating DRR

Each year fixed amount is transferred from profits to SF a/c

The amount is invested in some outside securities

Interest received is again reinvested

In last year no investment is made

Profit/loss on sale of investment is t/f to SF

SF A/c is t/f to GR after redemption

Any profit on cancellation of own debentures is a capital profit and should be transferred to capital reserve and not general reserve

SF A/c means Sinking Fund A/c

GR means General reserve

t/f means transferred

For transfer of annual contribution to SF

• P/L Appropriation A/c Dr • To SF/Debenture redemption fund

For investing the amount of annual contribution

• SF Investment A/c Dr • To bank

When interest is received

• Bank A/c Dr • To interest on SF investment A/c

When interest is transferred to sinking fund A/c

• Interest on SF investment A/c Dr • To SF A/c

When amount is reinvested

• Sinking fund Investment A/c Dr • To Bank A/c

Other entries being the same except no amount is reinvested In the last year

For sale of sinking fund investments

• Bank A/c Dr • SF A/c Dr(in case of loss) • To SF investment(at B.V) • To SF A/c(in case of profit)

When amount remaining in sinking fund t/f to General reserve • Sinking fund A/c Dr • To Capital reserve A/c(for profit on cancellation) • To General reserve A/c

Certain amount of total debentures are

redeemed in annual installments

Transfer of amount at least 50% DRR is

necessary

Debentures may be redeemed by conversion into shares in accordance

with the term of issue

There is no need for creating DRR as there is

no cash outflow

For making amount due to debenture holders • % Debentures A/c Dr • Premium on redemption Dr(If redeemed at premium) • To debenture holders

For issuing shares to debenture holders • Debenture holders A/c Dr • To share capital A/c • To securities premium A/c

If debentures are originally issued at discount then at the time of conversion

shares can be issued only against net

amount received from issue of debentures

after discount

A company can if authorised by its AOA can redeem its debentures by purchasing them in the open market

When debentures are purchased for immediate cancellation

• On purchase of own debentures • Own debentures A/c • To bank

• On immediate cancellation • % debentures A/c Dr • To own debentures • To capital reserve(profit on cancellation)

When a company purchases its own

debentures from the open market and does

not cancel it immediately, then

interest saved is the income

• Price paid includes interest from last due date till date of purchase

Cum interest

• Price paid does not include interest from last due date till date of purchase. Amount of interest is paid as extra

Ex interest

May 2000 (4 marks)

Pass Journal Entries in year 1 in the case of the issue of debentures by ABC Co. Ltd

Issued Rs.1,00,000 11% debentures at 95 percent redeemable at the end of 10 years ◦ (i) at 102 percent, and ◦ (ii) at 98 percent

In books of ABC Co.

Particulars Dr.

Cr.

Bank A/c Dr Discount on issue of debentures A/c Dr Loss on issue of debentures A/c Dr To 11% Debentures A/c To Premium on redemption of debentures A/c

(Being, Issue of Rs. 1,00,000 11% debentures at a Discount of 5% but redeemable at a premium of 2%)

95,000 5,000 2,000

1,00,000 2, 000

Particulars Dr. Cr.

Bank A/c Dr. Discount on issue of debentures A/c Dr. To 11% Debentures A/c

(Issue of Rs. 1,00,000 11% debentures at a discount of 5% but redeemable at a discount of 2%)

95,000 5,000

1,00,000

Nov 2007 (4 marks)

A company purchased its own 11% debentures in the open market for Rs.50,00,000 (cum interest)

Interest amount included in above 1,50,000. The face value of the debentures purchased is

Rs.52,00,000. The company cancelled the debentures so purchased.

Pass Journal Entries

,

Particulars Dr. Cr.

11% Own debenture Account Dr Deb. Interest A/c Dr To Bank (Being purchase of Cum interest own debentures)

48,50,000 1,50,000

50,00,000

11% Debenture A/c Dr To 11% Own Debenture A/c To Capital Reserve

(Being, profit on cancellation t/f to Capital Reserve)

52,00,000 48,50,000 3,50,000

May 2010 (2 marks)

A company issued 20,000, 13% Convertible debentures of Rs. 100 each on 1st April, 2007.

The debentures are due for redemption on 1st July, 2009.

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 (FV Rs. 10) at Rs. 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

Total no. of debenture holders 20,000 Less: Number of debenture on which option has

not been exercised = 2,500 17,500 Redeemable value = 17,500 x 105 =18,37,500 Convertible portion (redeemable value x 20%) = 18,37,500 x 20% = 3,67,500 Value per share = Rs. 15 Number of shares = 3,67,500/15 = 24,500 shares

Nov 2010 (5marks)

Rama Limited issued 8%. Debenture of Rs. 3,00,000 on which interest is payable half year on 31st March and 30th September.

The company has power to purchase its own debentures in the open market

The following purchases were made during the financial year 11–12 and cancellation made on 31st March 2012: ◦ (a) On 1st April Rs. 50,000 FV purchased for Rs. 49,450, ex-

interest. ◦ (b) On 1st September Rs. 30,000 FV purchased for Rs. 30,250

cum interest Show the Journal Entries(without narrations)

Particulars Dr. Cr.

1 -4-11 8% Own debenture Account Dr

To Bank

49,450

49,450

1-9-11 8% Own debentures A/c

Dr

Interest on own debentures A/c (30000X8%X5/12)

To Bank

30-9-11 Interest on debentures A/c

29,250

1,000

30,250

Dr

To Bank

To Interest on own debentures A/c

12,000

8,800

3,200

Dr

Particulars Dr. Cr.

31-3-12 8% Debenture Account

Dr

To Own debentures

80,000

78,700

31-3-12 Interest on own debentures

Dr

To Profit and Loss A/c(3200+3200-1000)

31-3-12 Interest on debentures A/c

5,400

5,400

Dr

To Bank

To Interest on own debentures A/c

12,000

8,800

3,200

To Profit on cancellation 1,300

Particulars Dr. Cr.

31-3-12 Profit on cancellation of debentures A/c

Dr

To Capital Reserve A/c

1,300

1,300

31-3-12 Profit and Loss A/c( 12000+12000)

Dr

To Interest on debentures A/c

24,000

24,000

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