What is Redemption of Debentures?
Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem the debentures before the expiry of the fixed period either by instalments or by purchasing them in the open market if authorised by its articles of Association and the terms of issue.
Redemption of Debentures In Installments by Drawing Lots:
Under this method, instead of redeeming its debentures in a single lot(redemption in lump sum), a company redeems the debentures in annual instalments. For this, the company selects the debentures for redemption on a random basis and then redeems them accordingly. This process is known as the Redemption of Debentures in instalments by draw of lots. These debentures are redeemed either at par or at premium. However, as per SEBI rules, the company has to transfer the profits to debenture redemption reserve equivalent to 25% of debentures issued.
Illustration 1:
Sukant Ltd. issued 12% Debentures of ₹1,80,000 payable in three annual instalments at par beginning from 31st March 2020. Pass the necessary journal entries if debentures are to be redeemed out of profit.
Solution:
Illustration 2:
On 1st April 2020, Sayeba Ltd. issued ₹1,00,000 15% Debentures of ₹100 each redeemable at a premium of 10% at the end of 2 years beginning from 31st March 2020. The company had in its Debenture Redemption Reserve Account a balance of ₹30,000. Pass the necessary journal entries both at the time of Issue and Redemption of Debentures without providing for the Interest and loss on issued Debentures. Investment, as required by law, was made in a fixed deposit of the bank.
Solution:
Note: DRR should be created of the 100% nominal value of the debentures to be redeemed because there is an existing DRR of more than 25% of the nominal value of the debentures to be redeemed.