Question

Can a company purchase its own debentures, in the open market? Explain.

Answer 1

Yes, a company, if authorised by its Articles Association, can purchase its own debentures in the open market: The main purposes of such purchase may be as follows

(i) A Company may purchase its own debenture for immediate cancellation for reducing the debenture liability eapecially in case when the interest rate on its debenture is higher than the market rate of interest.

(ii) A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and thereby earn profit.

When a company purchase its own debenture,in the-open market it can happen in either of the two ways first, debentures may be purchased at premium for cancellation and debenture may be purchase at discount for cancellation. The following will be the accounting treatment in both the situation

(i) If Debentures are Purchased at Discount for Cancellation When the company purchase its own debentures at discount for cancellation then the following Journal entries are recorded.

\( \begin{array}{|c|l|c|l|c|}

\hline

\text{Date} & \text{Particulars} & \text{LF} & \text{Amt.(Dr)} & \text{Amt.(Cr)}\\\hline

& \text{Own Debentures A/c}~~~~~~~~~~~~~~~~~~~~~~~~~Dr & & & \\

& \text{To Bank A/c} & & &\\

& \text{(Beging own debentures purchased in} & & & \\

& \text{the open market)} & & & \\

& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\

& \text{Debenture A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & &\\

& \text{To Own Debentures A/c} & & & \\

& \text{To Profit on Redemption of Debentrue A/c} & & &\\

& \text{(Being own debentures cancelled)} & & & \\

& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\

& \text{Profit on Cancellation of Own} & & & \\

& \text{Debentures A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr & & & \\

& \text{To Capital Reserve A/c} & & & \\

& \text{(Being profit on cancellation of onw} & & & \\

& \text{debentures transferred to capital reserve} & & & \\

& \text{account)} & & & \\\hline

\end{array} \)

If Debentures are Purchased at Premium for Cancellation

(ii) \( \begin{array}{|c|l|c|l|c|}

\hline

\text{Date} & \text{Particulars} & \text{LF} & \text{Amt.(Dr)} & \text{Amt.(Cr)}\\\hline

& \text{Own Debentures A/c}~~~~~~~~~~~~~~~~~~~~~~~~~Dr & & & \\

& \text{To Bank A/c} & & &\\

& \text{(Beging own debentures purchased in} & & & \\

& \text{the open market)} & & & \\

& \underline{~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~} & & & \\

& \text{Debenture A/c}~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Dr. & & &\\

& \text{Loss on Redemption of Debenture A/c}~~Dr & & &\\

& \text{To Own Debentures A/c} & & & \\

& \text{(Being own debentures cancelled)} & & & \\\hline

\end{array} \)