Redemption Of Debentures By Sinking Fund Method: Everything You Need To Know (Pdf Download)

1. X Ltd. Issued 2,000, 10% debentures of Rs.100 each at a discount of 8% on1 Jan, 1992 which are redeemable at par by annual drawings in 4 yearscommencing from 31st March 1993 as per the following redemption plan:Ist Draw 10%, 2nd Draw 20%, 3rd Draw 30%, and 4th Draw 40%. Calculate theamount of discount to be written-off each year assuming that X Ltd. followscalendar year as its accounting year.

2. G Ltd. issued 5,00,000, 12 % debenture of Rs.100 each on April 1, 2002 redeemable at par on July 1, 2003. The company received applications for 6,00,000 debentures and the allotment was made to all the applicants on pro-rata basis. The debenture were redeemed on due date. How much amount of Debenture Redemption Reserve is to be created before the redemption is carried out? Also record necessary journal entries regarding issue and redemption of debenture. Ignore tax deducted at source.

Redemption Of Debentures By Sinking Fund Method Pdf Download

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Question 8. When all the debentures are redeemed, balance in the debentures redemption fund account is transferred to (a) Capital reserve (b) General reserve (c) Profits and loss appropriation accountAnswer (b) General reserve

Question 9. The nominal and book values of debenture redemption fund investments account are respectively ? 1,00,000 and ? 96,000. The company sold investments of nominal value of? 30,000 at a price which was just sufficient to redeem debentures of ? 30,000 at 10% premium, the profit on sale of investment is (a) Rs. 4,200 (b)Rs. 3,000 (c) NilAnswer (a) Rs. 4,200

Question 11. Profit on cancellation of own debentures is transferred to (a) Profit and loss appropriation account (b) Debenture redemption reserve (c) Capital reserveAnswer (c) Capital reserve

Question 12. When debentures are redeemed out of profits, an equal amount is transferred to (a) General reserve (b) Debenture redemption reserve (c) Capital reserveAnswer (b) Debenture redemption reserve

Question 13. Profit on sale of debenture redemption fund investments in the first instance is credited to (a) Debenture redemption fund account (b) Profit and loss appropriation account (c) General reserve accountAnswer (a) Debenture redemption fund account

Question 14. The balance of sinking fund investment account after the realisation of investments is transferred to (a) Profit and loss account (b) Debentures account (c) Sinking fund accountAnswer (c) Sinking fund account

Question 15. When debentures are issued at a discount and are redeemable at a premium, which of the following accounts is debited at the time of issue (a) Debentures account (b) Premium on redemption of debentures account (c) Loss on issue of debentures accountAnswer (c) Loss on issue of debentures account .

1. G Ltd. has 800 lakhs, 10% debentures of Rs.100 each due for redemption on March 31, 2003. Assume that Debenture Redemption Reserve has a balance of Rs. 3,40,00,00,000 on that date. Record necessary entries at the time of redemption of debenture.Note:Debentures for 80,000 (lakhs) were to be redeemed as per SEBI guidelines, 50% debenture redemption reserve is to be maintained. For Rs. 80,000 (lakhs) it comes to 40,000 (lakhs). Deberture redemption reserve already exist in books for Rs.34,000 (lakhs). Hence entry for balance 6,000 (lakhs) is passed in this solution.

5. On 31.1.2005 Janta Ltd. converted its Rs.88,00,000, 6% debentures into equity shares of Rs.20 each at a premium of Rs.2 per share. Record necessary journal entries in the books of the company for redemption of debentures.

6. Anirudh Ltd. has 4,000, 8% debentures of Rs.100 each due for redemption on March 31, 2005. The company has a debenture redemption reserve of Rs.1,50,000 on that date. Assuming that no interest is due record the necessary journal entries at the time of redemption of debentures.

Question 14. What is meant by redemption of debentures ?Answer The term redemption implies the discharge of an obligation arising out of the contractual obligations created through the debenture Trust Deed. In other words, discharge of the liability on account of debentures is called redemption of debenture.The redemption of debentures is made by the company in accordance with the terms and conditions of issue. Debentures may be redeemable at par, premium or discount, but in present scenario redemption of debentures at par and at premium is most popular. The redemption can be done out of profits or from the fresh issue of debentures or shares.Redemption of debentures may be done by the following methods(i) By paying after stipulated period(ii) By annual drawing(iii) By conversion into shares or new debentures(iv) By purchasing own debentures in the open market(v) At the option of the company

Question 16. What is meant by redemption of debentures by conversion?Answer Debentures are usually redeemed in cash but sometimes privilege is given to the debenture holders to exchange their debentures either for shares or for new debentures of the company. The redemption of debentures by means of shares or new debentures is known as redemption by conversion and the debentures which carry such a right is called convertible debentures.

Question 5. Explain the different terms for the issue of debentures with reference to their redemption.Answer Debentures can be issued at par, at premium and at discount in the same way they can be redeem at par and at premium. Debentures can never be redeemed at discount. The following are the six situation under which debentures can be issued to their redemption.(i) Issue at Par and Redeemable at Par: When the debentures are issued and are redeemed at their face value, then the following Journal entry is passed.(ii) Issue at Premium and Redeemable at Par When the debentures are issued at premium and redeemable at par, then the following Journal entry is passed. As premium is a gain for a company so it is credited in the Journal entry.(iv)Issue at Discount and Redeemable at Par When the debentures are issued at discount and redeemable at par, then the following Journal entry is passed. As discount is a loss for a company so it is debited in the Journal entry.(v) Issue at Premium and Redeemable at Premium When debentures are issued at par and redeemable at premium, then the following Journal entry is passed. In such case, the company did not suffer any loss at the time of issue but there will be loss at the time of redemption.(vi) Issue at Discount and Redemption at Premium When the debentures are issued at discount and redeemable at premium, then the following Journal entry is passed.

Question 6. Differentiate between redemption of debentures out of capital and out of profits.Answer Debentures can be redeemed out of capital and out of profits. The following are the difference between these two methods.Redemption of Debentures Out of Capital: This is the situation where debentures are redeemed out of capital and no profits are utilised for redemption of the debentures, such redemption is termed as redemption out of capital. In this situation, no profits are required to be transferred to the Debenture Redemption Reserve (DRR).Here it is to be remembered that no company can redeem its debenture purely out of capital because as per the guideline laid down by Securities and Exchange Board of India (SEBI) and the Section 117C of Company Act of 1956, before starting any redemption process a company is required to create a DRR equal to 50% of the debentures issued).Therefore, it is not possible to redeem debentures purely out of capital, as it reduces the value of assets. There are exceptions in the following case(i) Infrastructure companies (i.e., those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities)(ii) A Company that issues debentures with a maturity up to 18 months.(iii) In case of convertible debentures and convertible portion of partly convertible debentures.Redemption of Debenture Out of Profits:When debentures are redeemed out of profit then no capital is utilised for redemption. Before redeeming the debentures profits are transferred to DRR from Profit and Loss Appropriation Account. The creation of DRR is mandatory as per the guidelines laid down by Securities and Exchange Board of India (SEBI).

SEBI mandates transferring amount equal to 50% of debentures issued to DRR before redeeming debentures. As transfer of amount (profits) to the DRR from Profit and Loss Appropriation Account reduces the amount of profit available for distribution of dividend, so this redemption process is known as redemption out of profit.

Question 7. Explain the guidelines of SEBI for creating Debenture Redemption Reserve.Answer Securities and Exchange Board of India (SEBI) have provided some guidelines for redemption of debentures. The focal points of these guidelines are *(i) Every company shall create Debenture Redemption Reserve in case of issue of debenture redeemable after a period of more than 18 months from the date of issue.(ii) The creation of Debenture Redemption Reserve is obligatory only for non-convertible debentures and non-convertible portion of partly convertible debentures.(iii) A company shall create Debenture Redemption Reserve equivalent to at least 50% of the amount of debenture issue before starting the redemption of debenture.(iv) Withdrawal from Debenture Redemption Reserve is permissible only after 10% of the debenture liability has already been reduced by the company. 2ff7e9595c