Redemption of Debentures

Redemption of debenture
Redeemable debenture will be redeemed on
or before a specified date which is stated
clearly in the terms of the issue of
debentures

In order to provide the funds to finance the

redemption of debentures, the company may use
the money from the following resources:
(I) The balance of existing cash and bank account
(II) The money received from the fresh issue of shares
(III)or debentures for the purpose of the redemption

Debenture Redemption Reserve

If the company is unable to redeem its debentures by
issuing new shares to raise necessary funds, the company
should create Debenture Redemption Reserve account for
redeeming the debentures
Equal to the cash used in redemption might be
voluntarily transferred to a debenture redemption
reserve fund from profit and loss account as a matter of
financial prudence
The debenture redemption reserve is then identified as
not being available for dividend distribution
The voluntary appropriation of profit to Debenture
Redemption Reserve ensures that the resources of the
company are not disadvantageously reduced

Premium on Redemption of
Debentures
Redeemed price
of debentures

Par value
of Debentures

Premium on
Redemption

An amount equals Premium on Redemption will be

transferred from Share Premium account to Debenture
Redemption account
If it is not covered by Share Premium account, the
balance will be transferred from Profit and Loss account
5

Discount on Redemption of
Debentures
Par value
of Debentures

Redeemed price
of debentures

Discount on
Redemption

An amount equals Discount on Redemption will

be transferred from to Debenture Redemption
account to Reserve or Profit and loss account

Redemption of Debentures
without a Sinking Fund

Summary of Procedures
Out of distributable profits

Out of the proceeds of new issue

1. Declaration of redemption
Dr. Debentures
Cr. Debenture Redemption

1. Declaration of redemption
Dr. Debentures
Cr. Debenture Redemption

2. Transfer of distributable profit

to debenture redemption
reserve
Dr. Profit and Loss
Appropriation
Cr. Debenture Redemption
Reserve

2. (a) New shares issued at premium

Dr. Bank
Cr. Share Capital
Cr. Share Premium
(b) Transfer to redemption reserve
Dr. Profit and Loss Appropriation
Cr. Debenture Redemption Reserve

Out of distributable profit/proceeds of new issue

3. Redemption at a premium
a) if the debentures were originally issued at a premium
Dr. Share/Debenture Premium
Cr. Debenture Redemption
b) if the debentures were not issued at a premium
Dr. Profit and Loss Appropriation
Cr. Debenture Redemption
c) if the current balance of premium or the premium
received on debentures originally issued is less than the
premium on redemption
Dr. Share/Debenture Premium
Dr. Profit and Loss Appropriation
Cr. Debenture Redemption

Out of distributable profit/proceeds of new issue

4. Redemption at a discount
Dr. Debenture Redemption
Cr. Debenture Redemption Reserve / General Reserve
5. Redemption of debentures
Dr. Debenture Redemption
Cr. Bank

10

Example 1

11

Example 1
$1,000 debentures were redeemed at par
A new issue of $1,000 ordinary shares at par
Dr.

1. Bank
Ordinary Shares
Being issue of ordinary shares

1000

2. Debentures
Debenture Redemption
Being declaration of redemption

1000

3. Debenture Redemption
Bank
Being redemption of debentures

1000

Cr.

1000

1000

1000

12

Example 2
$1,000 debentures were redeemed at par
with no new issue of shares
Dr.

1. Debentures
Debenture Redemption
Being declaration of redemption

1000

2. Profit and Loss Appropriation

Debenture Redemption Reserve
Being transfer to debenture redemption reserve

1000

3. Debenture Redemption
Bank
Being redemption of debentures

1000

Cr.

1000

1000

1000

13

Example 3
$1,000 debentures were redeemed at par
Redemption was partly provided for out of the proceeds of a new issue of
800 ordinary shares at par
Dr.

1.

Bank
Ordinary Shares
Being issue of ordinary shares

2. Profit and Loss Appropriation

Debenture Redemption Reserve

Cr.

800
800
200
200

Being transfer to debenture redemption reserve

3. Debentures

1000

Being
Debenture
declaration
Redemption
of redemption
4. Debenture Redemption
Being
redemption of debentures
Bank

1000
1000
100014

Example 4
$1,000 debentures were redeemed at a premium of 20%
with no new issue of shares
Dr.

1. Debentures
Debenture Redemption
Being declaration of redemption
2.

Profit and Loss Appropriation

Debenture Redemption Reserve
Being transfer to debenture redemption reserve

Cr.

800
800
1000
1000

3. Profit and Loss Appropriation

Debenture Redemption
Being premium on redemption

200

4. Debenture Redemption
Bank
Being redemption of debentures

1200

200

1200

15

Example 5
Case 1

16

Example 5
$1,000 debentures, issued at a premium of 5%
Redeemed at a premium of 20%
Case 1: 1,200 $1 ordinary shares at par
These balances may not be the same, as some
funds may have been used up in the bonus issue
Case 1
and redemption
$
Balance before new issue
Premium on new issue
Balance after new issue
Less: Amount transferred to the
redemption account
(should be the lower of the
balance after the new issue
or
the original premium on the
issue)
Balance after redemption 1000*5%=50

10
10

10
17

Dr.

Debentures
Debenture Redemption
Being redemption of debentures

1000

Bank
Ordinary Share

1200

Being issue of ordinary shares

Share Premium
Profit and loss
Debenture Redemption (1000*20%)
Being premium on redemption
Debenture Redemption
Bank (1000*1.2)
Being amount paid on redemption

Cr.

1000

1200
10
190
200
1200
1200

18

Example 5
Case 2

19

Example 5
$1,000 debentures, issued at a premium of 5%
Redeemed at a premium of 20%
Case 2: 1,000 $1 ordinary shares at a 10% premium
These balances may not be the same, as some
funds may have been used up in the bonus issue
Case 2
and redemption
$
Balance before new issue
Premium on new issue
Balance after new issue
Less: Amount transferred to the
redemption account
(should be the lower of the
balance after the new issue
or
the original premium on the
issue)
Balance after redemption
1000*5%=50

50
100
150

1000*0.1

50
100
20

Dr.

Debentures
Debenture Redemption
Being redemption of debentures
Bank
Ordinary Share
Share Premium (1000*0.1)
Being issue of ordinary shares
Share Premium
Profit & Loss Appropriation
Debenture Redemption

Cr.

1000
1000
1100
1000
100
50
150
200

Being premium on redemption

Debenture Redemption
Bank
Being amount paid on redemption

1200
1200

21

Example 5
Case 3

22

Example 5
$1,000 debentures, issued at a premium of 5%
Redeemed at a premium of 20%
Case 3: 800 $1 ordinary shares at a 20% premium
These balances may not be the same, as some
funds may have been used up in the bonus issue
Case 3
and redemption
$
Balance before new issue
Premium on new issue
Balance after new issue
Less: Amount transferred to the
redemption account
(should be the lower of the
balance after the new issue
or
the original premium on the
issue)
Balance after redemption 1000*5%=50

50
60
210
800*0.2

50
160
23

Dr.

Debentures
Debenture Redemption
Being redemption of debentures
Bank
Ordinary Share
Share Premium
Being issue of ordinary shares
Profit & Loss Appropriation (1000-800*1.2)
Debenture Redemption Res.
Being part of redemption not covered by new issue
Share Premium
Profit & Loss Appropriation
Debenture Redemption
Being premium on redemption
Debenture Redemption
Bank
Being amount paid on redemption

Cr.

1000
1000
960
800
160
40
40
50
150
200
1200
1200

24

Redemption of Debenture
by a Sinking Fund

25

Descriptions

Book-keeping Entries

Set aside an annual appropriation

to the Sinking Fund.
The same amount out of cash or
bank will be invested in a specific
investment under Sinking Fund
Investment Account to provide
sufficient funds for the debenture
redemption.

Dr. Profit and Loss Account

Cr. Sinking Fund

Any interest or dividend income

received from Sinking Fund
Investment

Dr. Sinking Fund Cash/Bank

Cr. Sinking Fund

Dr. Sinking Fund Cash/Bank

Cr. Cash/Bank
Dr. Sinking Fund Investment
Cr. Sinking Fund Cash/Bank

Re-investment of income received Dr. Sinking Fund Investment

(except in the last few months
Cr. Sinking Fund Cash
before the redemption)

26

Descriptions

Book-keeping Entries

Disposal of Sinking Fund Investment Dr. Sinking Fund Cash/Bank

Cr. Sinking Fund Investment
Profit on disposal of Sinking Fund
Investment or

Dr. Sinking Fund Investment

Cr. Sinking Fund

Loss on disposal of Sinking Fund

Investment

Dr. Sinking Fund

Cr. Sinking Fund Investment

Transfer the amount of Debentures

to be redeemed to Debenture
Redemption Account

Dr. Debentures
Cr. Debenture Redemption

Payment on Debenture Redemption

Dr. Debenture Redemption

Cr. Sinking Fund Cash/Bank

27

Descriptions
Premium on Redemption
Profit on Redemption will be
transferred from Redemption
Account to Sinking Fund
Account
OR
Discount on Redemption
Loss on Redemption will be
transferred from Redemption
Account to Sinking Fund
Account

Book-keeping Entries

Dr. Debenture Redemption

Cr. Sinking Fund
.

Dr. Sinking Fund

Cr. Debenture Redemption

Transfer of the nominal value of

Dr. Sinking Fund
the debentures redeemed at every Cr. Debenture Redemption Reserve
redemption and the balance of
OR
the sinking fund at the final
General Capital Reserve
redemption to the general reserve

28

Example

29

Pacific Ltd. Issued $1,000,000 12% debentures at par on 1 January 1987. These were
redeemable at a premium of 10% on 31 December 1997. A sinking fund account was
Created by the annual appropriation of profits. Investments were made to provide
Cash to redeem the debentures. All investment income must be reinvested, except for
The final year of redemption.
The following balances were extracted from the books at 1 January 1997:
12% Debentures
Sinking Fund
Sinking Fund Investment
Sinking Fund Cash

1,000,000
800,000
800,000
100,000

During 1997, the following transactions took place:

Jan 1
Investment income of $10,000 was received
Jan 30 Six months interest was paid on the debentures
July 1 Investment costing $400,000 was sold for $450,000 to provide funds for the
redemption of some debentures. The company redeemed $400,000
debentures at a discount of 5%
Dec 1 All remaining investments were sold for $600,000
Dec 31 The remaining debentures were redeemed at a premium of 10% and the
outstanding interest was paid.

30

Sinking Fund Cash

Jan 1
Bal b/f
100,000 July 1
Jan 1
Sinking Fund
10,000
July 1 Sinking Fund InvestDec 31
ment
450,000
Dec 1 Sinking Fund Investment
600,000

July 1

12% Debentures
Debenture Redempt.
Jan. 1
ion
400,000

Dec 31 Debenture Redemption

600,000
1,000,000

Debenture Redemption
(400000*0.95)

380,000

Debenture Redemption
(1600000*1.1)

660,000

Bal b/f

1,000,000

1,000,000

31

Sinking Fund
July 1 General Reserve
400,000 Jan 1
Jan 1
(par value)
Dec 31 Debenture Redemption 60,000 July 1
(discount)
July 1
Dec 31 General Reserve
620,000
Dec 1

Bal. B/f
800,000
Sinking Fund Cash
10,000
Sinking Fund Investment 50,000
(profit)
Debenture Redemption
20,000
( premium)
Sinking Fund Investment 200,000

1,080,000

1,080,000

Sinking Fund Investment

July 1 Bal b/f
July 1 Sinking Fund: profit on
sales (450000-400000)
Dec 1 Sinking fund: profit on
sales (660000-400000)

800000

July 1 Sinking fund cash

Dec 1 Sinking fund cash

450000
600000

50000

200000
11050000

11050000

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Debenture Redemption
July 1 Sinking fund cash
380000 July 1 12% Debenture
July 1 Sinking fund: profit
20000
400000
Dec 31 Sinking fund cash
660000 Dec 31 12% Debenture
Dec 31 Sinking fund: discount

400000
400000
600000
60000
660000

660000
Debenture interest
June 30 Bank
(1000000*12%*1/2)
Dec 31 Bank
(600000*12%*1/2)

60000 Dec 31 Profit and loss

96000

36000
96000

96000

33