PURCHASE OF DEBENTURES AS INVESTMENT (OWN DEBENTURES) :

The accounting entries in such a case will be as follows:

(a) Where no Sinking Fund Exists:

On purchase of debentures as investment –

Own Debentures A/c                                                                           Dr.
Or Investment in Own Debentures A/c                                          Dr.           with the amount paid for the debentures
To Bank

(b) Where Sinking Fund Exists:

On sale of investments –

Bank                                                                                                       Dr.             with the realised amount
To Debenture Redemption Fund Investment A/c

Note: If there is any profit or loss on sale of investments the same has to be transferred to Debenture Redemption Fund Account.

On purchase of debentures as investment –

Bank                                                                                                       Dr.              With the amount received
Own Debentures A/c                                                                          Dr.
Or Investment in Own Debentures A/c                                         Dr.              with the amount paid for the debentures
To Bank

Notes: (1) Own Debentures Account signifies investment and will be shown as an asset in the Balance Sheet unless such debentures are re-issued or cancelled in future.

(2) Until and unless, these debentures are re-issued or cancelled in future, the question of profit or loss on redemption of debentures will not arise.

Cancellation of Own Debentures

When own debentures are subsequently cancelled –

Bank                                                                                                  Dr.   With the amount received
Debentures A/c                                                                               Dr.   with the nominal value of the debentures cancelled
To Own Debentures A/c
OrTo Investment in Own Debentures A/c

Note: (1) If there is any difference between the nominal value of the debentures cancelled and the amount standing to the debit of Own Debentures Account, the same has to be treated as profit or loss on redemption of debentures and should be credited or debited to Profit on Redemption of Debentures Account or Loss on Redemption of Debentures Account. The entry for this will be as follows:

In case of profit –

Debentures A/c                                                                             Dr.                   nominal value of the debentures cancelled                    To Own Debentures A/c                                                                      book value of the own debentures cancelled                  To Profit on Redemption of Debentures A/c                                 with the difference, if any

In case of loss –

Debentures A/c                                                                               Dr.                nominal value of the debentures cancelled

Loss on Redemption of Debentures A/c                                   Dr.                with the difference, if any book value of the                                                                                                                                  own debentures

To Own Debenture A/c

(2) If Sinking Fund exists, the accounts of profit on redemption of debentures or loss on redemption of debentures should be transferred to debenture redemption fund account.
(3) If no Sinking Fund exists it is desirable that an amount equal to the nominal value of the debentures cancelled should be transferred to Debenture Redemption Reserve Account out of the profit of the company on cancellation.
(4) If Sinking Fund exists, on cancellation, an amount equal to the nominal value of the debentures cancelled should be transferred to General Reserve from the Debenture Redemption Fund Account.