Redemption of Debentures

CBSE Test Paper 01
Redemption of Debentures

It is not necessary for All India Financial Institutions regulated by RBI and Banking Companies to invest amount in
1. Debenture Redemption Investment (DRI)
2. Debenture Redemption Reserve (DRR)
3. General Reserve
4. Profit
According to the guidelines issued by the Securities and Exchange Board of India (SEBI) what percentage of the number of debentures must be transferred to Debentures Redemption Reserve before the commencement of redemption of debentures, in case of convertible debentures?
1. Zero
2. 25%
3. 100%
4. 50%
Debentures can be redeemed:
1. By existing resources
2. By all of these
3. By Accumulated profits
4. By issue of new shares
Arpit Ltd. is to redeem its debentures of nominal (face) value ₹ 2,50,000 each on 30th June 2018, 30th September,2018,31 st December 2018 and 31 st March 2019. The amount to be invested in Debenture Redemption Investment on or before 30th April 2019 should be
1. ₹ 37,500
2. ₹ 10,00,000
3. ₹ 1,50,000
4. ₹ 2,50,000
Star Ltd. has 10,000,9% Debentures of ₹100 each due for redemption at a premium of 5%. It already has a balance of ₹1,50,000 in Debentures Redemption Reserve. How much amount Star Ltd. is required to transfer to Debentures Redemption Reserve?
1. ₹ 2,50,000
2. ₹ 10,50,000
3. ₹ 1,00,000
4. ₹ 10,00,000
Fill in the blanks:
The amount ________ to DRR can be utilised for the purpose of redemption of debentures.
Give two sources of finance for the Redemption of Debentures.
State the meaning of Non-Convertible Debentures.
On January 1st, 2004, S Ltd issued 1,000 10% debentures of Rs. 500 each at par redeemable after 7 years. However the company gave an option to debenture holder to get debentures converted into equity shares of Rs. 100 each at a premium of Rs. 25 per share any time after the expiry of one year. Arvind, the holder of 200 debentures, informed on Jan, 2006 that he wanted to excise the option of conversion of debentures into equity shares.
Pass necessary Journal entries to record the issue of debentures on Jan, 2004 and conversion of debentures on Jan, 2006.
Bank of India Ltd. has outstanding 1,00,000; 10% Debentures of ₹10 each issued in 2015 due for redemption on 30th June 2019. How much amount of Debentures Redemption Reserve should be created before the redemption of debentures begins and also how much amount should it invest in specified securities?
Pass Journal entries at the time of redemption of debentures.
F Ltd issued Rs. 1,00,000, 15% debentures of Rs. 100 each at a premium of 5%, redeemable at a premium of 10% at the end of 4 years. The board of directors decided to transfer the minimum required amount to debenture redemption reserve account at the time of redemption. Pass journal entries at the time of redemption of debentures.
Maharana Ltd main business is manufacturing of tyres. The company is very particular about the observation of the provisions of the Companies Act and SEBI guidelines. On 1st April, 2010 the company issued Rs. 18,00,000, 8% debentures of Rs.100 each. The debentures were redeemable at a premium of 5%. On 31st March, 2015, all the debentures were redeemed. Since, the manufacturing of tyres results in air pollution, the company had installed a plant for its effective control.
Pass necessary journal entries for the redemption of debentures. Also, identify the value observed by Maharana Ltd. It is assumed that the company has adequate balance in debenture redemption reserve account.
State Bank of India issued 20,000, 6% Debentures of ₹50 each at a premium of 8% on June 30, 2010 redeemable on June 30, 2018. The issue was fully subscribed. Record necessary entries for issue and redemption of debentures.
Rahul Ltd. redeemed Rs. 25,00,000; 12% Debentures at a premium of 5% out of profit on 30th Sept., 2015. Pass the necessary journal entries for the redemption of Debentures.
Pass the necessary Journal entries for issue and redemption of Debentures in the following cases:
10,000 12% Debentures of Rs. 50 each were issued and to be redeemed as follows :
1. Issued at par and redeemed at a premium of 10%.
2. issued at a premium of 10% and redeemable at a premium of 20%.
3. issued at par and 50% of the redemption to be made in cash, and the balance to be redeemed at a premium of 20% through the issue of fresh debentures.

CBSE Test Paper 01
Redemption of Debentures

Solution

(a) Debenture Redemption Investment (DRI)
Explanation: Debenture Redemption Investment (DRI)
(a) Zero
Explanation: Zero
(b) By all of these
Explanation: By all of these
(a) ₹ 37,500
Explanation: ₹ 37,500
(c) ₹ 1,00,000
Explanation: ₹ 1,00,000
Credited
1. Out of profit, Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business.
2. From the proceeds of the fresh issue of Share Capital and Debentures.
Non-Convertible Debentures are those debentures which are not convertible into shares. Non-convertible debentures usually have higher interest rates than convertible debentures

Journal of S Limited

Date	Particulars		L.F.	Debit	Credit
2004, Jan 1	Bank A/c (500*1000)	Dr.		5,00,000	....
	To 10% Debentures A/c			.....	5,00,000
	(Being Debentures money received)			.....	.....
2006, Jan 1	10% Debenture a/c (500*200)	Dr.		1,00,000	.....
	To Debenture Holder a/c			.....	1,00,000
	(Being Amount due to debentures holders on redemption.)			.....	.....
	Debentures holders a/c Dr.			1,00,000	.....
	To Equity share capital A/c (W.N.)			.....	80,000
	To Securities Premium Reserve a/c (W.N.)			.....	20,000
	(Being payment made to debentures holders)				.....

Working Note :

Number of Equity Shares to be issued : (200*500)/125 = 800

Equity Share Capital = 800*100 = 80,000

Security Premium Reserve = 800*25 = 20,000

JOURNAL OF BANK OF INDIA LTD.

Date	Particulars		L.F.	Dr. (₹)	Cr. (₹)
2019
June 30	10% Debentures A/c	Dr.		10,00,000
	To Debentureholders' A/c				10,00,000
	(Being the amount due to debentureholders on redemption)
	Debentureholders' A/c	Dr.		10,00,000
	To Bank A/c				10,00,000
	(Being the amount due to debenture holders paid)

JOURNAL

Date	Particulars		L.F.	Amt (Dr)	Amt (Cr)
	Surplus i.e. Balance in Statement of Profit and Loss A/c	Dr		25,000
	To Debenture Redemption Reserve A/c (1,00,000 $\times$ 25%)				25,000
	(Being debentures redemption reserve created)
	Debenture Redemption Investment A/c (1,00,000 $\times$ 15%)	Dr		15,000
	To Bank A/c				15,000
	(Being the investment equal to 15% of the value of debenture to be redeemed invested)
	Bank A/c	Dr		15,000
	To Debenture Redemption Investment A/c				15,000
	(Being the debenture redemption investment encashed)
	15% Debentures A/c (1,000 $\times$ 100)	Dr		1,00,000
	Premium on Redemption of Debentures A/c (1,000 $\times$ 10)	Dr		10,000
	To Debentureholders' A/c				1,10,000
	(Being debentures due for redemption)
	Debentureholders' A/c	Dr		1,10,000
	To Bank A/c				1,10,000
	(Being amount paid to debentureholders')
	Debenture Redemption Reserve A/c Dr	Dr		25,000
	To General Reserve A/c				25,000
	(Being debenture redemption reserve transferred to general reserve account)

Notes:

1. Companies Act prescribes that every company issuing debentures shall create Debenture Redemption Reserve out of its profits available for distribution as dividend.

2. Amount credited to DRR shall not be utilised by company except for redemption of debentures.

Books of Maharana Ltd.

JOURNAL

Date	Particulars		L.F.	Amt (Dr)	Amt (Cr)
2014,Apr 30	Debenture Redemption Investment A/c (18,00,000 $\times$ 15%)	Dr		2,70,000
	To Bank A/c				2,70,000
	(Being the amount equal to 15% of value of debentures to be redeemed invested in specified securities)
2015 Mar 31	Bank A/c	Dr		2,70,000
	To Debenture Redemption Investment A/c				2,70,000
	(Being the investment encashed)
	8% Debentures A/c (18,000 $\times$ 100)	Dr		18,00,000
	Premium on Redemption of Debentures A/c (18,000 $\times$ 5)	Dr		90,000
	To Debenture holders A/c				18,90,000
	(Being debentures made due for redemption at a premium of 5%)
	Debenture holders' A/c	Dr		18,90,000
	To Bank A/c				18,90,000
	(Being final payment made to debenture holders')
	Debenture Redemption Reserve A/c	Dr		4,50,000
	To General Reserve A/c				4,50,000
	(Being the transfer of balance of D.R.R. to general reserve)

Value being observed by Maharana Ltd is Respect for statutory provisions by following the guidelines laid down by Companies Act and SEBI. Company is also aware towards conservation of environment.

Note : There is no need to create Debenture Redemption Reserve of at least an amount equal to 25% of the nominal value of debentures outstanding, i.e., Rs 4,50,000 since company has adequate balance in Debenture Redemption Reserve Account.

Books of State Bank of India
JOURNAL

Date	Particulars		L.F.	Dr. (₹)	Cr. (₹)
30 June 2010	Bank A/c	Dr.		10,80,000
	To 6% Debenture Application & Allotment A/c				10,80,000
	(Receipt of application money)
30 June	6% Debenture Application & Allotment A/c	Dr.		10,80,000
	To 6% Debentures A/c				10,00,000
	To Securities Premium Reserve A/c				80,000
	(Transfer of application money)
30 June 2018	6% Debentures A/c	Dr.		10,00,000
	To Debentureholders A/c				10,00,000
	(Amount due on redemption)
30 June	Debentureholders A/c	Dr.		10,00,000
	To Bank A/c				10,00,000
	(Payment of amount due to debenture holders)

Journal in the Books of Rahul Ltd.

Date	Particulars		Debit (Rs.)	Credit(Rs.)
2015	Debentures Redemption Investment A/c	Dr.	3,75,000	...
	To Bank A/c		...	3,75,000
	(Being investment made equal to 15% of the debentures be redeemed in the current financial year)		...	...
30 Sep.	Balance in statement of Profit & Loss A/c	Dr.	25,00,000	...
	To Debentures Redemption Reserve A/c		...	25,00,000
	(Being amount equal to 100% of Debenture amount transferred to Debenture Redemption Reserve A/c)		...	...
30. Sep.	Bank A/c	Dr.	3,75,000	...
	To Debentures Red. Investment A/c		...	3,75,000
	(Being Deb. Red. Investment encashed)		...	...
30 Sep.	12% Debentures A/c	Dr.	25,00,000	...
	Premium on Red. Of Debentures A/c	Dr.	1,25,000	...
	To Debentures holders A/c		...	26,25,000
	(Being the amount due to Debentures holders)		...	...
30 Sep.	Debenture holders A/c	Dr.	26,25,000	...
	To Bank A/c		...	26,25,000
	(Being Payment made to Debentures holders)		...	...
30 Sep.	Debentures Redemption Reserve A/c	Dr.	25,00,000	...
	To General Reserve A/c		...	25,00,000
	(Being D.R.R. transferred to General Reserve)		...	...

Journal

Particulars		Debit Amount (Rs)	Credit Amount (Rs)
For Issue of Debentures
Bank A/c To Debentures Application and Allotment A/c (Being the receipt of debenture application money)	Dr.	5,00,000	5,00,000
Debenture Application and Allotment A/c Loss on Issue of Debentures A/c To 12% Debentures A/c To Premium on Redemption of Debentures A/c (Being the issue of 10,000 debentures at par redeemable at 10 % premium)	Dr. Dr.	5,00,000 50,000	5,00,000 50,000
On Redemption of Debentures
12% Debentures A/c Premium on Redemption of Debentures A/c To Debenture holders’ A/c (Being the amount due to debenture holders on redemption)	Dr. Dr.	5,00,000 50,000	5,50,000
Debenture Holders’ A/c To Bank A/c (Being the payment made to debenture holders)	Dr.	5,50,000	5,50,000
On Issue of Debentures
Bank A/c To Debenture Application and Allotment A/c (Being the application money received)	Dr.	5,50,000	5,50,000
Debenture Application and Allotment A/c Loss on Issue of Debentures A/c To 12% Debentures A/c To Securities Premium Reserve A/c To Premium on Redemption of Debentures A/c (Being 10,000 debentures issued at a premium of 10% and redeemable at a premium of 20%)	Dr. Dr.	5,50,000 1,00,000	5,00,000 50,000 1,00,000
Loss on Issue of Debentures A/c To 12% Debentures A/c To Securities Premium Reserve A/c To Premium on Redemption of Debentures A/c (Being 10,000 debentures issued at a premium of 10% and redeemable at a premium of 20%)	Dr.	6,50,000	5,00,000 50,000 1,00,000
On Redemption of Debentures
12% Debentures A/c Premium on Redemption of Debentures A/c To Debenture holder’s A/c (Being the amount due to debenture holders on redemption)	Dr. Dr.	5,00,000 1,00,000	6,00,000
Debenture holders A/c To Bank A/c (Being the payment made to debentures)	Dr.	6,00,000	6,00,000
On Issue of Debentures
Bank A/c To Debenture Application and Allotment A/c (Being the debenture application money received)	Dr.	5,00,000	5,00,000
Debenture Application and Allotment A/c Loss on Issue of Debentures A/c To 12% Debentures A/c To Premium on Redemption of Debentures A/c (Being 10,000 debentures issued at par, 50% of the redemption to be made in cash and balance to be redeemed at a premium of 20%)	Dr. Dr.	5,00,000 50,000	5,00,000 50,000
On Redemption of Debentures
12% Debentures A/c Premium of Redemption of Debentures A/c To Debenture holders’ A/c (Being the amount due to debenture holders on redemption)	Dr. Dr.	5,00,000 50,000	5,50,000
Debenture holders’ A/c To Bank A/c To Debentures (New) A/c (Being 50% of redemption made in case and balance is redeemed at a premium of 20% by an issue of new debentures)	Dr.	5,50,000	2,50,000 3,00,000

Redemption of Debentures - Test Papers