COMPANY ACCOUNTS 11.

183

UNIT – 6: REDEMPTION OF DEBENTURES

LEARNING OUTCOMES

After studying this unit, you will be able to:

♦ Understand about the redemption of debentures;
♦ Understand the requirement of creation of a Debenture Redemption
Reserve and creation of Debenture Redemption Fund (i.e. making
investments for purpose of redemption of debentures);
♦ Understand various methods of redemption of debentures;
♦ Understand the accounting treatment of redemption of debentures;
♦ Solve problems based on redemption of debentures.

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UNIT OVERVIEW

Methods of Redemption of Debentures

By payment in By payment in By purchase in By conversion

Lumpsum instalments open market into shares

Provisions under the Companies Act, 2013

for Issue of Debentures

Section 71 (1) Section 71 (2) Section 71 (4)

A company may Where debentures

issue debentures are issued by a
with an option to No company can company, then the
convert such issue any company should
debentures into debentures create a debenture
shares, either which carry any redemption reserve
wholly or partly voting rights. account out of the
at the time of profits of the
redemption. company available
for payment of
dividend and the
Provided that the issue amount credited to
of such debentures with such account
an option to convert should not be
into shares, wholly or utilised for any
partly, should be purpose other than
approved by a special the redemption of
resolution passed at a debentures.
duly convened general
meeting.

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6.1 INTRODUCTION
A debenture is an instrument issued by a company under its seal, acknowledging a debt and
containing provisions as regards repayment of the principal and interest.
Under Section 71 (1) of the Companies Act, 2013, a company may issue debentures with an
option to convert such debentures into shares, either wholly or partly at the time of
redemption.
Provided that the issue of debentures with an option to convert such debentures into shares,
wholly or partly, should be approved by a special resolution passed at a duly convened general
meeting.
Section 71 (2) further provides that no company can issue any debentures which carry any
voting rights.
Section 71 (4) provides that where debentures are issued by a company, the company should
create a debenture redemption reserve account out of the profits of the company available
for payment of dividend and the amount credited to such account should not be utilized by
the company for any purpose other than the redemption of debentures.
Basic provisions
If a charge has been created on any asset or the entire assets of the company,
 the nature of the charge
 the asset(s) charged

are described therein.

• Since the charge is not valid unless registered with the Registrar, his certificate
registering the charge is printed on the bond.
• It is also customary to create a trusteeship in favour of one or more persons in the case
of mortgage debentures. The trustees of debenture holders have all powers of a
mortgage of a property and can act in whatever manner they think necessary to
safeguard the interest of debenture holders.
Note: Issue of debentures has already been discussed in detail in unit 3 of Chapter 11.

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6.2 REDEMPTION OF DEBENTURES

Debentures are usually redeemable i.e. either redeemed in cash or convertible to equity shares
after a time period.
Redeemable debentures may be redeemed:
 after a fixed number of years; or

 any time after a certain number of years has elapsed since their issue; or
 on giving a specified notice; or
 by annual drawing.

A company may also purchase its debentures, as and when convenient, in the open market.
When the debentures are quoted at a discount on the Stock Exchange, it may be profitable
for the company to purchase and cancel them.

6.3 DEBENTURE REDEMPTION RESERVE

A company issuing debentures may be required to create a debenture redemption reserve
account out of the profits available for distribution of dividend and amounts credited to such
account cannot be utilised by the company for any other purpose except for redemption of
debentures. Such an arrangement would ensure that the company will have sufficient liquid
funds for the redemption of debentures at the time they fall due for payment.
An appropriate amount is transferred from profits every year to Debenture Redemption
Reserve and its investment is termed as Debenture Redemption Reserve Investment (or
Debenture Redemption Fund). In the last year or at the time of redemption of debentures,
Debenture Redemption Reserve Investments are encashed and the amount so obtained is
used for the redemption of debentures.

6.3.1 Requirement to create Debenture Redemption Reserve

Section 71 of the Companies Act 2013 covers the requirement of creating a debenture
redemption reserve account. Section 71 states as follows:
(1) Where a company issues debentures under this section, it should create a debenture
redemption reserve account out of its profits which are available for distribution of
dividend every year until such debentures are redeemed.
(2) The amounts credited to the debenture redemption reserve should not be utilised by
the company for any purpose except for the purpose aforesaid.

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(3) The company should pay interest and redeem the debentures in accordance with the
terms and conditions of their issue.

(4) Where a company fails to redeem the debentures on the date of maturity or fails to
pay the interest on debentures when they fall due, the Tribunal may, on the application
of any or all the holders of debentures or debenture trustee and, after hearing the
parties concerned, direct, by order, the company to redeem the debentures forthwith
by the payment of principal and interest due thereon.

6.3.2 Balance in Debenture Redemption Reserve (DRR)

When the company decides to establish the Debenture Redemption Reserve Account, the
amount indicated by the Debenture Redemption Reserves tables is credited to the Debenture
Redemption Reserve account and debited to profit and loss account. That shows the intention
of the company to set aside sum of money to build up a fund for redeeming debentures.
Immediately, the company should also purchase outside investments. The entry for the purpose
naturally will be to debit Debenture Redemption Reserve Investments and credit Bank.
If the debentures are purchased within the interest period, the price would be inclusive of
interest provided these are purchased “Cum-interest”; but if purchased “Ex-interest”, the
interest to the date of purchase would be payable to the seller additionally. In order to adjust
the effect thereof the amount of interest accrued till the date of purchase, if paid, is debited
to the Interest Account against which the interest for the whole period will be credited. As a
result, the balance in the account would be left equal to the interest for the period for which
the debentures were held by the company.

6.3.3 Adequacy of Debenture Redemption Reserve (DRR)

As per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment Rules, 2019,
the company shall comply with the requirements with regard to Debenture Redemption
Reserve (DRR) and investment or deposit of sum in respect of debentures maturing during
the year ending on the 31st day of March of next year (refer para 6.4 below), in accordance
with the conditions given below—
the Debenture Redemption Reserve shall be created out of the profits of the company
available for payment of dividend; the limits with respect to adequacy of DRR and investment
or deposits, as the case may be, shall be as under:

S. Debentures issued by Adequacy of Debenture

No Redemption Reserve (DRR)
1 All India Financial Institutions (AIFIs) regulated No DRR is required
by Reserve Bank of India and Banking

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Companies for both public as well as privately

placed debentures
2 Other Financial Institutions (FIs) within the DRR will be as applicable to
meaning of clause (72) of section 2 of the NBFCs registered with RBI (as
Companies Act, 2013 per (3) below)
3 For listed companies (other than AIFIs and Banking Companies as specified in Sr.
No. 1 above):
a. All listed NBFCs (registered with RBI under No DRR is required
section 45-IA of the RBI Act,) and listed HFCs
(Housing Finance Companies registered with
National Housing Bank) for both public as
well as privately placed debentures
b. Other listed companies for both public as No DRR is required
well as privately placed debentures
4 For unlisted companies (other than AIFIs and Banking Companies as specified in
Sr. No. 1 above
a. All unlisted NBFCs (registered with RBI No DRR is required
under section 45-IA of the RBI (Amendment)
Act, 1997) and unlisted HFCs (Housing
Finance Companies registered with National
Housing Bank) for privately placed
debentures
b. Other unlisted companies DRR shall be 10% of the value
of the outstanding debentures
issued

6.3.4 Investment of Debenture Redemption Reserve (DRR)

Amount
Further, as per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment
Rules, 2019, following companies
(a) All listed NBFCs
(b) All listed HFCs

(c) All other listed companies (other than AIFIs, Banking Companies and Other FIs); and
(d) All unlisted companies which are not NBFCs and HFCs
shall on or before the 30th day of April in each year, in respect of debentures issued, deposit

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or invest, as the case may be, a sum which should not be less than 15% of the amount of its
debentures maturing during the year ending on the 31st day of March of next year, in any
one or more of the following methods, namely:
(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any State Government;
(c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of Section 20 of
the Indian Trusts Act, 1882;
(d) in unencumbered bonds issued by any other company which is notified under clause
(f) of Section 20 of the Indian Trusts Act, 1882.
The amount deposited or invested, as the case may be, above should not be utilised for any
purpose other than for the redemption of debentures maturing during the year referred to above.
Provided that the amount remaining deposited or invested, as the case may be, shall not at
any time fall below 15% of the amount of debentures maturing during the 31st day of March
of that year.
In case of partly convertible debentures, DRR shall be created in respect of non-convertible
portion of debenture issue.
The amount credited to DRR shall not be utilised by the company except for the purpose of
redemption of debentures.
Note: It should be noted that appropriation to DRR can be made any time before redemption
and Investments in specified securities as mentioned above can be done before 30th April for
the debentures maturing that year, however, for the sake of simplicity and ease, it is advisable
to make the appropriation and investment immediately after the debentures are allotted
assuming that the company has sufficient amount of profits (issued if allotment date is not
given in the question). Also, in some cases, the date of allotment could be missing, in such
cases the appropriation and investments should be done on the first day of that year for which
ledgers accounts are to be drafted.

6.3.5 Journal Entries

The necessary journal entries passed in the books of a company are given below:

1. After allotment of debentures

(a) For setting aside the fixed amount of profit for redemption
Profit and Loss A/c Dr.
To Debenture Redemption Reserve A/c

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(b) For investing the amount set aside for redemption

Debenture Redemption Reserve Investment A/c Dr.
To Bank A/c

(c) For receipt of interest on Debenture Redemption Reserve Investments

Bank A/c Dr.
To Interest on Debenture Redemption Reserve Investment A/c
(d) For transfer of interest on Debenture Redemption Reserve Investments (DRRI)
Interest on Debenture Redemption Reserve Investment A/c Dr.
To Profit and loss A/c*
* Considering the fact that interest is received each year through cash/bank account and
it is not re-invested. In the illustrations given in the chapter, the same has been considered
and hence interest on DRR investment is not credited to DRR A/c but taken to P&L A/c.
2. At the time of redemption of debentures
(a) For encashment of Debenture Redemption Reserve Investments
Bank A/c Dr.

To Debenture Redemption Reserve Investment A/c

(b) For amount due to debentureholders on redemption
Debentures A/c Dr.

To Debentureholders A/c
(c) For payment to debentureholders
Debentureholders A/c Dr.

To Bank A/c
(d) After redemption of debentures, DRR should be transferred
to general reserve

DRR A/c Dr.

To General Reserve

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6.4 METHODS OF REDEMPTION OF DEBENTURES

Redemption of debentures must be done according to the terms of issue of debentures and
any deviation therefrom will be treated as a default by the company.
Redemption by paying off the debt on account of debentures issued can be done in any one
of the three methods viz:

6.4.1 By payment in lumpsum

Under payment in lumpsum method, at maturity or at the expiry of a specified period of
debenture the payment of entire debenture is made in one lot or even before the expiry of
the specified period.

6.4.2 By payment in Instalments

Under payment in instalments method, the payment of specified portion of debenture is made
in instalments at specified intervals.

6.4.3 Purchase of Debentures in Open Market

Debentures sometimes are purchased in open market. This is not covered in the chapter as it
has been specifically excluded from the syllabus at Foundation level.
ILLUSTRATION 1
The following balances appeared in the books of a company (unlisted company other than AIFI,
Banking company, NBFC and HFC) as on December 31, 2021: 6% Mortgage 10,000 debentures
of ` 100 each; Debenture Redemption Reserve (for redemption of debentures) ` 50,000;
Investments in deposits with a scheduled bank, free from any charge or lien ` 1,50,000 at interest
4% p.a. receivable on 31st December every year. Bank balance with the company is ` 9,00,000.
The Interest on debentures had been paid up to December 31, 2021.

On February 28, 2022, the investments were realised at par and the debentures were paid off at
101, together with accrued interest.
Write up the concerned ledger accounts (excluding bank transactions). Ignore taxation.
SOLUTION
6% Mortgage Debentures Account

2022 ` 2022 `
Feb. 28 To Debenture- 10,00,000 Jan. 1 By Balance b/d 10,00,000
holders A/c

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Premium on Redemption of Debentures Account

2022 ` 2022 `
Feb. 28 To Debenture- 10,000 Feb. 28 By Profit and 10,000
holders A/c loss A/c

Debentures Redemption Reserve Investment Account

2022 ` 2022 `
Jan. 1 To Balance b/d 1,50,000 Feb. 28 By Bank 1,50,000

Debenture Interest Account

2022 ` 2022 `
Feb. 28 To Bank (10,000 x 100 10,000 Feb. 28 By Profit & Loss 10,000
x 6% x 2/12) A/c

Bank A/c

2022 ` 2022 `
Jan 01 To Balance b/d 9,00,000 Feb. 28 By Debenture-holders 10,10,000
(10,000 x 101)
Feb 28 To Interest on 1,000
Debentures
Redemption
Investments
(1,50,000 x 4% x
2/12)
To Debentures By Debenture Interest A/c 10,000
Redemption
Reserve By Balance c/d 31,000
investment A/c 1,50,000
10,51,000 10,51,000

Debenture Redemption Reserve Account

2022 ` 2022 `
Feb 28 To General 1,00,000 Jan.1 By Balance b/d 50,000
Reserve-note
Jan.1 By Profit & Loss (b/f) 50,000
1,00,000 1,00,000

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Note
Amount to be transferred to DRR before the redemption = ` 1,00,000 [i.e. 10% of
(10,000 X 100)].
ILLUSTRATION 2
The following balances appeared in the books of Paradise Ltd (unlisted company other than
AIFI, Banking company, NBFC and HFC) as on 1-4-2021:
(i) 12 % Debentures ` 7,50,000
(ii) Balance of DRR ` 25,000

(iii) DRR Investment 1,12,500 represented by 10% ` 1,125 Secured Bonds of the Government
of India of ` 100 each.
Annual contribution to the DRR was made on 31st March every year. On 31-3-2022, balance at
bank was ` 7,50,000 before receipt of interest. The investment were realised at par for
redemption of debentures at a premium of 10% on the above date.
You are required to prepare the following accounts for the year ended 31st March, 2022:

(1) Debentures Account

(2) DRR Account
(3) DRR Investment Account

(4) Bank Account

(5) Debenture Holders Account.
SOLUTION
1. 12% Debentures Account

Date Particulars ` Date Particulars `

31st March, 2022 To Debenture 7,50,000 1st April, 2021 By Balance b/d 7,50,000
holders A/c
7,50,000 7,50,000

2. DRR Account

Date Particulars ` Date Particulars `

1st April, 2021 By Balance b/d 25,000
31st
March, To General reserve 75,000 1 April, 2021
st
By Profit and loss A/c 50,000
2022 A/c (Refer Note) (Refer Note)
75,000 75,000

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3. 10% Secured Bonds of Govt. (DRR Investment) A/c

` `
1st April, 2021 To Balance b/d 1,12,500 31st March, 2022 By Bank A/c 1,12,500
1,12,500 1,12,500

4. Bank A/c
` `
31st March, To Balance b/d 7,50,000 31st March, By Debenture 8,25,000
2022 To Interest on DRR 11,250 2022 holders A/c
Investment (1,12,500 x 10%)
To DRR Investment A/c 1,12,500 By Balance c/d 48,750
8,73,750 8,73,750

5. Debenture holders A/c

` `
31st March, To Bank A/c 8,25,000 31st March, By 12% Debentures 7,50,000
2022 2022 By Premium on redemption of
debentures (7,50,000 X 10%) 75,000

8,25,000 8,25,000
Note–
Calculation of DRR before redemption = 10% of ` 7,50,000 = 75,000

Available balance = ` 25,000

DRR required = 75,000 – 25,000 = ` 50,000.
ILLUSTRATION 3
XYZ Ltd. has issued 1,000, 12% convertible debentures `100 each redeemable after a period of
five years. According to the terms & conditions of the issue, these debentures were redeemable
at a premium of 5%. The debenture holders also had the option at the time of redemption to
convert 20% of their holdings into equity shares of ` 10 each at a price of ` 20 per share and
balance in cash. Debenture holders amounting ` 20,000 opted to get their debentures converted
into equity shares as per terms of the issue. You are required to calculate the number of shares
issued and cash paid for redemption of ` 20,000 debenture holders.

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SOLUTION

Number of
debentures
Debenture holders opted for conversion (20,000 /100) 200
Option for conversion 20%
Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5% [40 x (100+5)] ` 4,200
Equity shares of ` 10 each issued on conversion
[` 4,200/ ` 20] 210 shares

Calculation of cash to be paid : `

Number of debentures 200
Less: number of debentures to be converted into equity shares (40)
160
Redemption value of 160 debentures (160 × ` 105) ie. ` 16,800.
ILLUSTRATION 4
The Balance Sheet of BEE Co. Ltd. (unlisted company other than AIFI, Banking company, NBFC
and HFC) as at 31st March, 2021 is as under:

Particulars Note No `

I. Equity and liabilities

(1) Shareholder's Funds
(a) Share Capital 1 2,00,000
(b) Reserves and Surplus 2 1,20,000
(2) Non-current liabilities
(a) Long term borrowings 3 1,20,000
(3) Current Liabilities
(a) Trade payables 1,15,000
Total 5,55,000
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 4 1,15,000

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(2) Current assets

(a) Inventories 1,35,000
(b) Trade receivables 75,000
(c) Cash and bank balances 5 2,30,000
Total 5,55,000

Notes to Accounts

1. Share Capital
Authorised share capital
30,000 shares of ` 10 each fully paid 3,00,000

Issued and subscribed share capital

20,000 shares of ` 10 each fully paid 2,00,000

2. Reserve and Surplus

Profit & Loss Account 1,20,000
3. Long term borrowings
12% Debentures 1,20,000
4. Property, Plant and Equipment
Freehold property 1,15,000
5. Cash and bank balances
Cash at bank 2,00,000
Cash in hand 30,000 2,30,000

At the Annual General Meeting, it was resolved:

(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for every four
shares (held prior to the bonus distribution). This option was taken up by all the shareholders.
(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%.
Give the necessary journal entries for these transactions.

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SOLUTION
Journal of BEE Co. Ltd.

Dr. Cr.
` `
Bank A/c Dr. 75,000
To Equity Shareholders A/c 75,000
(Application money received on 5,000 shares @ ` 15 per
share to be issued as rights shares in the ratio of 1:4)
Equity Shareholders A/c Dr. 75,000
To Equity Share Capital A/c 50,000
To Securities Premium A/c 25,000
(Share application money on 5,000 shares @ ` 10 per
share transferred to Share Capital Account, and ` 5 per
share to Securities Premium Account vide Board’s
Resolution dated…)
Securities Premium A/c Dr. 25,000
Profit & Loss A/c Dr. 25,000
To Bonus to Shareholders A/c 50,000
(Amount transferred for issue of bonus shares to existing
shareholders in the ratio of 1:5 vide General Body’s
resolution dated...)
Bonus to Shareholders A/c Dr. 50,000
To Equity Share Capital A/c 50,000
(Issue of bonus shares in the ratio of 1 for 5 vide Board’s
resolution dated....)
Profit and Loss A/c Dr. 12,000
To Debenture Redemption Reserve 12,000
(for DRR created 10% x 1,20,000)
Debenture Redemption Reserve Investment A/c Dr. 18,000
To Bank A/c 18,000
(for DRR Investment created 15% x 1,20,000)
12% Debentures A/c Dr. 1,20,000
Premium Payable on Redemption A/c @ 3% Dr. 3,600

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To Debenture holders A/c 1,23,600

(Amount payable to debentures holders)
Profit and loss A/c Dr. 3,600
To Premium Payable on Redemption A/c 3,600
(Premium payable on redemption of debentures charged
to Profit & Loss A/c)
Debenture Redemption Reserve A/c Dr. 12,000
To General Reserve 12,000
(for DRR transferred to general reserve)
Bank A/c Dr. 18,000
To Debenture Redemption Reserve Investment 18,000
(for DRR Investment realised)
Debenture holders A/c Dr. 1,23,600
To Bank A/c 1,23,600
(Amount paid to debenture holders on redemption)

SUMMARY
 Debentures may create a charge against some or all the assets of the company.
 Charge may be fixed or floating, depends upon the condition of issue.
 Debentures may be redeemed after a fixed number of years or after a certain period
has elapsed.
 For redemption of debentures, certain companies are required to create Debenture
Redemption Reserve.
 Methods of redemption: lumpsum payment and payment in instalments.

TEST YOUR KNOWLEDGE

True and False
1. Amounts credited to the debenture redemption reserve may be utilised by the company
for any purpose.
2. All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking
Companies for both public as well as privately placed debentures need not create any
Debenture Redemption Reserve (DRR).

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3. Under payment in instalments method, the payment of entire debenture is made in one
lot.
4. At redemption of debentures, DRR should be transferred to general reserve.

Multiple Choice Questions

1. Which of the following statements is true?
(a) A debenture holder is an owner of the company.
(b) A debenture holder can get his money back only on the liquidation of the
company.
(c) A debenture issued at a discount can be redeemed at a premium.
2. Which of the following statements is false?
(a) Debentures can be redeemed by payment in lump sum at the end of a specified
period.

(b) Debentures cannot be redeemed during the life time of the company.
(c) Debentures can be redeemed by payments in annual instalments.
3. For debentures issued by unlisted companies (other than AIFIs, Banking companies,
NBFCs and HFCs), Debentures Redemption reserve will be considered adequate if it is:
(a) 25% of the value of debentures issued through public issue.
(b) 10% of the value of debentures issued through public issue.
(c) 5% of the value of debentures issued through public issue.
4. A company has issued 6% debentures for ` 10,00,000, interest being payable on
31st March and 30th September. The company redeems ` 10,000 debentures at ` 96 (ex-
interest) on 1st August 2021. The amount of Profit/loss on cancellation of debentures
will be
(a) Profit of ` 600.
(b) Profit of ` 400.
(c) Loss of ` 400

Theoretical Questions
1. What is meant by redemption of debentures? Explain.
2. Write short note on Debenture Redemption Reserve.

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Practical Questions
1. A company had issued 20,000, 13% debentures of ` 100 each on 1st April, 2021. The
debentures are due for redemption on 1st July, 2022. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to
the debenture holders to convert 20% of their holding into equity shares (Nominal value
` 10) at a price of ` 15 per share. Debenture holders holding 2,500 debentures did not
exercise the option. Calculate the number of equity shares to be allotted to the debenture
holders exercising the option to the maximum.
2. Libra Limited (a listed company) recently made a public issue in respect of which the
following information is available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price-
` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6
months from the date of closing of issue.

(c) Date of closure of subscription lists- 1.5.2021, date of allotment- 1.6.2021, rate
of interest on debenture- 15% payable from the date of allotment, value of equity
share for the purpose of conversion- ` 60 (Face Value ` 10).
(d) No. of debentures applied for- 2,00,000.
(e) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2022 (including cash and bank entries).
3. Case Ltd. (unlisted company other than AIFI, Banking company, NBFC and HFC) provides
the following information as at 31st March, 2022:

Particulars `
Shareholder's Funds
(a) Share Capital
Authorized share capital:
45,000 equity shares of ` 10 each fully paid 4,50,000
Issued and subscribed share capital:
30,000 equity shares of ` 10 each fully paid 3,00,000
(b) Reserves and Surplus
Profit & Loss Account 1,62,000

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Debenture Redemption Reserve 18,000

Non-current liabilities
(a) Long term borrowings
12% Debentures 1,80,000
Current Liabilities
(a) Trade payables 1,72,500
Non-current assets
(a) Property, Plant and Equipment (Freehold property) 1,72,500
(b) Non-current Investment: DRR Investment 27,000
Current assets
(a) Inventories 2,02,500
(b) Trade receivables 1,12,500
(c) Cash and bank balances:
Cash at bank 2,73,000
Cash in hand 45,000

At the Annual General Meeting on 1.4.2022, it was resolved:

(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for
every four shares (held prior to the bonus distribution). This option was taken up
by all the shareholders.
(b) To issue one bonus share for every five shares held.
(c) To repay the debentures at a premium of 3%.
Give the necessary journal entries for these transactions.

ANSWERS/ HINTS
True and False
1. False: Amounts credited to the debenture redemption reserve should not be utilised
by the company for any purpose except for the purpose other than for redemption of
debentures.
2. True: All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and
Banking Companies for both public as well as privately placed debentures need not
create any DRR.

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3. False: under payment in instalments method, the payment of specified portion of

debentures are made in instalments at specified intervals.
4 True: DRR is transferred to general reserve at the time of redemption of debentures.

Multiple Choice Questions

1. (c) 2. (b) 3. (b) 4. (b)

Theoretical Questions
1. Debentures are usually redeemable i.e. either redeemed in cash or convertible after a
time period.
Redeemable debentures may be redeemed:
 after a fixed number of years; or

 any time after a certain number of years has elapsed since their issue; or
 on giving a specified notice; or
 by annual drawing.

For details, refer para 6.2 of the chapter.

2. A company issuing debentures may be required to create a debenture redemption
reserve account out of the profits available for distribution of dividend and amounts
credited to such account cannot be utilised by the company except for redemption of
debentures. Such an arrangement would ensure that the company will have sufficient
liquid funds for the redemption of debentures at the time they fall due for payment.
For details, refer para 6.3.

Practical Questions
1. Calculation of number of equity shares to be allotted

Number of debentures
Total number of debentures 20,000
Less: Debenture holders not opted for conversion (2,500)
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500
Redemption value of 3,500 debentures at a premium of

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5% [3,500 x (100+5)] ` 3,67,500

Equity shares of ` 10 each issued on conversion
[` 3,67,500/ ` 15] 24,500 shares

2. Journal Entries in the books of Libra Ltd.

Journal Entries

Date Particulars Amount ` Amount `

Dr. Cr.

1.5.2021 Bank A/c Dr. 2,00,00,000

To Debenture Application A/c 2,00,00,000
(Application money received on 1,50,000
debentures @ ` 100 each)
1.6.2021 Debenture Application A/c Dr. 2,00,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to
applicants and 50,000 debentures to
underwriters)
1.6.2021 Debenture Redemption Investment A/c 12,00,000
To Bank A/c Dr.
(2,00,000 X 100 x 15% X 40%) 12,00,000
(Being Investments made for redemption
purpose)
30.9.2021 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months
@ 15% on ` 2,00,00,000)
31.10.2021 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value of
` 10)

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31.3.2022 Debenture Interest A/c Dr. 7,50,000

To Bank A/c 7,50,000
(Interest paid on debentures for the half
year) (Refer working note)

Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2022
On ` 80,00,000 for 6 months @ 15% = `6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000

`7,50,000
3. Journal Entries in the Books of Case Ltd.

Dr.` Cr.`
Bank A/c Dr. 1,12,500
To Equity Shareholders A/c 1,12,500
(Application money received on 7,500 shares @ ` 15 per
share to be issued as rights shares in the ratio of 1:4)
Equity Shareholders A/c Dr. 1,12,500
To Equity Share Capital A/c 75,000
To Securities Premium A/c 37,500
(Share application money on 7,500 shares @ ` 10 per share
transferred to Share Capital Account, and ` 5 per share to
Securities Premium Account vide Board’s Resolution dated…)
Securities Premium A/c Dr. 37,500
Profit & Loss A/c Dr. 37,500
To Bonus to Shareholders A/c 75,000
(Amount transferred for issue of bonus shares to
existing shareholders in the ratio of 1:5 vide General
Body’s resolution dated...)
Bonus to Shareholders A/c Dr. 75,000
To Equity Share Capital A/c 75,000
(Issue of bonus shares in the ratio of 1 for 5 vide Board’s
resolution dated....)

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12% Debentures A/c Dr. 1,80,000

Premium Payable on Redemption A/c (@ 3%) Dr. 5,400
To Debenture holders A/c 1,85,400
(Amount payable to debentures holders)
Profit and loss A/c Dr. 5,400
To Premium Payable on Redemption A/c 5,400
(Premium payable on redemption of debentures
charged to Profit & Loss A/c)
Debenture Redemption Reserve A/c Dr. 18,000
To General Reserve 18,000
(For DRR transferred to general reserve)
Bank A/c Dr. 27,000
To Debenture Redemption Reserve Investment 27,000
(for DRR Investment realised)
Debenture holders A/c Dr. 1,85,400
To Bank A/c 1,85,400
(Amount paid to debenture holders on redemption)

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