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Redemption of Debentures

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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.

Issue of Debentures from the point of view of Redemption:

A company can issue debentures at different terms. Just like the issue of debentures can be made at par, premium, or discount; the redemption of debentures can also be made at par, premium, or discount. 

Accounting Treatment:

Case 1: Debentures are issued at par, redeemable at par:

Assume 8% Debentures issued at ₹100, redeemable at ₹100

i) Entries for Issue:

Journal Entries

 

ii) Entries for Redemption:

Journal Entries

 

Illustration:

Gaurav Ltd. issued 1,000; 8% Debentures of ₹1,000 each at par, redeemable at par. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.

Solution:

Journal Entries

 

Balance Sheet of Gaurav Ltd.

 

Case 2: Debentures are issued at a premium, redeemable at par:

Assume 8% Debentures of ₹100 issued at 5% premium, redeemable at par.

i) Entries for Issue:

Journal Entries

 

ii) Entries for Redemption:

Journal Entries

 

Illustration:

Kashish Ltd. issued 1,000; 8% Debentures of ₹1,000 each at a premium of 5%, redeemable at par. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.

Solution:

Journal Entries

 

Balance Sheet of Kashish Ltd.

 

Case 3: Debentures are issued at discount, redeemable at par:

Assume 8% Debentures of ₹100 issued at 5% discount, redeemable at par.

i) Entries for Issue:

Journal Entries

 

ii) Entries for Redemption:

Journal Entries

 

Illustration:

Vaibhav Ltd. issued 1,000; 8% Debentures of ₹1,000 each at a discount of 5%, redeemable at par. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.

Solution:

Journal Entries

 

Balance Sheet of Vaibhav Ltd.

 

Case 4: Debentures are issued at par, redeemable at premium:

Assume 8% Debentures of ₹100 issued, redeemable at ₹105.

i) Entries for Issue:

Journal Entries

 

ii) Entries for Redemption:

Journal Entries

 

Notes:

  1. Loss on Issue of Debentures is a capital loss, and is shown on the liabilities side under the head, “Reserves & Surplus” in a negative sign. It will be written off from capital profit or gradually from Profit & Loss A/c during the tenure of debentures.
  2. The company will pay the Premium on Redemption at the time of redemption. As it is a known loss, it is recorded at the time of issue of debentures and will be shown under the head, “Current Liabilities & Provisions” on the liabilities side of the Balance Sheet until they are paid on redemption.

Illustration:

Tanya Ltd. issued 1,000; 8% Debentures of ₹1,000 each at par, redeemable at a premium of 5%. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.

Solution:

Journal Entries

 

Balance Sheet of Tanya Ltd.

 

Case 5: Debentures are issued at discount, redeemable at premium:

Assume 8% Debentures of ₹100 issued at a discount of 5%, redeemable at a premium of 5%.

i) Entries for Issue:

Journal Entries

 

ii) Entries for Redemption:

Journal Entries

 

Note: When debentures are issued at a discount and redeemable at a premium, then the loss is the sum of the discount on issue + the amount of premium payable on redemption.

Illustration:

Akanksha Ltd. issued 1,000; 8% Debentures of ₹1,000 each at a discount of 5%, redeemable at a premium of 5%. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.

Solution:

Journal Entries

 

Balance Sheet of Akanksha Ltd.

 

Case 6: Debentures are issued at premium, redeemable at premium:

Assume 8% Debentures of ₹100 issued at a premium of 5%, redeemable at ₹110.

i) Entries for Issue:

Journal Entries

 

ii) Entries for Redemption:

Journal Entries

 

Illustration:

Nupur Ltd. issued 1,000; 8% Debentures of ₹1,000 each at a premium of 5%, redeemable at a premium of 8%. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.

Solution:

Journal Entries

 

Balance Sheet of Nupur Ltd.

 



Last Updated : 05 Apr, 2023
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