INTEREST ON OWN DEBENTURES :

The purchase of its own debentures by a company involves the question of adjustment of interest payable on these debentures. As soon as the company purchases its own debentures, it saves the interest which would have been payable on them. When the company purchases its own debentures for immediate cancellation, outstanding debentures are reduced by the amount cancelled and hence Debenture Interest Account is debited in future only with the net amount of interest payable on the outstanding debentures. But where debentures are purchased as investment, the total debentures are deemed to be outstanding. Some debentures are held by the
company itself as its own investment, the interest on these own debentures will be retained by the company and the amount of interest on debentures held by the outsiders will be actually paid by the company. The accounting entries in such a case will be as follows:

(a) Where no Sinking Fund exists:

(1) On interest becoming due on debentures –

Debenture Interest A/c                                  Dr.            with the total amount of interest on all the debentures

                To Debentureholders A/c                                with the amount of interest payable   on debentures held by                                                                                                      outsiders

              To Interest on Own Debentures A/c                with the amount of interest on debentures held by the                                                                                                               company
(2) On payment of interest on debentures –

Debentureholders A/c                                      Dr.            with the amount of interest paid to outsiders
To Bank

(3) On transfer of Debenture Interest to Profit and Loss A/c

  Profit and Loss A/c                                         Dr.              with the total interest on all the  debentures
To Debenture Interest A/c

(4) On transfer of Interest on Own Debentures to Profit and Loss A/c

Interest on Own Debentures A/c                   Dr.                  with the amount of interest on debentures held by the                                                                                                                company
To Profit and Loss A/c

Note: As the adjustment of interest on debentures head as investments by the company involves debiting and crediting the Profit and Loss Account with the same amount, interest on such debentures can be omitted altogether. Thus, alternatively, the following entries can be passed:

(1) On interest becoming due on debentures held by outsiders –

Debenture Interest A/c                                    Dr.                   with the net amount of interest
To Debentureholders A/c                           payable on debentures held by outsiders

(2) On payment of interest to debentureholders –

Debentureholders A/c                                      Dr.                  with the net amount of interest
To Bank                                                            payable on debentures held by outsiders

(3) On transfer of Debenture Interest to Profit and Loss A/c

Profit and Loss A/c                                            Dr.                  with the net amount of interest
To Debenture Interest A/c                         payable on debentures held by outsiders

(b) Where Sinking Fund exists: Where the debentures are purchased as an investment against the Sinking Fund, the interest on such debentures is credited to the Sinking Fund Account as if the debentures are outside securities. The accounting entries will be as follows:

(1) On interest becoming due on debentures

Debenture Interest A/c                                    Dr.                  with the total amount of interest payable on all the                                                                                                                     debentures

To Debenture Redemption Fund A/c                with the amount of interest payable on debentures held                                                                                                           by the company

To Debentureholders A/c                                     with the amount of interest payable on debentures held                                                                                                            by outsiders

(2) On payment of interest to debentureholders –

 Debentureholders A/c                                          Dr.              with the amount paid
To Bank

(3) On transfer of interest to Profit and Loss A/c –

Profit and Loss A/c                                                 Dr.              with the total interest payable
To Debenture Interest A/c

Note: While making payment of interest to debentureholders income-tax has to be deducted at source and deposited with the Government.