Redemption of Debentures refers to the repayment of debentures to the debenture holders and the discharge of the company's liability arising from the issue of debentures. Generally, debentures are redeemed on the expiry of the period for which they were originally issued. However, a company may also redeem them before the maturity date if permitted by its Articles of Association and the terms of issue. Early redemption can be carried out either by paying the debenture holders in instalments or by purchasing the debentures from the open market. Thus, redemption marks the settlement of the debt obligation of the company towards its debenture holders.
Issue of Debentures from the point of view of Redemption:
It means that debentures can be issued under different conditions, and similarly, they can also be redeemed under different terms. Just as debentures may be issued at par, at a premium, or at a discount, they may also be redeemed at par, at a premium, or at a discount depending on the terms agreed at the time of issue. In other words, the amount paid at the time of redemption may be equal to, more than, or less than the face value of the debentures, as specified in the terms of issue.
Accounting Treatment:
Case 1: Debentures are issued at par, redeemable at par:
Assume 8% Debentures issued at ₹100, redeemable at ₹100
i) Entries for Issue:
ii) Entries for Redemption:
Illustration:
Gaurav Ltd. issued 1,000; 8% Debentures of ₹1,000 each at par, redeemable at par. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.
Solution:
Case 2: Debentures are issued at a premium, redeemable at par:
Assume 8% Debentures of ₹100 issued at 5% premium, redeemable at par.
i) Entries for Issue:
ii) Entries for Redemption:
Illustration:
Kashish Ltd. issued 1,000; 8% Debentures of ₹1,000 each at a premium of 5%, redeemable at par. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.
Solution:
Case 3: Debentures are issued at discount, redeemable at par:
Assume 8% Debentures of ₹100 issued at 5% discount, redeemable at par.
i) Entries for Issue:
ii) Entries for Redemption:
Illustration:
Vaibhav Ltd. issued 1,000; 8% Debentures of ₹1,000 each at a discount of 5%, redeemable at par. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.
Solution:
Case 4: Debentures are issued at par, redeemable at premium:
Assume 8% Debentures of ₹100 issued, redeemable at ₹105.
i) Entries for Issue:
ii) Entries for Redemption:
Notes:
- Loss on Issue of Debentures is a capital loss, and is shown on the liabilities side under the head, "Reserves & Surplus" in a negative sign. It will be written off from capital profit or gradually from Profit & Loss A/c during the tenure of debentures.
- The company will pay the Premium on Redemption at the time of redemption. As it is a known loss, it is recorded at the time of issue of debentures and will be shown under the head, "Current Liabilities & Provisions" on the liabilities side of the Balance Sheet until they are paid on redemption.
Illustration:
Tanya Ltd. issued 1,000; 8% Debentures of ₹1,000 each at par, redeemable at a premium of 5%. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.
Solution:
Case 5: Debentures are issued at discount, redeemable at premium:
Assume 8% Debentures of ₹100 issued at a discount of 5%, redeemable at a premium of 5%.
i) Entries for Issue:
ii) Entries for Redemption:
Note: When debentures are issued at a discount and redeemable at a premium, then the loss is the sum of the discount on issue + the amount of premium payable on redemption.
Illustration:
Akanksha Ltd. issued 1,000; 8% Debentures of ₹1,000 each at a discount of 5%, redeemable at a premium of 5%. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.
Solution:
Case 6: Debentures are issued at premium, redeemable at premium:
Assume 8% Debentures of ₹100 issued at a premium of 5%, redeemable at ₹110.
i) Entries for Issue:
ii) Entries for Redemption:
Illustration:
Nupur Ltd. issued 1,000; 8% Debentures of ₹1,000 each at a premium of 5%, redeemable at a premium of 8%. Pass the necessary Journal Entries for the issue and redemption of debentures, and also prepare a balance sheet as at 31st March 2021.
Solution:
