Question

What entries for the redemption of debentures will be done when (a) debentures are redeemed by annual drawings out of profits; (b) debnetures are redeemed by drawing a lot of capital; and (c) debentures are redeemed by purchasing them in the open market when sinking fund for the redemption of debentures is not maintained - (i) when out of profit, and (ii) when out of capital?

Answer 1

$\text{Journal Entries}\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}\\ \text{(a)}& \text{Profit and Loss Appropriation A/c}& \text{Dr}& & & \\ & \text{To Debentures Redemption Reserve A/c}& & & & \\ & \text{(Profit transferred to debentures redemption}& & & & \\ & \text{reserve)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Debenture A/c}& \text{Dr}& & & \\ & \text{To Debenture Holders A/c}& & & & \\ & \text{(Amount due of debentures to debenture}& & & & \\ & \text{holders)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Debenture Holders A/c}& \text{Dr}& & & \\ & \text{To Bank A/c}& & & & \\ & \text{(Amount of debentures paid to debenture}& & & & \\ & \text{holders)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Debenture Redemption Reserve A/c}& \text{Dr}& & & \\ & \text{To General Reserve A/c}& & & & \\ & \text{(Amount of debentures redemption reserve}& & & & \\ & \text{transferred to general reserve)}& & & & \\ & \underset{–}{}& & & & \\ \text{(b)}& \text{Debenture A/c}& \text{Dr}& & & \\ & \text{To Debenture Holders A/c}& & & & \\ & \text{(Amount of debentures due to debenture}& & & & \\ & \text{holders)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Debenture Holder A/c}& \text{Dr}& & & \\ & \text{To Bank A/c}& & & & \\ & \text{(Amount of debentures paid to debenture}& & & & \\ & \text{holders)}& & & & \\ & \underset{–}{}& & & & \\ \text{(c) (i)}& \text{Profit and Loss Appropriation A/c}& \text{Dr}& & & \\ & \text{To Debenture Redemption Reserve A/c}& & & & \\ & \text{(Transfer of ptofit to debenture redemption}& & & & \\ & \text{reserve)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Own Debentures A/c}& \text{Dr}& & & \\ & \text{To Bank A/c}& & & & \\ & \text{(Own debentures purchased from open}& & & & \\ & \text{market)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Debentures A/c}& \text{Dr}& & & \\ & \text{To Own Debenture A/c}& & & & \\ & \text{(Own debentures cancelled)}& & & & \\ & \underset{–}{}& & & & \\ \text{(ii)}& \text{Own Debenture A/c}& \text{Dr}& & & \\ & \text{To Bank A/c}& & & & \\ & \text{(Own debentures purchased from open}& & & & \\ & \text{market)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Debenture A/c}& \text{Dr}& & & \\ & \text{To own Debenture A/c}& & & & \\ & \text{(Own debentures cancelled)}& & & & \end{array}$

Note:
Whenever profit are involved in redemption of debentures, the amount is transferred to debenture redemption reserve from profits.