Chapter 9 Company Accounts Redemption of Debentures Class 12 Accountancy Notes & PDF

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Time of Redemption

  1. At maturity: When repayment is made at the date of maturity of debentures which is determined at the time of issue of debentures.
  2. Before maturity: If articles of association and terms of issue mentioned in prospectus allows, then a company can redeem its debentures before maturity date.

Redemption Methods

  1. Redemption in Lump-sum: When redemption is made at the expiry of a specific period, as per the terms of issue.
  2. Redemption by draw of lots: In this method a certain proportion of debentures are redeem each, year, the debenture for which repayment is to be made is selected by draw of lots.
  3. Redemption by purchases in open market: If articles of association of a company authorize, it may purchases its own debentures from open market i.e. stock exchange

Advantages of this Method

  1. When market price of own debentures is low than the redeemable value is less then the amount payable on maturity.
  2. Decrease the amount of interest payable to outsiders.
  3. If term of issue is provided that debentures are to be redeemed at premium then such premium can be reduced.
  1. To maintain the solvency ratio.
  2. To utilize the surplus money or funds which are lying idle with the company.
  3. When rate of interest on debentures is more than the current market rate of interest on debentures in the industry.

Sources of Redemption of Debentures

  1. Proceeds from fresh issue of Share Capital or Debenture holder.
  2. From accumulated profit.
  3. Proceeds from sale of fixed assets.
  4. A company may purchases its own debentures out of its surplus funds.

Two terms which are used in the redemption of debentures :

  1. Redemption out of capital: When a company has not used its reserve or accumulated profit for redemption of its debentures, it is called redemption out of capital, So company using this method have not transferred its profit to DRR A/c. But as per SEBI guidelines it is necessary for a company to transfer 50% amount of nominal value of debentures to be redeemed in DRR A/c before redemption of debentures commence.
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  3. Redemption out of profit: Redemption out of profit means that adequate amount of profits are transferred to DRR A/c from Statement of Profit & Loss before the redemption of debenture commences. This reduces the amount available for dividends to shareholders.
  4. Debenture Redemption Reserve (DRR): Section 71 (4) of the Companies Act, 2013 requires the company to create DRR out of the profits available for dividend and the amount created in DRR shall not be utilized for any purpose except redemption. Rule 18 (7) of Companies (share capital and Debentures) Rules, 2014 requires the following companies to create DRR of an amount equal to 25% of the value of Debentures:–
  1. To maintain the solvency ratio.
  2. To utilize the surplus money or funds which are lying idle with the company.
  3. When rate of interest on debentures is more than the current market rate of interest on debentures in the industry.

Sources of Redemption of Debentures

  1. Proceeds from fresh issue of Share Capital or Debenture holder.
  2. From accumulated profit.
  3. Proceeds from sale of fixed assets.
  4. A company may purchases its own debentures out of its surplus funds.

Two terms which are used in the redemption of debentures :

  1. Redemption out of capital: When a company has not used its reserve or accumulated profit for redemption of its debentures, it is called redemption out of capital, So company using this method have not transferred its profit to DRR A/c. But as per SEBI guidelines it is necessary for a company to transfer 50% amount of nominal value of debentures to be redeemed in DRR A/c before redemption of debentures commence.
  2. Redemption out of profit: Redemption out of profit means that adequate amount of profits are transferred to DRR A/c from Statement of Profit & Loss before the redemption of debenture commences. This reduces the amount available for dividends to shareholders.
  3. Debenture Redemption Reserve (DRR): Section 71 (4) of the Companies Act, 2013 requires the company to create DRR out of the profits available for dividend and the amount created in DRR shall not be utilized for any purpose except redemption. Rule 18 (7) of Companies (share capital and Debentures) Rules, 2014 requires the following companies to create DRR of an amount equal to 25% of the value of Debentures:–

Exemption to create DRR:–

  1. All India Financial Institutions regulated by RBI.
  2. Banking Companies.

Note: 1. It is assumed that company has invested 15% of redeemable amount an April 30 and incashed it as per Companies Act, 2013.

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2. It is assumed that company has created debenture Redemption Reserve @25% of the redeemable debenture and transferred it to General Reserve after redemption of all the debentures.

Redemption Method 3: Redemption of debentures by the purchase of own debentures in the open market. According to the Companies Act, a company can redeem its debentures in full or in part by purchasing its own debentures in the open market (Stock exchange) provided the company is authorised to do so by its Articles of Association.

Suitability of this Method

  1. When interest rate on own debentures is higher than the market interest rate.
  2. When own debentures are quoted at a discount in the open market, a company can earn profit on redemption as debentures are available at below its nominal value in the market, otherwise normal redemption may be at par or at premium.

Debenture Redemption Reserve : Creation of Debenture Redemption Reserve (DRR) is necessary if debentures have been purchased for cancellation. Unless otherwise stated in question, it is assumed that the company has adequate balance in DRR before initiating the process of purchase of debentures for cancellation.

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