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1 REDEMPTION OF DEBENTURES PreNote: Students are required to refer the chapter "Issue of Debentures" from CPT Study Module. TOPICS A) Methods of Redemption B) Sources of Redemption C) Accounting for Debenture Interest D) Transfer of Premium/Discount on redemption, Gain/loss on cancellation. E) Maintaining Sinking Fund. F) Purchase of Own Debenture from Open Market Not for Immediate Cancellation G) Transfer of Interest on Own Debentures, Profit/loss on sale/cancellation of own debentures. A) Methods of Redemption 1) Lumpsum 2) Instalments a) By Annual Drawings b) By Purchase from Open Market (for immediate cancellation) 3) Conversion into Shares B) Sources of Redemption 1) Out of Profits 2) Out of Sinking Fund Note: No source is required in case of redemption of debentures by conversion into shares. C) Accounting for Debenture Interest 1) On Due date 2) At the time of redemption/cancellation 3) Accrued Debenture Interest. 4) Transfer of Annual Debenture Interest Note: Whenever debentures are redeemed, we have to pay debenture interest accrued, for the proportionate period. D) Transfer of Premium/Discount on redemption, Gain/loss on cancellation. 1) When there is no Sinking Fund. 2) When there is Sinking Fund. E) Maintaining Sinking Fund. 1) Annual Appropriation to Sinking Fund 2) Purchase of Sinking Fund Investment 3) Interest on Sinking Fund Investment 4) Sale of Sinking Fund Investment 5) Transfer of Profit/loss on sale of Sinking Fund Investment 6) Transfer of Interest on Sinking Fund Investment 7) Entry when Debenture redeemed 8) Transfer of balance of Sinking Fund A/c (last year) F) Purchase of Own Debenture from Open Market Not for Immediate Cancellation 1) Purchase of Own Debentures 2) Interest due on Own Debentures 3) Sale of Own Debentures 4) Cancellation of Own Debentures 1 By:- FCA. RAVI CHUGH

2 G) Transfer of Interest on Own Debentures, Profit/loss on sale/cancellation of own debentures. 1) When there is No Sinking Fund. 2) When there is Sinking Fund. JOURNAL ENTRIES A) Methods of Redemption 1) Lumpsum/Annual Drawings a) 12% Debentures Dr. Face value redeemed To Debentureholders Amount due (Diff. trfd. to Premium/Discount on Redemption) b) Debentureholders Dr. Amount due To Bank Amount due 2) Purchase from Open Market 12% Debentures Dr. Face value cancelled (for Immediate Cancellation) To Bank Amount paid Ex.intt (Diff. trfd. to Gain/Loss on cancellation) 3) Conversion into Shares a) 12% Debentures Dr. Face value redeemed To Debentureholders Amount due (Diff. trfd. to Premium/Discount on Redemption) b) Debentureholders Dr. Amount due To Eq./Pref. Share Capital Face value (Diff. trfd. to Premium/Discount on Issue of Shares) B) Sources of Redemption 1) Out of Profits Profit & Loss Appr. A/c Dr. To General Reserve (with the amount of face value of debentures redeemed during the year) 2) Out of Sinking Fund Sinking Fund A/c Dr. (Debenture Redemption Fund) To General Reserve (with the amount of face value of debentures redeemed during the year) Note: No source is required in case of redemption of debentures by conversion into shares. C) Accounting for Debenture Interest 1) On Due date Debenture Interest Dr. (Face value Outstanding To Bank x Rate x Period) 2) At the time of redemption/cancellation Debenture Interest Dr. (Face value redeemed/cancelled To Bank x Rate x Proportionate Period) 3) Accrued Debenture Interest. a) Closing Debenture Interest Dr. (Face value Outstanding To Accrued Interest x Rate x Proportionate Period) b) Opening Accrued Interest Dr. To Debenture Interest 4) Transfer of Annual Debenture Interest Profit & Loss A/c Dr. To Debenture Interest 2 By:- FCA. RAVI CHUGH

3 D) Transfer of Premium/Discount on redemption, Gain/loss on cancellation. When there is no Sinking Fund When there is Sinking Fund Premium on Redemption Sec. Premium / P&L A/c Dr. Sinking Fund A/c Dr. To Premium on Redemption To Premium on Redemption Discount on Redemption Discount on Red. A/c Dr. Discount on Red. A/c Dr. To Capital Reserve To Capital Reserve Gain on Cancellation Gain on Cancellation A/c Dr. Gain on Cancellation A/c Dr. ( Net of Loss on cancellation) To Capital Reserve To Capital Reserve Loss on Cancellation Sec. Premium / P&L A/c Dr. Sinking Fund A/c Dr. ( Net of Gain on cancellation) To Loss on Cancellation To Loss on Cancellation E) Maintaining Sinking Fund. 1) Annual Appropriation to Sinking Fund Profit & Loss Appr. A/c Dr. Annual Appropriation To Sinking Fund 2) Purchase of S/Fund Investment a) Sinking Fund Investment Dr. Amount paid (Ex.intt) To Bank Amount paid (Ex.intt) b) Intt. on Sinking Fund Inv. Dr. (Face value purchased x Rate To Bank x Proportionate Period) 3) Interest received on Sinking Fund Bank A/c Dr. (Face value held x Rate x Period) Investment. To Intt. on Sinking Fund Inv. 4) Sale of Sinking Fund Investment a) Bank A/c Dr. Amt received (Ex.intt) To Sinking Fund Investment Amt received (Ex.intt) b) Loss on sale of S.F.Invest. Dr. Purchase Cost Ex Intt. Sale To Sinking Fund Investment (If Profit on sale, the above entry will be reversed) c) Bank A/c Dr. (Face value sold x Rate To Intt. on S/Fund Inv. x Proportionate Period) 5) Transfer of Profit/loss on sale of Profit on sale of S/F/Inv. Dr. Sinking Fund Dr. Sinking Fund Investment To Sinking Fund To Loss on sale of S/F/Inv. 6) Trfr. of intt. On S/F/Investment a) If Sinking Fund is Cumulative Intt. on Sinking Fund Inv. Dr. To Sinking Fund b) If S/Fund is Non Cumulative Intt. on Sinking Fund Inv. Dr. To Profit & Loss A/c Note: If Que. Silent, we always assume Sinking Fund is cumulative. 7) Entry when Debenture redeemed Sinking Fund A/c Dr. To General Reserve (with the amount of face value of debentures redeemed during the year) 3 By:- FCA. RAVI CHUGH

4 8) Trfr. of balance of S/Fund A/c (last year) Debit Balance Credit Balance Profit & Loss Appr. A/c Dr. Sinking Fund A/c Dr. To Sinking Fund To Capital Reserve F) Purchase of Own Debenture from Open Market Not for Immediate Cancellation 1) Purchase of Own Debentures a) 12% Own Debentures Dr. Amount paid (Ex.intt) To Bank Amount paid (Ex.intt) b) Intt. on Own Debentures Dr. (Face value purchased x Rate To Bank x Proportionate Period) 2) Interest due on Own Debentures Debenture Interest Dr. (Face value held x Rate x Period) To Intt. on Own Debentures 3) Sale of Own Debentures a) Bank A/c Dr. Amt received (Ex.intt) To 12% Own Debentures Amt received (Ex.intt) b) Loss on sale of Own Deb. Dr. Purchase Cost Ex Intt. Sale To 12% Own Debentures (If Profit on sale, the above entry will be reversed) c) Bank A/c Dr. (Face value sold To Intt. on Own Debentures x Rate x Prop. period) (Interest received on sale of Own Debentures) 4) Cancellation of Own Debentures a) 12% Debentures Dr. Face value cancelled To 12% Own Debentures Purchase Cost (Diff. trfd. to Gain/Loss on cancellation) b) Debenture Interest Dr. (Face value cancelled To Intt. on Own Debentures x Rate x Prop. period) G) Transfer of Interest on Own Debentures, Profit/loss on sale/cancellation of own debentures. When there is no Sinking Fund When there is Sinking Fund Profit on sale Profit on sale Dr. Profit on sale Dr. of own debentures To Profit & Loss A/c To Sinking Fund A/c Loss on sale Profit & Loss A/c Dr. Sinking Fund A/c Dr. of own debentures To Loss on sale To Loss on sale Gain on Cancellation Gain on Cancellation A/c Dr. Gain on Cancellation A/c Dr. ( Net of Loss on cancellation) To Capital Reserve To Capital Reserve Loss on Cancellation Sec. Premium / P&L A/c Dr. Sinking Fund A/c Dr. ( Net of Gain on cancellation) To Loss on Cancellation To Loss on Cancellation Interest on Own Debentures Intt. on Own Debentures Dr. If Sinking Fund is Cumulative To Profit & Loss A/c Intt. on Own Debentures Dr. To Sinking Fund A/c If Sinking Fund is Non Cumulative Intt. on Own Debentures Dr. To Profit & Loss A/c Note: If Que. Silent, always assume Sinking Fund is cumulative. 4 By:- FCA. RAVI CHUGH

5 PRACTICAL QUESTIONS Methods of Redemption (When there is no Sinking Fund) Q.1 A company issued 12% Rs debentures on 1/4/00 at par. Interest is payable every year on 31st Mar. Pass necessary Journal entries for 2 years if: i) Debentures are redeemable at par after 2 years at lumpsum. ii) Debentures are redeemable in 2 equal instalments by drawing lot at year end at 10% premium. iii) Debentures are redeemable by purchase from open market for immediate cancellation as below: 31/5/00 Rs at Rs.98 (cum interest) 31/8/01 Rs at Rs.102 (ex interest) iv) Debentures are redeemable by converting into equity shares issued at 25% premium as below: 31/3/01 Rs redeemable at par 31/3/02 Rs redeemable at 20% discount Ans: Hints: Q.2 On 1st Jan., Rama Ltd., had outstanding in its books 500 6% Debentures of Rs.100 each. In accordance with the powers in the deed, the directors acquired in the open market Debentures for immediate cancellation as follows: 1st Mar. Rs.5000 at Rs.98 (cum interest) 1st Aug. Rs at Rs (cum interest) 15th Dec. Rs.2500 at Rs (ex interest) Debenture interest is payable half yearly, on 30th June and 31st Dec. You are required to pass necessary Journal entries and prepare necessary ledger A/cs. Ans: Debentures (closing) = Rs Debenture Interest = Rs.2494 Hints: Gain on cancell.(capital Reserve) = Rs.212 Q.3 Progressive Ltd. issued Rs , 6% Debentures Stock at par on Interest was payable on 30th June and 31st December, in each year. Under the terms of the Debentures Trust, the owned stock is redeemable at par. The trust deed obliges the Company, to pay to the trustees on 31st Dec.1995 and annually thereafter, the sum of Rs , to be utilised for the redemption and cancellation of an equivalent amount of stock, which is to be selected by drawing lots. Alternatively, the Company is empowered as from 1st Jan.1995, to purchase its own debentures in the open market. These debentures must be surrendered to the Trustees for cancellation and any adjustments for accrued interest recorded in the books of account. If in any year, the nominal amount of the stock surrendered under this alternative does not amount to Rs , then the shortfall is to be paid by the Company to the Trustees in cash on 31st Dec. The following purchases of stock were made by the Company: Date Nominal value of Purchase price per stock purchased (Rs.) Rs.100 of stock (Rs.) 30th Sept st May (Ex interest) 31st July The Company fulfilled all its obligations under the trust deed. You are required to prepare necessary ledger A/cs for the 3 years. [NOV. 98] Ans: Debentures(closing); Rs Deb. Intt; Rs.58200, 50175, Hints: Debentures are purchased for immediate cancell. Gain on cancell.(capital Reserve); Rs.4200, 3750, 9775 Assume stock purchased on 30th Sept. and 31st July are cum interest. 5 By:- FCA. RAVI CHUGH

6 Sinking Fund Q.4 A company issued 12% Rs debentures on 1/1/01 at par. Interest is payable every year on 31st Dec. Pass necessary Journal entries & prepare necessary ledger A/cs for 3 years if: i) Debentures are redeemable at 20% premium after 3 years on ii) Annual appropriation to Sinking fund = Rs iii) 6% Sinking Fund investment purchased as below: 31/1/02 Rs at par 28/2/03 Rs at Rs.102 iv) On 31/12/03, all the Investments are sold for 98 (cum interest) & debentures are redeemed. Ans: Sinking fund(p&l Appr.); Rs Deb. Intt.; Rs.7200, 7200, 7200 Intt. on S.F. Investment; Rs. 825, 1900 Loss on sale of S.F. Investment; ; Rs Hints: Assume investments purchased are Ex intt. Q.5 The following balances appeared in the books of a company as on 31st Dec.2005: 6% Mortgage debentures of Rs.100 each Sinking Fund (for redemption of debentures) ; Rs Sinking Fund Investments: Rs , 4% Government Loan purchased at par. Rs , 3 1/2% Government paper purchased for Rs The interest on debentures had been paid upto 31st Dec.,2005. On 28th Feb.2006, the investments were sold at Rs.90 and Rs.87 respectively & the debentures were paid off at 101, together with accrued interest. You are required to pass necessary Journal entries and prepare necessary ledger A/cs. The Sinking Fund is non cumulative. Ans: Sinking fund(p&l Appr.); Rs Debenture Interest; Rs Hints: Assume investments sold on 28/2/06 Ex intt. Intt. on S.F. Investment; 4% Govt. Loan Rs.3520, 3.5% Govt. Paper Rs.3267 Loss on sale; 4% Govt. Loan Rs.52800, 3.5% Govt. Paper Rs Purchase of own debentures not for immediate cancellation Q.6 Swati Associates Ltd. has issued % Debentures of Rs.100 each on These debentures are redeemable after 3 years at a premium of Rs.5 per debenture. Interest is payable annually. i) On 1st Oct.2004, it buys 1500 debentures from the market at Rs.98 per debenture. These are sold away on 30 June 2005 at Rs.105 per debenture. ii) On 1st Jan.2005, it buys 1000 debentures at Rs.104 per debenture from the open market. These are cancelled on 1st Apr iii) On 1st Oct.2005, it buys 2000 debentures at Rs.106 per debenture from the open market. These debentures along with other debentures are redeemed on 31st Dec You are required to pass necessary Journal entries and prepare necessary ledger A/cs for the year 2003, 2004 and Ans: Debenture Interest; Rs , , Hints: Other debentures to be redeemed at 5% prem. Intt. On Own Debentures; Rs.4500, Assume all prices are given Ex interest. 12% Own Debentures; Loss on cancell. Rs.4000, Profit on sale Rs By:- FCA. RAVI CHUGH

7 Q.7 Sencom Ltd. issued Rs , 5% Debentures on which interest is payable half yearly on 31st March and 30th Sept. The company has power to purchase debentures in the open market for cancellation thereof. The following purchases were made during the year ended 31st Dec.2005 and the cancellation were made on the following 31st Mar. 1st Mar. Rs nominal value purchased for Rs ex interest. 1st Sept. Rs nominal value purchased for Rs cum interest. You are required to pass necessary Journal entries and prepare necessary ledger A/cs upto the date of cancellation. Ans: Debentures(closing); Rs Debenture Interest; Rs.7500, 1875 Hints: Accrued Deb. Intt.; Rs.1875 (Opening & Closing) Intt. On Own Debentures; Rs.1375, 563. Gain on cancell.(capital Res.); Rs.567 Accrued Intt. on Own Debentures; Rs.563 Accounting year is calender year and Interest year is financial year. So we have to consider, Accrued Interest also. Sinking Fund & Purchase of own debentures Q.8 MM Ltd. had the following balances on 1st Jan.2005: Rs. 11% Debentures A/c (2000 issue) Debenture Redemption Fund A/c % Debentures in XX Ltd. A/c (Face value Rs ) Own Debentures A/c (Face value Rs ) As 31st Dec.2005, was the date for redemption of the 2000 debentures, the company started buying own debentures and made the following purchases in the open market: 1st Feb debentures at Rs.98 (cum interest). 1st June debentures at Rs.99 (ex interest). Half yearly interest is due on the debentures on 30th June and 31st Dec., in the case of both the companies. On 31st Dec.2005, the debentures in XX Ltd. were sold for Rs.95 each ex interest. On that date, the outstanding debentures of MM Ltd. were redeemed by payment and by cancellation. The face value of a debenture was Rs You are required to prepare necessary ledger A/cs for the year Ans: Sinking fund (P&L Appr.); Rs Debenture Interest; Rs Hints: Assume debentures were redeemable at par. Intt. on Own Debentures; Rs Intt. on 13.5% XX Ltd. Debentures Rs Loss on sale; 13.5% XX Ltd. Debentures Rs Gain on cancell.(capital Res.); Rs By:- FCA. RAVI CHUGH

CHAPTER-7 J. K. SHAH CLASSES INTER C.A.- ACCOUNTING

CHAPTER-7 J. K. SHAH CLASSES INTER C.A.- ACCOUNTING J. K. SHAH CLASSES INTER C.A.- ACCOUNTING CHAPTER-7 (I) Investment in fixed interest securities Accounting Procedure 1. When the given transaction is at ex - interest price, the price itself is cost and