PURCHASE OF DEBENTURES FOR IMMEDIATE CANCELLATION :

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

(a) Where no Sinking Fund exists

(1) On purchase and cancellation of debentures –

Debentures A/c                                                                                                 Dr.                           with the amount paid

                              To Bank

Notes: 1. If there is any difference between the nominal value of the debentures cancelled and the price paid for them, the same has to be treated as profit or loss on cancellation and should be credited or debited to Profit on Redemption of Debentures Account or Loss on Redemption of Debentures Account. Thus, the entry for this will be as follows:

In case of profit –

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

                              To Bank                                                                              with the price paid for them
To Profit on Redemption of Debentures A/c            with the profit, if any.

In case of loss –

Debentures A/c                                                                    Dr.                    with the nominal value of debentures cancelled
Loss on Redemption of Debentures A/c                        Dr.                    with the loss, if any
To Bank A/c                                                                       with the total

Such profit or loss, being of capital nature, should be transferred to Capital Reserve Account (if profit) or written off against the Profit and Loss Account or Capital Profit including Securities Premium Account (if loss). The entry for this will be as follows:

In case of profit –

Profit on Redemption of Debentures A/c                   Dr.                       with the profit on redemption

                                 To Capital Reserve A/c

In case of loss –

Profit and Loss A/c                                                               Dr.                       with the loss on redemption
Or, Capital Reserve A/c (if any)                                        Dr.
Or, Securities Premium A/c (if any)                                 Dr.
To Loss on Redemption of Debenture A/c

2. On transfer of profits which would otherwise be available for dividend to Debenture Redemption Reserve –

Profit and Loss Appropriation A/c                                    Dr.                      with the nominal value of
To Debenture Redemption Reserve A/c                               debentures cancelled

Note: As in this case, working capital of the company is adversely affected, it is desirable that an amount equal to the nominal value of the debenture cancelled should be transferred to the Debenture Redemption Reserve Account out of the profits of the company. This will help in maintaining the working capital of the company by not paying as dividend a part of the profit set aside.

(b) Where Sinking Fund Exists –

1. On Sale of Sinking Fund Investments –

Bank                                                                                           Dr.                     with the realisation value
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.

2. On purchase and cancellation of debentures –

Debentures A/c                                                                       Dr.                      with the amount paid

To Bank

3. Profit or loss on cancellation or redemption of debentures shall be transferred to Sinking Fund or Debenture
Redemption Fund Account. The accounting entries:

In case of profit:

Debentures A/c                                                                     Dr.               with the nominal value
To Bank with the price paid
To Profit on Redemption Debentures A/c                  with the amount of profit

 

Profit on Redemption of Debentures A/c                     Dr.                with the profit
To Sinking Fund A/c

In case of loss:

Debentures A/c                                                                               Dr.     with the nominal value
Loss on Cancellation or Redemption of Debentures A/c     Dr.      with the loss on cancellation/redemption
To Bank with the amount paid

 

Sinking Fund A/c                                                                            Dr.       with the amount of loss

To Loss on Cancellation or   Redemption of Debentures A/c

4. On transfer of the nominal value of the debentures cancelled to General Reserve Account from the Debenture Redemption Fund Account –

Debenture Redemption Fund A/c                                              Dr.       with the nominal value of the debentures
To General Reserve A/c                                                             cancelled