Page 194 - MA-12

8.2 Double Entry Book Keeping (Section A)—ISC XII

SUMMARY OF THE CHAPTER

• Redemption of Debentures is a process of repayment of loan taken by issue of debentures.
• Methods of Redemption of Debentures:
1. On maturity in lump sum;
2. In instalments by draw of lots;
3. By purchase of Own Debentures from Open Market, and
4. By Conversion into Shares or New Class of Debentures (It is not in Syllabus).
• Sources of Redemption of Debentures: Debentures can be redeemed by utilising any of the
following sources:
(i) Redemption Out of Capital: When debentures are redeemed without adequate profits being transferred
from Surplus, i.e., Statement of Profit and Loss to Debentures Redemption Reserve (DRR), at the time of
redemption of debentures, such redemption is said to be out of capital.
(ii) Redemption Out of Profits: When debentures are redeemed only out of profits and amount equal to
nominal (face) value of Debentures is transferred from Surplus, i.e., Statement of Profit and Loss to
Debentures Redemption Reserve (DRR) before the redemption of debentures, such redemption is said
to be out of profits.
(iii) Redemption Partly out of Profits and Partly out of Capital: It means that the company does not transfer
100 per cent nominal (face) value of total redeemable debentures of a particular series to DRR out of surplus.
• Debentures Redemption Reserve (DRR) is created out of profits of the company available for payment as
dividend for the purpose of redemption of debentures.
DRR is created before the redemption starts.
As per the provisions of Section 71(4) of the Companies Act, 2013 read with Rule 18(7) (b) of the Companies
(Share Capital and Debentures) Rules, 2014, a company shall transfer at least 25 per cent of nominal (face)
value of the outstanding debentures of that class out of surplus available for payment of dividend to DRR.
DRR is required to be created only in case of Non-convertible Debentures (NCD) and Non-convertible
portion of Partly Convertible Debentures (PCD)
Debentures Redemption Investment: A company required to create/maintain DRR shall on or before 30th
April of the current year, deposit or invest (as the case may be) at least 15% of the amount of its debentures
maturing during the year ending on 31st March of the next year.
Companies not required to create DRR are not required to invest in specified securities.

Solved Questions

Illustration 1.
N Ltd. issued 10,000; 9% Debentures of ` 100 each at par on April, 2014 with the condition that
they will be redeemed at a premium of 5% after the expiry of five years.
Pass Journal entries for issue and redemption of these debentures along with the entries for
DRR. Investment is to earn interest @ 6% p.a.
Solution: In the Books of N Ltd.
JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
2014
April 1 On Issue of Debentures
Bank A/c ...Dr. 10,00,000
To Debentures Application and Allotment A/c 10,00,000
(Being the amount received on 10,000 debentures @ ` 100 each)