REDEMPTION OUT OF SALE PROCEEDS OF ASSETS OF THE COMPANY :
When debentures are redeemed out of the sale proceeds of assets of the company, the accounting treatment is
as follows:
(i) On sale of assets
Bank Dr. (with sale proceeds)
To Respective Assets A/c
The profit or loss on sale of the asset will be transferred to profit and loss account.
The entries for redemption of debenture will be the same as discussed before.
Illustration 16
(When Debentures are redeemed out of the proceeds of fresh issue of shares or debentures)
The following is the Balance Sheet of Good Luck Ltd. as at 1st April, 2014
The following is the Balance Sheet of Good Luck Ltd. as at 1st April, 2014
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders’ funds | 5,00,000 | |
| (a) Share capital 1 | 50,000 | |
| (b) Reserves and Surplus: 2 | ||
| 2. Non-current liability | ||
| Long term borrowings 3 | 1,00,000 | |
| 3. Current liabilities | ||
| Trade payables | 1,50,000 | |
| TOTAL | 8,00,000 | |
| II. ASSETS | ||
| 1. Non-current assets | ||
| (a) Fixed Assets: | ||
| (i) Tangible fixed assets 4 | ||
| 2. Current Assets | ||
| Inventories | 1,70,000 | |
| Trade receivables | 2,00,000 | |
| Cash and cash equivalents | 20,000 | 3,90,000 |
| TOTAL | 8,00,000 | |
| Notes | ||
| 1. Share capital | ||
| Authorised Capital | ||
| 1,00,000 Equity Shares of ` 10 each | 10,00,000 | |
| Issued Subscribed and paid up capital | ||
| 50,000 Equity shares of ` 10 each fully paid-up | 5, 00,000 | |
| 2. Reserve and surplus | ||
| Profit & Loss A/c | 50,000 | |
| 3. Long term borrowings | ||
| 1,000 12% Debentures of ` 100 each fully paid-up | 1,00,000 | |
| 4. Tangible Fixed assets | ||
| Land and Building | 2,00,000 | |
| Plant and Machinery | 2,00,000 | |
| Furniture and Fixtures | 10,000 | |
| 4,10,000 |
The Debenture Trust Deed provides that the company may redeem the debentures at a premium of 5% at any time before the maturity. In order to exercise this option, the directors decided to issue 10,000 equity shares of 10 each at 11 on this day and to redeem the debentures. All the shares were duly subscribed and the debentures were redeemed.
Show the journal entries in the books of the company. Also prepare the Balance Sheet after the redemption of debentures.
Solution:
Journal Entries
| Date | Particulars | Dr.(Rs.) | Cr.(Rs.) | ||||
| 2014
April 1 |
Bank Dr.
To Equity Share Capital A/c To Securities Premium A/c (Allotment of 10,000 equity shares of ` 10 each issued at a premium of ` 1/- per share as per Board’s resolution dated….) |
1,10,000 |
|
||||
|
1,00,000 |
|||||||
|
10,000 |
|||||||
| “ |
(Amount due on redemption of debentures at premium of 5%) |
1,00,000 |
|||||
|
5,000 |
|||||||
|
1,05,000 |
|||||||
| “ |
|
1,05,000 |
|||||
|
1,05,000 |
|||||||
| “ |
|
5,000 |
|||||
|
5,000 |
|||||||
Balance Sheet of Good Luck Ltd. as on 1st April, 2014
| I. EQUITY AND LIABILITIES | ||
| 1. Shareholders’ funds | ||
| (a) Share capital 1 | 6,00,000 | |
| (b) Reserves and Surplus: 2 | 55,000 | |
| 2. Current liabilities | ||
| Trade payables | 1,50,000 | |
| TOTAL | 8,05,000 | |
| II. ASSETS | ||
| 1. Non-current assets | ||
| (a) Fixed Assets: | ||
| (i) Tangible fixed assets 3 | 4,10,000 | |
| 2. Current Assets | ||
| Inventories | 1,70,000 | |
| Trade receivables | 2,00,000 | |
| Cash and cash equivalents | 25,000 | 3,95,000 |
| TOTAL | 8,05,000 | |
| 1. Share capital | ||
| Authorised Capital | ||
| 1,00,000 Equity Shares of ` 10 each | 10,00,000 | |
| Issued Subscribed and paid up capital | ||
| 60,000 Equity shares of ` 10 each fully paid-up | 6, 00,000 | |
| 2. Reserve and surplus | ||
| Profit & Loss A/c | 50,000 | |
| Securities premium | 5,000 | 55,000 |
| 3. Tangible Fixed assets | ||
| Land and Building | 2,00,000 | |
| Plant and Machinery | 2,00,000 | |
| Furniture and Fixtures | 10,000 | 4,10,000 |
Notes:
(1) In this case, additional equity share capital raised for the purpose of redemption of debentures replaces the debentures. As such transfer to General Reserve out of profits of the company is not required.
(2) Premium on redemption of debentures has been written off against the Securities Premium Account.