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Redemption of Debentures in case of Lump-Sum


What’s Redemption of Debentures?

Reimbursement of debentures to the debenture holders or discharge of the legal responsibility on account of debentures is called the redemption of debentures. They’re usually redeemed on the expiry of the interval for which they have been initially issued. The corporate can also redeem the debentures earlier than the expiry of the mounted interval both by instalments or by buying them within the open market if authorised by its articles of Affiliation and the phrases of situation.

Redemption of Debentures in Lump Sum after stipulated interval:

Debentures are mortgage taken by an organization, and being a legal responsibility it needs to be paid. On this technique, the corporate redeem entire of its debentures in a single lump sum on the expiry of a specified interval which is the maturity date of the debentures or earlier, on the firm’s possibility. As per the phrases of the problem, redemption might be made at par or premium. Earlier than the graduation of redemption of debentures, it’s important to switch 25% of the face worth of debentures issued from Surplus in Assertion of Revenue & Loss to a newly opened account, “Debenture Redemption Reserve”.This switch reduces the stability of earnings, which in the end reduces the quantity accessible for dividends. And as this quantity shouldn’t be used for the cost of dividends, it’s used to pay for debentures. Such sort of redemption is called Redemption out of earnings. 

Journal Entries:

i. On creation of Debenture Redemption Reserve:

 

ii. On deposit or funding in Specified Securities:

 

iii. On making the quantity as a result of Debenture holders:

a. When Debentures are redeemed at Par:

 

b. When Debentures are redeemed at Premium:

 

iv. On Sale of Debenture Redemption Funding:

 

v. On making cost to Debentureholders:

 

vi. On the closure of DRR after Redemption:

 

Illustration 1 (Out of Capital):

Sahil Ltd. had excellent ₹20,00,000, 12% Debentures of ₹100 every due for redemption on 31st March 2020. The required funding was made on 30th April 2019. Go the mandatory journal entries relating to the redemption of debentures, creation of DRR, and Funding.

Answer:

 

Illustration 2 (Out of Earnings):

Sukant Ltd. has a stability of ₹21,00,000 within the Revenue & Loss A/c. The corporate determined to forego the cost of dividend and as an alternative utilise the earnings to repay ₹15,00,000,12% Debentures (issued on 1st April 2017) absolutely out of earnings on 30th September 2020 at a premium of 10% Debentures. Curiosity is payable yearly on 31st March yearly when the accounts are closed. The corporate additionally has a stability of ₹10,00,000 within the Debenture Redemption Reserve. Go the mandatory journal entries each on the time of Difficulty and Redemption of Debentures.

Answer:

 

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