Paper 5 Advance Accounting Chapter 4 Unit 3 C.A S.K Chhabra

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

Meaning Redemption of debentures means repayment of the amount of debentures to debenture holders

Redemption from profits Companies Act and SEBI require creation of Debenture redemption reserve at least 50% of amount of debentures issued before redemption Redemption from capital Now its not possible to redeem debentures purely out of capital Exceptions to creation of DRR If maturity period of debentures is up to 18 months Infrastructure companies

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

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

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) 11% Debenture A/c Dr To 11% Own Debenture A/c To Capital Reserve (Being, profit on cancellation t/f to Capital Reserve) 48,50,000 1,50,000 52,00,000 50,00,000 48,50,000 3,50,000

May 2010 (2 marks)

A company issued 20,000, 13% Convertible debentures of Rs. 100 each on 1 st April, 2007. The debentures are due for redemption on 1 st 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 31 st March and 30 th 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 31 st March 2012: (a) On 1 st April Rs. 50,000 FV purchased for Rs. 49,450, exinterest. (b) On 1 st 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 1-9-11 8% Own debentures A/c Dr Interest on own debentures A/c (30000X8%X5/12) Dr To Bank 49,450 29,250 1,000 49,450 30,250 30-9-11 Interest on debentures A/c To Bank To Interest on own debentures A/c Dr 12,000 8,800 3,200

Particulars Dr. Cr. 31-3-12 Interest on debentures A/c To Bank To Interest on own debentures A/c Dr 12,000 8,800 3,200 31-3-12 8% Debenture Account Dr To Own debentures 80,000 78,700 To Profit on cancellation 1,300 31-3-12 Interest on own debentures Dr To Profit and Loss A/c(3200+3200-1000) 5,400 5,400

Particulars Dr. Cr. 31-3-12 Profit and Loss A/c( 12000+12000) To Interest on debentures A/c Dr 24,000 24,000 31-3-12 Profit on cancellation of debentures A/c Dr 1,300 To Capital Reserve A/c 1,300

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