The methods of redemption of debentures are of four in numbers and we have explained all one by one as follows with examples. But before studying methods you have to get know the meaning of Debentures and redemption of debentures. These are explained as follows:
What are Debentures:
The Debenture is the type of loan or debt instrument which is issued in the market to subscribe to the public. It is not taken from any individual institution. It is issued like equity or preference shares in the market for purchase and sale to the number of subscribers. Like every type of loan, it also has a fixed rate of interest which will be paid by the company to the subscriber of these debentures. The subscriber of the debenture is known as Debenture holder.
If you want to know more explanation about the debenture please check our previous article by click here.
Debenture – Meaning, Definition, Features, and types
What is Redemption of Debentures?
When business discharges the liability for the debentures by repaying the amount of the debentures to the debenture holders is known as the redemption of the debenture.
Mainly the debentures always repaid after a fixed period time which is decided before issuing of debentures. The date of redemption has predefined in the terms of issue of debentures. But the debentures can be redeemed in instalments by drawing lots or by purchase from the open market before the actual date of redemption.
If you want to know more explanation about the Redemption of debentures please check our previous article by click here.
Redemption of Debentures – explained with an example
Methods of Redemption of Debentures:
There are four methods of redemption of debentures which are shown as follows:
- Payment Made in a Lump sum on Maturity:
- Payment Made in Installments
- Purchased Debentures from open Market
- Conversion into shares and new Debentures
1. Payment Made in a Lump sum on Maturity:
Under this method, The debentures are redeemed on maturity in the lump sum payment to the Debentures holders. The maturity date has already mentioned in the terms of issue of the debentures. In this method, the debentures can be redeemed at par or at a premium.
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Journal Entries for the redemption of Debentures:
The following journal entries will be passed at the time of maturity of the debentures:
| Date | Particulars |
L. F. | Debit | Credit | |
| (i) For transferring the total amount due against debentures to the debenture holders | |||||
| (a) In the case of Debentures are redeemed at par: | |||||
| ___% Debenture A/c | Dr. | **** | |||
| To Debenture holders A/c | **** | ||||
| (Being the total amount due against debenture transferred to the Debenture holders) | |||||
| OR | |||||
| (b) In the case of Debentures are redeemed at a premium: | |||||
| ___% Debenture A/c | Dr. | **** | |||
| Premium on Redemption A/c | Dr. | *** | |||
| To Debenture holders A/c | **** | ||||
| (Being the total amount due against debenture transferred to the Debenture holders including the amount of premium) | |||||
| (ii) Payment made to Debenture holders | |||||
| Debenture holders A/c | Dr. | **** | |||
| To Bank A/c | **** | ||||
| (Being the amount due paid to debenture holders) | |||||
| (iii) If Debentures Redeemed out of Profit: | |||||
| Debentures Redemption Reserves A/c | Dr. | **** | |||
| To General Reserves A/c | **** | ||||
| (Being DRR transferred to the General Reserves account) | |||||
2. Payment Made in Installments:
Under this method, the amount of the debentures have paid in the installments as per the terms of such debentures. The instalments may in a regular or irregular basis depends on the terms of issue. This process is also called Redemption of Debentures by Draw of lots.
All journal entries posted at the time of payment of installment at the end of each specific period i.e. end of the year.
3. Purchased Debentures from open Market:
When the business brought its own Debentures from the open market to cancelled them before the date of Maturity is known as the purchased Debentures from the open market method of redemption of the debentures.
4. Conversion
When the Business offer to the debenture holder to convert their debentures in the new category of debentures or into equity share is known as the conversion method of redemption of debentures.
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References: –
- ebook.mca.gov.in
- Class +2 Accountancy by Sultan Chand & Sons (P) Ltd.