REDEMPTION OF DEBENTURES OUT OF PROFIT :

The company withholds a part of divisible profits for redeeming the debentures. The amount of profit is reduced to the extent of the debentures to be redeemed and hence not available for distribution by way of dividends among the shareholders. The payment to debentureholders in such a case is out of profit earned in the course of the business and therefore it is termed as redemption out of profits. Thus the existing liquid resources are not affected by redemption in this method.

There are two options available to the company in regard:

(A) The amount of divisible profits withheld by the company may be retained in the business itself as a source of internal financing i.e. in the form of general reserve and no investment is made outside to provide cash for redemption. In such a case the following journal entries are passed.

(1) On debentures becoming due for payment

Debentures A/c                                                                                           Dr.           (with the nominal value)

Premium on Redemption of Debentures A/c                                      Dr.           (with the amount of premium, if any)

To Debentureholders A/c                                                                           (with the amount paid)

(2) On redemption

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

(3) On transfer of Profit to General Reserve

Debenture Redemption Reserve                                                          Dr.
Profit and Loss Appropriation A/c                                                        Dr.         (with the nominal value of debentures                                                                                                                                               redeemed)

               To General Reserve

(B) The amount of divisible profits withheld from distribution as dividend may be invested either in (i) readily marketable securities or (ii) taking out insurance policy to provide funds when required. In either case, the profit set aside will be accumulated in an account styled as Debenture Redemption Fund or Sinking Fund.

(a) Debenture Redemption Fund/Sinking Fund Method

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

First Year (At the end)

(1) On transfer of profits to Debenture Redemption Fund Account –

Profit and Loss A/c / Surplus A/c                                                   Dr.        with the annual amount set aside out of profit*

To Debenture Redemption Fund A/c

(2) On investment of the amount of the profit set aside in readily marketable securities –

Debenture Redemption Fund Investments A/c                       Dr.        with the amount invested

            To Bank

*Debenture Redemption Fund Investment Account will appear on the Assets side of the Balance Sheet while
Debenture Redemption Fund Account will appear on the Liabilities side of the Balance Sheet, under the head
“Reserves and Surplus”.

Second and subsequent years over the life of the Debentures excepting the last year (At the end) –

 (1) On receipt of interest on Debenture Redemption Fund Investment –

Bank                                                                                                  Dr.           with the amount of interest received
on investment

              To Interest on Debenture Redemption Fund Investments A/c

(2) On Transfer of the interest to Debenture Redemption Fund –

Interest on Debenture Redemption Fund Investments A/c  Dr.       with the amount of interest received on                                                                                                                                            investments

To Debenture Redemption Fund A/c

(3) On Transfer of Profits to Debenture Redemption Fund Account –

Profit and Loss Appropriation A/c                                               Dr.       with the annual amount of profit set aside
To Debenture Redemption Fund A/c

(4) On investment of annual profit and interest received on investment –

Debenture Redemption Fund Investments A/c                                       Dr.      with the total amount of profit set aside                                                                                                                                           plus interest received on investments

                                    To Bank

In the last year when the debentures become due for redemption (at the end) –

(1) On receipt of interest on Debenture Redemption Fund Investment –

Bank                                                                                                                  Dr.       with the amount of interest received on

                                                                                                                                           investment

                  To Interest on Debenture Redemption  Fund Investments A/c

(2) On transfer of the interest –

Interest on Debenture Redemption Fund Investments A/c                Dr.          with the amount of interest received

                              To Debenture Redemption Fund A/c                                          on investments

(3) On transfer of profits to Debenture Redemption Fund A/c –

Profits and Loss Appropriation A/c                                                          Dr.         with the amount of annual profit set
To Debenture Redemption Fund A/c                                      aside

(4) On realisation of Investments made so as to provide cash for the redemption –

Bank                                                                                                             Dr.        with the realised value of

                 To Debenture Redemption Fund Investments A/c                      investments

(5) If there is any profit or loss on sale of investments, the same has also to be transferred to Debenture Redemption Fund Account –

(a) In case of profit –

Debenture Redemption Fund Investments A/c                              Dr.           with the amount of profit
To Debenture Redemption Fund A/c

(b) In case of loss –

Debenture Redemption Fund A/c                                                      Dr.         with the amount of loss

                            To Debenture Redemption Fund Investments A/c

(6) On transfer of Debentures to Debenture holders Account for payment to be made –

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

(7) If debentures are redeemable at premium –

Premium on Redemption of Debentures A/c                              Dr.             with the amount of premium on
To Debentureholders A/c                                                             redemption

(8) On Payment –

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

(9) On transfer of Premium on Redemption of Debentures to Debenture Redemption Fund Account (In case Premium on Redemption of Debentures Account is not opened at the time of issue of debentures) –

Debenture Redemption Fund A/c                                                 Dr.          with the amount of premium
To Premium on Redemption of Debentures A/c

(10) On transfer of Loss of Issue of Debentures Account to Debenture Redemption Fund Account (In case the
loss on Issue of Debentures Account is not yet written off) –

Debenture Redemption Fund A/c                                                 Dr.
To Loss of Issue of Debentures A/c

Either entry (9) or entry (10) may be passed depending upon the circumstances.

(11) On transfer of Debenture Redemption Fund Account balance to General Reserve –

Debenture Redemption Fund A/c                                               Dr.                   with the balance left

To General Reserve A/c

Notes:

(1) No investment should be made in the last year for the simple reason that payment have to be made to the Debentureholders in the last year by realising the investments. Therefore, there is no logic behind making investment in the last year and then immediately realising the same.

(2) If the Debentures are redeemable at a premium, the total amount to be accumulated in Debenture Redemption Fund Account must include the amount of premium.

(3) This method assumes the availability of profits and sufficient cash investments.

(4) Sometimes, it may so happen that Sinking Fund may be non-cumulative. In such a case, the interest received on investments should not be credited to the Sinking Fund nor should it be invested. Instead, interest should be treated as interest earned as on general investment and credited to Profit and Loss Account.

(5) The balance in the Debenture Redemption Fund is transferred to General Reserve Account after the redemption of debentures.

(6) While transferring the balance of debenture redemption fund to general reserve, the profit on cancellation of debentures and profit on sale of investments transferred to debenture redemption fund account should be eliminated and the same should be transferred to capital reserve.

Sinking Fund to Replace an Asset and to Repay a Liability – The sinking fund is created to provide the cash on the known date for two specific purposes (a) to replace an asset and (b) to redeem debentures (liability).

Though in practice the sinking funds for redemption of a liability and that for replacement of an asset operate in a similar manner yet there are some differences as stated below:

(i) The annual instalment set aside for sinking fund for the replacement of an asset is really depreciation and is a charge against profit and therefore it is debited to profit and loss account. On the other hand, in case of sinking fund created for redemption of a liability, the annual instalment is an appropriation of profit and debited to profit and loss appropriation account since the purpose is to accumulate profits and not to distribute dividends until the liability is repaid.

(ii) At the end of the estimated useful life of the assets, the sinking fund investments are sold to replace the old asset. The ultimate balance in sinking fund account then is utilised to write off the book value of the old asset requiring replacement. The sinking fund is therefore extinguished. In the other case, the sale proceeds of the investments would be utilised to discharge the liability involving the closure of liability account and sinking fund investment account. The balance in the sinking fund account is transferred to general reserve. It is in the nature of free reserves and which can be used to pay dividends at the discretion of the company.

(b) Insurance Policy Method

Under this method also, profits are set aside and credited to Debenture Redemption Fund Account in the same manner as it is done in case of Sinking Fund Method. But instead of investing the amount of profit set aside in readily convertible securities an Insurance Policy is taken out for the required sum and an amount equal to the profit set aside is paid as premium. Thus, at th  maturity of the policy, the required cash would be available for carrying out redemption of debentures. This method differs from the Sinking Fund Method in respect of interest on investment. Unlike Sinking Fund Method,interest will not be received every year but will accrue at a fixed rate. The total amount of premium will always be less than the amount of policy. Thus, the difference between the policy amount and the total amount  of premium paid on the policy is the total amount of interest that accrues on the premiums paid. The main advantage of this method is that the policy is not subscribed to any fluctuation in prices unlike securities in the Sinking Fund Method and as such the exact sum insured will be available at maturity. However, the following disadvantages may be accounted for:

(i) the annual rate of interest is lower than that obtainable from investments; and

(ii) if the policy is cancelled on account of non-payment of premium, the surrender value will be very much less than the amount which has been paid by way of annual premiums.

The accounting entries will be as follows:

All the years till the maturity of the policy (including the last year) –

(1) On payment of premium at the beginning of the year –

Debenture Redemption Fund Policy A/c                          Dr.              with the amount of annual premium

To Bank

(2) On transfer of profit to Debenture Redemption Fund Account at the end of the year –

Profit and Loss Appropriation A/c                                    Dr.              with the amount of profit set aside
To Debenture Redemption Fund A/c

In the last year on maturity of the policy

In addition to the above two entries, the following entries are also required on maturity of the policy at the end of the last year.

(3) On realisation of the policy amount from the Insurance Company –

Bank                                                                                        Dr.               with the amount of the policy
To Debenture Redemption Fund Policy A/c

(4) On transfer of accrued interest (i.e. the difference between the policy amount and the total premium paid) to
Debenture Redemption Fund Account –

Debenture Redemption Fund Policy A/c                      Dr                 with the difference between the policy amount                                To Debenture Redemption Fund A/c                         and the total premium paid

(5) On transfer of Debentures Account to Debentureholders’ Account for payment to be made –

Debentures A/c                                                                  Dr.                 with the nominal value of the debentures
To Debenture holders

(6) If debentures are redeemable at a premium –

Premium on Redemption of Debentures A/c             Dr.                with the amount of premium of redemption
To Debentureholders A/c

(7) On payment –

Debentureholders                                                           Dr.                with the amount paid
To Bank

(8) On transfer of Premium on Redemption of Debentures to Debenture Redemption Fund A/c (In case Premium
on Redemption of Debenture Account is not opened at the time of issue of debentures) –

Debenture Redemption Fund A/c                                Dr.                 with the amount of premium on redemption
To Premium on Redemption of Debentures A/c

(9) On transfer of Loss of Issue of Debentures Account to Debenture Redemption Fund Account (In case Loss on Issue of Debentures Account is not yet written off) –

Debenture Redemption Fund A/c                               Dr.                 with the amount
To Loss of Issue of Debentures A/c

Either entry (8) or entry (9) may be passed depending upon the circumstances.

(10) On transfer of Debenture Redemption Fund Account balance on General Reserve –

Debenture Redemption Fund A/c                             Dr.                       with the balance left

                          To General Reserve A/c

Note: In some cases, the company may decide to take credit every year. In such a case, the entry for interest will
be –

Debenture Redemption Fund Policy A/c                  Dr.                  with the interest

                       To Debenture Redemption Fund A/c

Illustration 12 (When debentures are redeemed out of profits)

Strong Ltd. issued 10,000, 14% debentures of Rs.100 each on 1st April, 2009 at a discount of 5% repayable at a premium of 10% after 5 years out of the profits of the company. On 1st April, 2014, balance in the Debenture Redemption Reserve Account stood at Rs.3,40,000.

You are required to give journal entries in the books of the company both at the time of issue and redemption of
debentures.

Solution:

Journal Entries

Date	Particulars	Dr. (Rs.)	Cr. (Rs.)
2009 April 1	Bank                                                                                             Dr.	9,50,000
	Loss on Issue of Debentures A/c                                                 Dr.	1,50,000
	To 14% Debentures A/c		1,50,000
	To Premium on Redemption of Debentures A/c] (Allotment of 10,000, 14% debentures of ` 100 each issued at a discount of 5% and redeemable at a premium of 10% as per the Board resolution dated……)		1,00,000
2014 April 1	14% Debentures A/c                                                                   Dr.	10,00,000
	Premium on Red. of Debentures A/c                                           Dr	1,00,000
	To Debenture holders A/c (Being the amount due on redemption)		1,00,000
“	Profit and Loss Appropriation A/c                                               Dr	1,60,000
	To Debenture Redemption Reserve A/c (Being the transfer of profit to debenture redemption reserve account as required under SEBI guidelines)		1,60,000
“	Debenture holders                                                                       Dr.	11,00,000
	To Bank (Being the amount paid to debentureholders)		11,00,000
“	Profit and Loss Appropriation A/c                                                Dr.	5,00,000
	To General Reserve (Being the transfer of profit to the extent of 50% of the face value of debentures redeemed)		5,00,000

“	Debenture Redemption Reserve A/c                                       Dr.	5,00,000
	To General Reserve A/c (Being the transfer of balance in debenture redemption reserve account to General reserves on redemption of debentures).		5,00,000

 

Note: Loss on Issue of Debentures Account has to be written off by the company over the period of 5 years preferably at the rate of ( 1,50,000 x 1/5) = ` 30,000 per year.

Illustration 13 (When Sinking Fund is created to redeem debentures at the end of the specified period)

Steady Ltd. issued 2,000, 9% Debentures of ` 100 each at par on 1st April 2009 repayable at the end of 5 years at a premium of 6%. It was decided to institute a Sinking Fund for the purpose, the investments being expected to yield 8% p.a. Sinking Fund tables show that Re. 1 per annum at 8% compound interest amounts to ` 5.867 in 5 years. Investments were made in multiples of rupees ten only.

On 31st March, 2014 the investments realised ` 1,75,000 and the debentures were redeemed. The bank balance as on that date was ` 54,800.

You are required to show the journal entries relating to the creation of Sinking Fund and to prepare the relevant ledger accounts in the books of the company. Ignore debenture interest.

Solution:

Journal Entries

Date	Particulars	Dr. (Rs.)	Cr. (Rs.)
2009 April 1	Bank                                                                                                        Dr.	2,00,000
	Loss on Issue of Debentures                                                       Dr.	12,000
	To 9% Debentures A/c To Premium on Redemption of Debentures A/c (Allotment of 2,000 9% Debentures of ` 100 each issued at par redeemable at a premium of 6%)		2,00,000 12,000
2010 Mar. 31	Profit and Loss Appropriation A/c                                                Dr.	36,134
	To Debenture Redemption Fund A/c (Transfer of the amount out of Profit to Debenture Redemption Fund Account to provide for the redemption of debentures)		36,134
“	Debenture Redemption Fund Investment A/c                              Dr	36,130
	To Bank (Amount of profit set aside invested in outside securities in multiples of ` 10)		36,130
2011 Mar. 31	Bank                                                                                             Dr.	2,890
	To Interest on Debenture Redemption Fund Investment A/c (Receipt of interest on investments @ 8% p.a.)		2,890
“	Interest on Debenture Redemption Fund Investment A/c           Dr.	2,890
	To Debenture Redemption Fund A/c (Transfer of Interest to Debenture Redemption Fund Account)		2,890
“	Profit and Loss Appropriation A/c                                                Dr.	36,134
	To Debenture Redemption Fund A/c (Transfer of the amount out of the profit to Debenture Redemption Fund Account to provide for the redemption of debentures)		36,134
“	Debenture Redemption Fund Investment A/c                             Dr.	39,020
	To Bank (Amount of profit set aside together with the interest received on investments invested in outside securities in multiplies of ` 10)		39,020

2012 Mar. 31	Bank                                                                                            Dr.	6,012
	To Interest on Debenture Redemption Fund Investment A/c (Receipt of Interest on Investment @ 8% p.a.)		6,012
“	Interest on Debenture Redemption Fund Investment A/c          Dr.	6,012
	To Debenture Redemption Fund A/c (Transfer of Interest to Debenture Redemption Fund Account)		6,012

“	Profit and Loss Appropriation A/c                                               Dr.	36,134
	To Debenture Redemption Fund A/c   (Transfer of the amount out of profit to Debenture Redemption Fund Account to provide for the redemption of debentures)		36,134
“	Debenture Redemption Fund Investment A/c                            Dr.	42,150
	To Bank (Amount of profit set aside together with the interest received on investments invested in outside securities in multiples of ` 10)		42,150
2013 Mar. 31	Bank                                                                                           Dr.	9,384
	To Interest on Debenture Redemption Fund Investment A/c   (Receipt of interest on investments @ 8% p.a.)		9,384
“	Interest on Debenture Redemption Fund Investment A/c         Dr                                         .	9,384
	To Debenture Redemption Fund A/c   (Transfer of interest to Debenture Redemption Fund Account)		9,384

“	Profit and Loss Appropriation A/c                                                Dr.	36,134
	To Debenture Redemption Fund A/c (Transfer of the amount out of profit to Debenture Redemption Fund Account to provide for the redemption of debentures)		36,134
“	Debenture Redemption Fund   Investment A/c                           Dr.	45,520
	To Bank (Amount of profit set aside together with the interest received on investments invested in outside securities in multiples of ` 10)		45,520
2012 Mar. 31	Bank                                                                                             Dr.	13,025
	To Interest on Debenture  Redemption Fund Investment A/c (Receipt of interest on Investment @ 8% p.a.)		13,025
“	Interest on Debenture Redemption Fund Investment A/c            Dr.	13,025
	To Debenture Redemption  Fund A/c (Transfer of interest to Debenture Redemption Fund Account)		13,025
“	Profit and Loss Appropriation A/c                                                Dr.	36,153
	To Debenture Redemption  Fund A/c (Transfer of the amount out of profit to Debenture Redemption Fund Account to provide for the redemption of debentures)		36,153
“	Bank                                                                                             Dr.	1,75,000
	To Debenture Redemption Fund  Investment A/c (Realisation of investments to pay off the debentures)		1,75,000

 

Ledger Accounts

9% Debentures Account

 

Dr.                                                                                                                                                                                                           Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2010	To   Balance c/d	2,00,000	1.4.2009	By Bank	2,00,000
31.3.2011	To  Balance c/d	2,00,000	1.4.2010	By Balance b/d	2,00,000
31.3.2012	To  Balance c/d	2,00,000	1.4.2011	By Balance b/d	2,00,000
31.3.2013	To   Balance c/d	2,00,000	1.4.2012	By  Balance b/d	2,00,000
31.3.2014	To  Debenture holder’s A/c	2,00,000	1.4.2013	By Balance b/d	2,00,000

 

Debentureholders Account

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2014	To Bank	2,12,000	31.3.2014	By 9% Debentures A/c ”         Premium on Redemption of Debentures A/c	2,00,000 12,000
		2,12,000			2,12,000

 

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2010	To                                  Balance c/d	36,134	31.3.2010	By                          Profit and Loss
				Appropriation A/c	36.134
31.3.2011	To                                  Balance c/d	75,158	1.4.2010	”     Balance b/d	36,134
			31.3.2011	By      Interest on Deb.
				Redemption Fund
				Investment A/c	2,890
			31.3.2011	By                          Profit and Loss	36.134
				Appropriation A/c
		75,158			75,158
31.3.2012	To                          Balance c/d	1,17,304	1.4.2011	By                           Balance b/d	75,158
			31.3.2012	By      Interest on Deb.
				Redemption Fund
				Investment A/c	6,012
			„	”        Profit and Loss
				Appropriation A/c	36.134
		1,17,304			1,17,304
31.3.2013	To                          Balance c/d	1,62,822	1.4.2012	By                           Balance b/d	1,17,304
			31.3.2013	”     Interest on Deb.
				Redemption Fund
				Investment A/c	9,384
			„	”        Profit and Loss
				Appropriation A/c	36.134
		1,62,822			1,62,822
31.3.2013	To     Loss on Issue of Debentures A/c	12,000	1.4.2013	By                           Balance b/d	1,62,822
			31.3.2014	”    Interest on Debenture
“	To      General Reserve A/c	2,00,000		Redemption Fund
“	To    Capital Reserve A/c (Profit on sale of Investment treated as capital profit)	12,180		Investment A/c	13,025
		2,24,180		”    Profit and Loss Appropriation A/c     Debenture Redemption Fund Investment A/c (Profit on sale of investment )	36,153 12,180 2,24,180

 

Date	Particulars		Date	Particulars
31.3.2010	To                     Bank	36.130	31.3.2010	By                            Balance c/d	36.130
1.4.2010	To                         Balance b/d	36,130	31.3.2011	By                            Balance c/d	75,150
31.3.2011	”     Bank	39.020
		75.150			75.150
1.4.2011	To                         Balance b/d	75,150	31.3.2012	By                            Balance c/d	1,17,300
31.3.2012	”     Bank	42.150
		1 17 300			1 17 300
1.4.2012	To                         Balance b/d	1,17,300	31.3.2013	By                            Balance c/d	1,62,820
31.3.2013	”     Bank	45.520
		1 62 820			1 62 820
1.4.2013	To                         Balance b/d	1,62,820	31.3.2014	By Bank	1,75,000
31.3.2014	”     Debenture	12,180
	Redemption Fund
	A/c (Profit on sale)
		1,75,000			1,75,000

 

Interest on Debenture Redemption Fund Investment Account

 

Date	Particulars		Date	Particulars
31.3.2011	To                                 Debenture Redemption	2,890	31.3.2011	By Bank A/c	2,890
	Fund A/c
31.3.2012	To                                 Debenture Redemption	6,012	31.3.2012	By Bank A/c	6,012
	Fund A/c
31.3.2013	To                                 Debenture Redemption	9,384	31.3.2013	By Bank A/c	9,384
	Fund A/c
31.3.2014	To                                 Debenture Redemption	13,025	31.3.2014	By Bank A/c	13,025
	Fund A/c

 

Working Notes:
(1) Sum required for the redemption of debentures has been arrived at as follows:
Rs.
Nominal value of 2,000 9% debentures @ ` 100                                                                                                    2,00,000
Add: Premium payable on redemption @ 6%                                                                                                           12,000
Sum required after 5 years                                                                                                                                          2,12,000

(2) Amount of profit set aside every year has been arrived at as follows:

Sinking fund tables show that Rs.1 per annum at 8% compound interest amounts toRs.867 in 5 years.

Since Rs.2,12,000 is required, the amount appropriated per annum will be:

2,12,000 ÷ 5.867 =Rs.36,134 (approx.).

(3) Profit on sale of investment is a capital profit and hence transferred to Capital Reserve Account.

(4) The payment of debenture interest is ignored.

Illustration 14 (When sinking Fund is created and debentures are redeemed partly at any time within the specified period).

S.S. Ltd., had Rs.1,50,000, 12% debentures outstanding on 1st April, 2014. The Debenture Redemption Fund Account of the Company stood at Rs.78,000 on the same date represented by investment in securities ofRs.100 each. The directors of the company decided to sell ` 50,000 worth of securities at ` 102 and to redeem Rs.50,000 debentures at a premium of 5%.

You are required to show the journal entries in the books of the company relating to the sale of securities and the redemption of debentures.

Solution:

Journal Entries

Date	Particulars	Dr. (Rs)	Cr.(Rs)
2014
April 1	Bank                                                                                       Dr.	51,000
	To Debenture Redemption Fund		51,000
	Investment A/c
	(Realisation of investments in securities of
“	! 100 each at ! 102 each to pay off the debentures) Debenture Redemption Fund Investment A/c                   Dr.	1,000
	To Debenture Redemption Fund A/c		1,000
	(Transfer of profit on sale of investments to
“	Debenture Redemption Fund Account) 12% Debentures A/c                                                             Dr.	50,000
	Premium on Redemption of                                               Dr.	2,500
	Debentures A/c
	To Debentureholders A/c		52,500

”

	(Amount due on redemption at a premium of 5%) Debentureholders A/c                                                           Dr.	Lesson 2          Debentures 52,500	113
	To Bank		52,500
	(Payment made of amount due)
“	Debenture Redemption Fund A/c                                         Dr.	2,500
	To Premium on Redemption of		2,500
	Debentures A/c
	(Transfer of Premium on Redemption of
	Debentures to Debenture Redemption Fund A/c)
“	Debenture Redemption Fund A/c                                         Dr.	50,000
	To General Reserve A/c		50,000
	(Transfer of the nominal value of debentures redeemed to General Reserve A/c)
“	Debenture Redemption Fund A/c                                         Dr.	1,000
	To Capital Reserve A/c		1,000
	(Profit on sale of investment transferred to
	Capital Reserve)

 

Notes:

(1) It has been assumed that the provision has been made for the premium on redemption. Hence, it has been
debited to Debenture Redemption Fund Account.

(2) After debentures are redeemed, an amount equal to the nominal value of the debentures redeemed has
been transferred to General Reserve from the Debenture Redemption Fund Account.

Illustration 15 (When Insurance Policy is taken out to provide cash for redemption of debentures).

Go Go Ltd. issued 500, 12% Debentures of ` 100 each at par on 1st April, 2011, repayable at par after 3 years
on 31st March, 2014. The directors decided to take out an insurance policy to provide necessary cash for the
redemption of the debentures. The annual premium for the policy, payable on 1st April every year was ` 15,705

You are required to show the journal entries and to prepare the relevant ledger accounts in the books of the
company relating to the issue and redemption of debentures.

Solution:

Journal Entries

Date	Particulars	Dr. (7)	Cr. (( )
2011
April 1	Bank                                                                                                  Dr.	50,000
	To 12% Debentures A/c		50,000
	(Allotment of 500 12% Debenture of ! 100 each as per Board’s resolution dated….)

114 EP-CA&AP it	Debenture Redemption Fund Policy A/c                                     Dr.	15,705
	To Bank		15,705
	(Payment of annual premium for the policy taken out to provide cash for redemption of debentures)
2012
Mar. 31	Profit and Loss Appropriation A/c                                                Dr.	15,705
	To Debenture Redemption Fund A/c		15,705
	(Transfer of profit to Debenture Redemption
	Fund Account)
April 1	Debenture Redemption Fund Policy A/c                                     Dr.	15,705
	To Bank		15,705
	(Payment of annual premium for the policy taken out to provide cash for redemption of debentures)
2013
Mar. 31	Profit and Loss Appropriation A/c                                                Dr.	15,705
	To Debenture Redemption Fund A/c		15,705
	(Transfer of profit to Debenture Redemption
	Fund Account)
April 1	Debenture Redemption Fund Policy A/c                                     Dr.	15,705
	To Bank		15,705
	(Payment of annual premium for the policy taken out to provide cash for redemption of debentures)
2014
Mar. 31	Profit and Loss Appropriation A/c                                                Dr.	15,705
	To Debenture Redemption Fund A/c		15,705
	(Transfer of profit to Debenture Redemption
“	Fund Account) Bank                                                                                                  Dr.	50,000
	To Debenture Redemption Fund Policy A/c		50,000
“	(Receipt of policy amount on maturity) Debenture Redemption Fund Policy A/c                                     Dr.	2,885
	To Debenture Redemption Fund A/c		2,885
	(Transfer of accumulated interest on the policy to Debenture Redemption Fund A/c)

“	12% Debentures A/c                                                                        Dr.	Lesson 2               Debentures 50,000	115
	To Debentureholders A/c		50,000
	(Amount due on redemption)
“	Debentureholders A/c                                                                     Dr.	50,000
	To Bank		50,000
	(Payment made for the amount due)
“	Debenture Redemption Fund A/c                                                 Dr.	50,000
	To General Reserve A/c		50,000
	(Transfer of the balance of Debenture
	Redemption Fund A/c to General Reserve)

Ledger Accounts

12% Debentures Account
Dr.                                                                                                                                                                                                                                                                                                                                                                                                                          Cr.

 

Date	Particulars		Date	Particulars
31.3.2010	To                          Balance c/d	2,00,000	1.4.2009	By Bank	2,00,000
31.3.2012	To                          Balance c/d	50,000	1.4.2011	By Bank	50,000
31.3.2013	To                          Balance c/d	50,000	1.4.2012	By                           Balance b/d	50,000
31.3.2014	To                                Debentureholders A/c	50,000	1.4.2013	By                           Balance b/d	50,000

 

Debenture Redemption Fund Policy Account

 

Date	Particulars		Date	Particulars
1.4.2011	To                     Bank	15.705	31.3.2012	By                            Balance c/d	15.705
1.4.2012	To                          Balance b/d	15,705	31.3.2013	By                            Balance c/d	31,410
	”     Bank	15.705
		31.410			31.410
1.4.2013	To                          Balance b/d	31,410	31.3.2014	By Bank	50,000
	”     Bank	15,705
31.3.2014	”    Debenture Redemption	2,885
	Fund A/c
		50,000			50,000

Debenture Redemption Fund Account

Date	Particulars		Date	Particulars
31.3.2012	To                          Balance c/d	15,705	31.3.2012	By                          Profit and Loss	15.705
				Appropriation A/c
31.3.2013	To                          Balance c/d	31,410	1.4.2012	By                           Balance b/d	15,705
			31.3.2013	”        Profit and Loss	15,705
				Appropriation A/c
		31.410			31.410
31.3.2014	To                  General Reserve A/c	50,000	1.4.2013	By                           Balance b/d	31,410
			31.3.2014	”        Profit and Loss	15,705
				Appropriation A/c
			31.3.2014	”    Debenture Redemption	2,885
				Fund Policy A/c
		50,000			50,000