Redemption of Debentures in case of Purchase of Own Debentures

What is Redemption of Debentures?

Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem the debentures before the expiry of the fixed period either by instalments or by purchasing them in the open market if authorised by its articles of Association and the terms of issue.

Redemption of Debentures by Purchase of Own Debentures in the Market:

A company can redeem its debentures by purchasing them in the open market. An open market means to purchase own debentures from the stock market. By purchasing debentures in the open market, a company can reduce its liabilities against debentures. Reduction of debentures also means cancelling them and redeem virtually. A company can purchase its own debentures at par, premium or discount. 

A company may purchase its debentures in the open market with the object of Immediate Cancellation or keeping them as Investments. Further, a company can purchase these debentures on the due date of interest or on any date other than the due date of interest. 

Note: In this case, it is assumed that the company has sufficient balance in Debenture Redemption Reserve before initiating the purchase of debentures for cancellation. Therefore, unless it is not stated, it is not required to create DRR under this method. Also, it is assumed that the required investment rate is 15% and it has been made. Therefore, there is no need to make investment. 

Accounting entries when Debentures are purchased in the open market for immediate cancellation on the due date of interest:

I. On purchase of Own Debentures for Immediate Cancellation:

ii. On cancellation of Own Debentures:

iii.  On transfer of Gain on Cancellation:

iv.  Providing Interest on Debentures:

v.  On Payment of Interest on Debentures:

vi.  On Transfer of Interest on Debentures to Profit & Loss A/c:

Illustration:

On 1^st April 2020, Akanksha Ltd. has 500, 12% Debentures of ₹100 each. On 1^st October 2020, the company purchased 150 Own Debentures at ₹93 for immediate cancellation. Interest on debentures is payable half yearly on 30^th September and on 31^st March. Pass the necessary journal entries on 1^st October and 31^st March.

Solution:

Working Note:

Profit & Loss A/c =

= 3,000 + 2,100

= ₹5,100

Accounting entries when Debentures are purchased in the open market on other than the due date of interest cancelled the same later on:

i.  On purchase of Own Debentures:

ii.  Providing Interest on Debentures:

iii.  On payment of Interest on Debentures:

iv.  On cancellation of Own Debentures:

v.  On transfer of Gain on Cancellation:

vi.  On transfer of Interest on Debentures to Profit & Loss A/c:

vii.  On transfer of Interest on Own Debentures to Profit & Loss A/c:

Illustration:

On 1^st April 2020, Akanksha Ltd. has 500, 12% Debentures of ₹100 each. On 1^st October 2020, the company purchased 150 Own Debentures at ₹93 and cancelled on 31^st March. Interest on debentures is payable half yearly on 30^th September and on 31^st March. Pass the necessary journal entries on 1^st October and 31^st March.

Solution:

Accounting Treatment when Debentures are purchased in the open market for Investment purpose on due date of Interest:

i. On purchase of Own Debentures:

ii. On sale of Own Debentures:

iii. On transfer of Gain on Sale of Investments:

iv. On cancellation of Own Debentures later on:

v. On transfer of Gain on Cancellation:

Illustration:

On 1^st April 2018, Akanksha Ltd. has 500, 12% Debentures of ₹100 each. On 1^st October 2020, the company purchased 150 Own Debentures at ₹93 for investment purpose and sold the same @ ₹99 on 1^st March 2021. Interest on debentures is payable half yearly on 30^th September and on 31^st March. Pass the necessary journal entries on the date of purchases and sale.

Solution: