Redemption of Debentures FA - III1644399049

3
Redemption of
Debentures
Chapter
3.1 INTRODUCTION
In addition to the funds raised by issue of shares, companies have to borrow large amounts of
money. It may not be possible for a few lenders to meet such loan requirements. Hence, a corporate
loan may be divided into many units called “debentures”. The debentures can be issued to a large
number of persons. A person who purchases a debenture is called a debentureholder. The company
issues to each debentureholder a debenture certificate under its seal as an acknowledgement of loan.
3.2 ISSUE OF DEBENTURES
There are no legal restrictions on the terms of issue of debentures. Hence, debentures may be
issued: (a) at par or (b) at a premium or (c) at a discount.
(a) At Par: If debentures are issued at an amount equal to their face value, they are said to be
issued at par (e.g., debentures of the face value of ` 10 issued for ` 10 only)
(b) At Premium: If debentures are issued at an amount higher than their face value, they are said
to be issued at a premium (e.g., debentures of the face value of ` 10 issued for ` 12, i.e., at a premium
of ` 2). Such premium on issue of debentures is a capital profit (like share premium) and hence cannot
be used for paying dividends. It can be used for writing off preliminary expenses, discount and
commission on issue of shares and debentures, or providing for premium payable on redemption of
debentures or redeemable preference shares. The balance of the premium is shown under “Reserves
and Surplus” on the liabilities side of the balance sheet.
(c) At Discount: If debentures are issued at an amount lower than their face value, they are said
to be issued at a discount (e.g., debentures of, the face value of ` 10 issued for ` 9, i.e., at a discount of
` 1). Such discount on issue of debentures is a capital loss (like discount on issue of shares) to be
written off over the period of debentures. The balance is to be shown under “Miscellaneous
Expenditure (to be written off)” on the assets side of the balance sheet.
3.3 ACCOUNTING ENTRIES ON ISSUE
The following accounting entries are passed in different cases:
1. Debentures Issued for Cash at Par:
Bank A/c Dr.
To --% Debentures A/c
126 Financial Accounting – IV
2. Debentures Issued for Cash at Premium:

Bank A/c Dr.
To Premium on Issue of Debentures A/c
3. Debentures Issued for Cash at Discount:
Bank A/c Dr.
Discount on Issue of Debentures A/c Dr.
4. Issue of Debentures Repayable at Premium:
Bank A/c Dr.
Loss on Issue of Debentures A/c Dr.
To Premium Due on Redemption of Debentures A/c
Notes:
(a) In (4) above, the amount of premium is debited to the Loss on Issue of Debentures A/c, which is a capital loss. Since the
premium is payable on redemption in future, it is credited to the Premium Due on Redemption of Debentures A/c, which is in
the nature of a provision for a future liability.
(b) In (4) above, the debentures are issued at par. However if the debentures are issued at premium, the amount of premium is
credited to the Premium on Issue of Debentures A/c. If the debentures are issued at discount, the amount of discount will be
debited to the Discount on Issue on Debentures Ale.
Illustration 1: What Journal entries would be made if a company issued 1,000 6% Debentures of
` 100 each: (a) at par, (b) at a premium of 10% and (c) at a discount of 10%?
Solution: Journal of ...... Limited
No. Particulars Debit (`) Credit (`)
(a) Bank A/c Dr. 1,00,000
To 6% Debentures A/c 1,00,000
[Being issue of 1,0006% Debentures of ` 100 each at Part]
(b) Bank A/c Dr. 1.10,000
To Premium on Issue of Debentures A/c 10,000
[Being issue of 1,000 6% Debentures of ` 100 each at a premium of ` 10
per Debentures]
Note: Premium on Issue of Debentures is capital profit to be shown
under the heading Reserves & Surplus in the Balance Sheet.
(c) Bank A/c Dr. 90,000
Discount on Issue of Debentures A/c Dr. 10,000
[Being issue of 1,0006% Debentures of ` 100 each at a discount of ` 10
per Debenture]
Note: Discount on Issue of Debentures is a capital loss, to be shown
under the heading Miscellaneous Expenditure [Not Written om in the
Balance Sheet]
3.4 REDEMPTION
The redemption (repayment) of debentures depends upon the type of debenture (irredeemable or
redeemable) and terms of redemption (at par/premium/discount).
Redemption of Debentures 127
Redeemable debentures are to be redeemed (repaid) at a specified future date. The date of
redemption is mentioned on the debenture certificate. Irredeemable Debentures are not to be redeemed
at all as long as the company exists. These are repaid only when the company is wound up or
liquidated.
If debentures are to be redeemed at their face value, they are said to be redeemable at par.
If debentures are to be redeemed at an amount higher than their face value, they are said to be
redeemable at a premium. Such premium payable on redemption is a capital loss for the company.
Such premium though payable on redemption must be provided as a liability at the time of issue itself.
If debentures are to be redeemed at an amount lower than their face value, they are said to be
redeemable at a discount. Such discount is a capital profit for the company. However, such debentures
are rarely issued in practice.
3.5 REDEMPTION OUT OF CAPITAL
Debentures may be redeemed out of capital or out of profits. On redemption, the
debentureholders are paid out of the cash or bank account. This reduces the working capital available
with the company. If no amount is set aside out of profits for such redemption, such redemption is said
to be out of the capital of the company. The entries are as follows:
1. Amount Payable on Redemption:
(i) Redemption at Par:
Debentures A/c Dr. Face value of debenture redeemed
To Debentureholders A/c
(ii) Redemption at a premium:
Premium on Redemption of
Debentures A/c Dr. Amount of premium
To Debentureholders A/c Total
(iii) Redemption at a discount:
To Debentureholders A/c
To Profit on Redemption
of Debentures A/c Amount of discount
2. Payment:
Debentureholders A/c Dr.
To Bank A/c
Illustration 2 (Redemption out of capital): On 1.1.2015, ABC Ltd. issued 400 8% Debentures
of ` 1,000 each at a discount of 5%. These debentures were redeemed at a premium of 10% at the end
of three years. Show the entries.
Solution: Journal of ABC Limited
Date Particulars Debit (`) Credit (`)
2015
Jan. 1 Bank A/c Dr. 3,80,000
Loss on Issue of Debentures A/c Dr. 60,000
To Debentures A/c 4,00,000
To Premium on Redemption of Debentures A/c 40,000
[Being 400 Debentures of ` 1,000 each issued at discount of 5%

repayable at a premium of 10%]
2015
Dec. 31 Profit and Loss A/c Dr. 20,000
To Loss on Issue of Debentures A/c 20,000
[Being 1/3rd loss on issue of debentures written off]
2015
To Loss on Issue of Debentures. A/c 20,000
2015
To Loss on Issue of Debentures A/c 20,000
Debentures A/c Dr. 4,00,000
Premium on Redemption of Debentures Dr. 40,000
To Debentureholders A/c 4,40,000
[Being amount payable on redemption of debentures at premium
of 10%]
Debentureholders A/c Dr. 4,40,000
To Bank A/c 4,40,000
[Being amount paid on redemption]
Note: Loss on issue of debentures is equal to Discount on issue (10% of ` 4,00,000, ` 40,000 + Premium payable on redemption (5%
of ` 4,00,000) ` 20,000 = Total loss of ` 60,000. This is written off equally (1/3) during the period of debentures, i.e., 3 years.
3.6 REDEMPTION OUT OF PROFITS

In this case, the debentureholders are paid out of the profits of the company. This may be done in
following different ways: (a) create reserve out of the profits in the year of redemption. (b) create debenture
redemption reserve out of profits of every year. (c) create sinking fund out of profits of every year.
3.7 RESERVE CREATED IN YEAR OF REDEMPTION
In this case, the redemption is made out of the profits earned during the year in which the
debentures are redeemed. An amount equal to the face value of debentures redeemed is transferred
from the profits to the General Reserve in the year of redemption. This ensures that such profits
remain in the business and are not used for paying dividends. On the date of redemption of debentures,
an amount equal to the face value of debentures redeemed is transferred from the profit and loss
appropriation account to general reserve, by passing the following entry:
Profit and Loss (Appropriation) A/c Dr. Face value of debentures redeemed
To General Reserve A/c
Note: If the debentures are to be redeemed in yearly lots, this entry is passed every year for an amount equal to the face value of
debentures redeemed in that year.
Illustration 3 (Redemption out of profit): On 31.12.2014, A Ltd. redeemed debentures of
` 1,00,000 issued on 1.1.2015 at a premium of 10% but of profits. Show the entries.
Solution: Journal of A Ltd.
2015
Dec. 31 Debentures A/c Dr. 1,00,000
[Being amount payable on redemption of debentures at premium of

10%]
Profit and Loss (Appropriation) A/c Dr. 10,000
[Being premium on redemption of debentures written off]
Profit and Loss (Appropriation) A/c Dr. 1,00,000
To General Reserve A/c 1,00,000
[Being transfer of an amount equal to face value of debentures
redeemed]
Note: The premium on redemption of debentures is adjusted against the P & L (Appropriation) A/c now, on the presumption that it
was not written off in the earlier years.
Illustration 4 (Redemption in annual instalments/lots/drawings): On 1.1.2014, P Ltd. issued
4,000, 6% Debentures of ` 100 each at a discount of 10% repayable. in 4 years by annual equal
instalments. Show the journal entries and ledger accounts. (CA Modified)
Solution: Journal of P Ltd.
2014
Jan. 1 Bank A/c Dr. 3,60,000
Discount on Issue of Debentures Dr. 40,000
[Bein debentures issued]
Dec. 31 Debenture Interest A/c Dr. 24,000
To Bank A/c 24,000
[Being interest paid on debentures: ` 40000 × 6%]
Debenture A/c Dr. 1,00,000
[Being amount payable on redemption of 1/4th Debentures at par]
To Bank A/c l,00,000
Profit and Loss A/c Dr. 40,000
To Debenture Interest A/c 24,000
To Discount on Issue of Debentures (See Note) 16,000
[Being annual interest and proportionate discount on debentures
adjusted]
redeemed]
2015
To Bank A/c 18,000
[Being interest paid on debentures: ` 300.000 × 6%]
Debentures A/c Dr. 1,00,000

To Discount on Issue of Debentures 12,000
[Being annual interest and proportionate discount on debentures
adjusted]
redeemed]
2016
To Bank A/c 12,000
[Being interest paid on debentures: ` 2,00,000 × 6%]
[Being amount payable on redemption 1/4th Debentures at par]
To Bank A/c
1,00,000
Profit and Loss (Appropriation) A/c Dr. 20,000
To Discount on Issue of Debentures
[Being annual interest and proportionate discount on debentures 8,000
adjusted]
[Being transfer of an amount equal to face value of debentures 1,00,000
redeemed]
2017
To Bank A/c 6,000
[Being interest paid on debentures: ` 1,00,000 × 6%]
To Debentures A/c
1,00,000
Debentureholder A/c Dr. 1,00,000
To Bank A/c
1,00,000
To Discount on Issue of Debentures 4,000
[Being annual interest and proportionate discount on
debentures adjusted]
redeemed]
Dr. 6% Debentures A/c Cr.

Date Particulars ` Date Particulars `
2014 2014
Dec. 31 To Bank 1,00,000 Dec. 31 By Bank 3,60,000
To Balance c/d 3,00,000 Jan. l By Discount on Issue of 40,000
Debentures
4,00,000 4,00,000
2015 2015
Dec. 31 To Bank 1,00,000 Jan. 1 By Balance b/d 3,00,000
To Balance c/d 2,00,000
3,00,000 3,00,000
2016 2016
2,00,000 2,00,000
2017 2017
1,00,000 1,00,000
Dr. Discount on Debentures A/c Cr.

2014 2014
Jan. 1 To 6% Debentures 40,000 Dec. 31 By P & L A/c 16,000
By Balance c/d 24,000
40,000 40,000
2015 2015 By P & L A/c 12,000
Jan. 1 To Balance b/d 24,000 Dec. 31 By Balance c/d 12,000
24,000 24,000
2016 2016
Jan. 1 To Balance b/d 12,000 Dec. 31 By P & L A/c 8,000
By Balance c/d 4,000
12,000 12,000
2017 2017
Jan. 1 To Balance b/d 4,000 By P & L A/c 4,000
4,000 Dec. 31 4,000
Dr. Debenture Interest A/c Cr.

2014 2014
Dec. 31 To Bank 24,000 Dec. 31 By & L A/c 24,000
24,000 24,000
2015 2015
Dec. 31 To Bank 18,000 Dec. 31 By P & L A/c 18,000
18,000 18,000
2016 2016
12,000 12,000
2017 2017
6,000 6,000
Note: Discount on debentures will be written off in proportion of the balance of Debentures A/c at each year end, i.e., 4 : 3 : 2 : 1.
Thus, discount written off in the first year will be ` 40,000 × 4/10 = ` 16,000: in the second year ` 40,000 × 3/10 = ` 12,000
and so on.
3.8 DEBENTURE REDEMPTION RESERVE

In Illustration No.3, though the benefit of debentures is enjoyed for many years, the profits of
only one year (year of redemption) are used for redemption. Instead, a fixed amount can be set aside
out of the profits every year by making a transfer from the Profit and Loss Appropriation A/c to a
Reserve A/c known as Debenture Redemption Reserve every year. The total value of debentures is
divided by the period of debentures to arrive at the yearly instalment. Thus, in Illustration No. 3, the
total value of debentures is ` 1,00,000 and the period is 5 years, so the fixed yearly instalment is
` 20,000. The yearly instalment is transferred from the Profit and Loss Appropriation Account to
Debenture Redemption Reserve Account, every year by passing the following entry:
Profit and Loss A/c Dr. Annual instalment
To Debenture Redemption Reserve A/c
When the debentures are redeemed the balance of the Debenture Redemption Reserve is
transferred to the General Reserve.
Debenture Redemption Reserve A/c Dr. Balance on date of redemption
3.9 SINKING FUND
If the fixed amount set aside out of profits every year is to be invested outside the business, a Sinking
Fund or a Debenture Redemption Fund is created. Out of the fund, the company purchases either
investments or an insurance policy. The income from the investments/policy is added back to the fund and
again reinvested. The investments are sold or the policy is surrendered on the date of redemption in order
to obtain money required to pay off the debentureholders. The entries are as follows:
1st Year :
1. Annual Instalment:
Profit and Loss Appropriation A/c Dr. Annual instalment
To Sinking Fund A/c
2. Investment Made:
Sinking Fund Investments A/c Dr. Annual instalment
To Bank A/c
2nd Year Onwards:
1. Interest Received on Investment:
Bank A/c Dr. Amount of instalment
To Sinking Fund A/c
2. Annual Instalments:
To Sinking Fund A/c
3. Investments Made:
Sinking Fund Investments A/c Dr. Annual instalment + Interest
To Bank A/c
Year of Redemption
1. Interest Received on Investments:
Bank A/c Dr. Amount of interest
To Sinking Fund A/c
2. Annual Instalment:
To Sinking Fund A/c
3. Investment Sold:
Bank A/c Dr. Sale Price Received
To Sinking Fund Investments A/c Cost
To Sinking Fund A/c Profit
Note: In case of loss, the loss is debited to the Sinking Fund A/c.
4. Sinking Fund transferred to General Reserve:
Sinking Fund A/c Dr. Balance
To General Reserve A/c Profit
Notes:
1. In case an insurance policy is purchased, a Sinking Fund Insurance Policy A/c is opened instead of Sinking Fund Investment A/c.
2. The Annual Instalment can be determined with reference to the factor in Sinking Fund Tables, by the formula:
Annual Instalment = Amount of Redemption × Factor in S.F. Table
For example, the S.F. Table shows that 0.31720856 at 5% compound interest in 3 years will
become ` 1. If amount of redemption. is ` 6,60,000, annual instalment to be made towards sinking
fund is 6,60,000 × 0.31720856 = ` 2,09,357.65.
Illustration 5 (Sinking Fund): ITC Ltd. issued 1,100 5% debentures of ` 100 each on
1st January, 2012 redeemable at par. The company decided to set aside every year a sum of ` 34,893
to be invested @ 5% outside the business. The investments were sold at ` 71,580 at the end of the
third year and the debentures were redeemed. Give journal entries. Also prepare Sinking Fund
Account and Sinking Fund Investments Account. (CMA Modified)
Solution: Journal of ITC Ltd.
2012
Jan. 1 Bank A/c Dr. 1,10,000
[Being 1,100 debentures of ` 100 each issued at par repayable at par]
Dec. 31 Profit and Loss Appropriation A/c Dr. 34,893
To Sinking Fund A/c 34,893
[Being amount set aside from profits for redemption of debentures ]
Sinking Fund Investments A/c Dr. 34,893
To Bank A/c
34,893
[Being amount invested out of sinking fund]
2013
Dec. 31 Bank A/c Dr. 1,745
[Being interest received on Sinking Fund Investments: 5% × 34 893]
Profit and Loss Appropriation A/c Dr. 34,893

[Being amount set aside from profits for redemption of debentures]
Sinking Fund Investments A/c Dr. 36,638
To Bank A/c 36,638
[Being amount invested out of sinking fund: 34,893 + 1,745]
2014
[Being interest received on Sinking Fund Investments: 5% × 71,531]
[Being amount set aside from profits for redemption of debentures]
Bank A/c (sale price) Dr. 71,58
To Sinking Fund Investments A/c (cost) 71,531
To Sinking Fund A/c (profit) 49
[Being amount received on sale of sinking fund investments]
5% Debentures A/c Dr. 1,10,000
[Being amount payable on redemption of debentures]
[Being amount paid on redemption of Sinking Fund A/c on
redemption of debentures]
Sinking Fund A/c Dr. 1,10,050
[Being transfer of Sinking Fund A/c on redemption of debentures]
Dr. Sinking Fund Account Cr.
2012 2012
Dec. 31 To Balance c/d 34,893 Dec. 31 By P & L Appropriation A/c 34,893
34,893 34,893
2013 2013
Dec. 31 To Balance c/d 71,531 Jan. 1 By Balance b/d 34,893
By Bank (interest) 1,745
Dec. 31 By P & L Appropriation A/c 34,893
71,531 71,531
2014 2014
Dec. 31 To General Reserve 1,10,050 Jan. 1 By Balance b/d 71,531
By SF Investment (profit) 49
1,10,050 1,10,050
Dr. Sinking Fund Investment Account Cr.
2012 2012
Dec. 31 To Bank A/c 34,893 Dec. 31 By Balance c/d 34,893
34,893 34,893
2013 2013
Jan. 1 To Balance b/d 34,893 Dec. 31 By Balance c/d 71,531
Dec. 31 To Bank A/c 36,638
71,531 71,531
2014 2014
Jan. 1 To Balance b/d 71,531 Dec. 31 By Bank A/c (sale) 71,580
Dec. 31 To Sinking Fund 49
(profit on sale)
71,580 71,580
Notes:
1. Interest on Sinking Fund Investments is credited to Sinking Fund A/c, and not to Interest Received A/c or Profit and Loss A/c.
2. Profit on sale of Sinking Fund Investment is credited to Sinking Fund A/c and not to Profit and Loss A/c.
3. In the second year, Investment is equal to yearly instalment (` 34,893) plus interest (` 1,745).
4. In the year of redemption, no investments are made.
Illustration 6: On 30th September, 2013, the following balance stood in the books of S.P. Ltd.
Particulars ` Particulars `
7% Second Mortgage Debenture Stock 4,00,000 Sinking Fund Investments:
Income Received on Sinking Fund (a) ` 80,000, 5% State Development Loans 76,000
Investments 14,500
Discount of Issue of Debentures 25,000 (b) ` 90,000, 6% National Defence Bonds 1,00,000
Sinking Fund 3,65,500 (c) ` 70,000, 7% Plan Progress Loans 70,000
(d) ` 1,80,000, 7½% Central Securities 1,85,000
On the same day, the investments were sold: the 5% State Development loans at 90, the 6%
National Defence Bonds at par, the 7% Plan Progress Loans at 115 and the 7½% Central Securities at
120. On 1st Oct., 2013, the debentures of ` 3,00,000 were redeemed at a premium of 2½%. On the
very same day, 8% Moon Landing Investments of ` 1,00,000 were purchased at a premium of 3%.
Annual contribution for redemption was ` 50,000. Ignore interest.
Prepare the following accounts: (i) Debenture stock; (ii) Sinking Fund; (iii) Sinking Fund
Investment and (iv) General Reserve. (CA Modified)
Solution:
Dr. 7% Debentures Stock Account Cr.
To Bank A/c 3,00,000 By Balance b/d 4,00,000
4,00,000 4,00,000
To General Reserve (on debenture By Balance b/d 3,65,500
redemption) 3,00,000
To Premium on redemption of debentures 7,500 By SF Investment (profit on sale) 27,500
To Discount on issue of debentures 18,750 By Interest of SF Investments 14,500
To Balance c/d 1,31,250 By P & L Appropriation A/c (yearly
instalment) 50,000
4,57,500 4,57,500
Dr. Sinking Fund Investment Account Cr.

To Balance b/d 4,31,000 By Bank A/c (investments sold) 4,58,500
To Sinking Fund (profit on sale) 27,500 By Balance c/d 1,03,000
To Bank A/c (purchase) 1,03,000
5,61,500 5,61,500
Notes:
1. Investments Sold:
5% State Development Loans: ` 80,000 × 90/100 = 72,000
6% National Defence Bonds: ` 90,000 at par = 90,000
7% Plan Progress Loans: ` 70,000 × 115/100 = 80,500
7.5% Central Securities: ` 1,80,000 × 120/100 = 2,16,000
4,58,500
Profit = ` 4,58,500 – ` 4,31,000 (Cost) = ` 27,500
2. Premium on redemption of 3,000 debentures (` 7,500) and proportionate discount on issue of
these 3,000 debentures (25,000 × 3/4 = ` 18,750) are adjusted against the Sinking Fund.
3. Amount equal o face value of debentures redeemed (` 3,00,000) is transferred from the Sinking
Fund to the General Reserve on redemption.
Illustration 7 (Reserve Fund): The summarised Balance Sheet of Successful Ltd. on 31st December,
2014 was:
Liabilities ` Assets `
Share Capital: Fixed Assets 2,10,000
Ordinary Shares of ` 1 each fully paid 2,00,000 Debentures Redemption
General Reserve 80,000 Reserve Fund Investments 50,000
Debenture Redemption Reserve Fund 50,000 Current Assets Including Balance at Bank 2,40,000
Premium on Redemption of Debentures A/c 1,000
5% Debentures 50,000
Current Liabilities 1,19,000
5,00,000 5,00,000
The directors decided to – (a) repay the debentures including premium of 2 per cent. (b) Make a
bonus issue to the ordinary shareholders of one share for every two shares held in order to capitalise
part of the undistributed profits. The appropriate resolution were passed, the above transactions were
duly completed. Deb. Redemption Reserve Fund Investments were sold for ` 50,000.
You are required to show: (a) The appropriate journal entries to record the transactions in the
books of the company and (b) The Balance Sheet as it would appear after the completion of the
transactions. (T.Y.B.Com./BAF, Modified, M.U.)
Solution: Journal of Successful Ltd.
Date Particulars Debits (`) Credit (`)
2014
To Debenture Redemption Reserve Fund Investments A/c 50,000
[Being sale of Debenture Redemption Reserve Fund
Investments for redemption of debentures]
Debentures A/c Dr. 50,000

To Debentureholders A/c 51,000
[Being amount payable on redemption of debentures at a
premium of 2%]
Debentureholders A/c Dr. 51,000
To Bank A/c 51,000
Debenture Redemption Reserve Fund A/c Dr. 50,000
To General Reserve A/c 50,000
[Being transfer of Debenture Redemption Reserve Fund A/c
on redemption of debentures]
General Reserve A/c Dr. 1,00,000
To Bonus to Shareholders A/c 1,00,000
[Being capitalisation of reserves for issue of bonus shares]
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital A/c 1,00,000
[Being issue of 1,00,000 fully paid shares as bonus shares]
Balance Sheet as on 31st March, 2014

Liabilities ` ` Assets ` `
Share Capital --------? Fixed Assets 2,10,000
Authorised: (Sundry)
Issue, Subscribed and Paid up: Investments Nil
3,00,000 Equity Shares of ` 1 3,00,000 Current Assets 2,39,000
each (Out of the above, 1,00,000 Cash and Bank
shares are allotted as Bonus (see note)
Shares)
Reserves and Surplus: Loans and Advances Nil
General Reserve: b/d 80,000 Misc. Expenditure Nil
(not w/o)
Add: Tfd. from Debenture
Redemption Reserve Fund 50,000
1,30,000
Less: Utilised for issue of Bonus 30,000
Shares 1,00,000
Secured Loan Nil
Unsecured Loans Nil
Current Liabilities and
Provisions:
A. Current Liabilities 1,19,000
B. Provisions Nil
4,49,000 4,49,000
Notes:
1. Cash Balance:
Cash and Bank b/d 2,40,000
Add: Sale of Investments 50,000
2,90,000
Less: Debentures redeemed 51,000

2,39,000
2. Premium on redemption of debentures:
Opening balance b/d 1,000
Less: Adjusted during year 1,000
Nil
Illustration 8 (Sinking Fund Insurance Policy): ABC Ltd. issued 9% debentures of ` 2,00,000
on 1st January, 2012 redeemable at par. The company decided to take a 5 years Sinking Fund
Insurance Policy for providing for redemption. The annual premium payable of 1st January every year
is ` 37,000. The value of the policy increases every year by 4%. Prepare the Sinking Fund A/c and
Sinking Fund Insurance Policy A/c for 5 years. (T.Y.B.Com., M.U.)
Solution:
2012 2012
Dec. 31 To Balance c/d 38,480 Dec. 31 By P & L Appropriation A/c 37,000
By SF Ins. Policy A/c (see note) 1,480
38,480 38,480
2013 2013
Dec. 31 To Balance c/d 78,499 Jan. 1 By Balance b/d 38,480
By SF Ins. Policy A/c 3,019
78,499 78,499
2014 2014
Dec. 31 To Balance c/d 1,20,119 Jan. 1 By Balance b/d 78,499
1,20,119 1,20,119
2015 2015
Dec. 31 To Balance c/d 1,63,404 Jan. 1 By Balance b/d 1,20,119
1,63,404 1,63,404
2016 2016
Dec. 31 To General Reserve 2,08,420 Jan. 1 By Balance b/d 1,63,404
By SF Insurance Policy A/c 8,016
2,08,420 2,08,420
Dr. Sinking Fund Insurance Policy Account Cr.
2012 2012
Jan. 1 To Bank A/c 37,000 Dec. 31 By Balance c/d 38,480
Dec. 31 To Sinking Fund A/c 1,480
(4% × 37,000)
38,480 38,480
2013 2013
Jan.1 To Balance b/d 38,480
Dec.31 To Bank A/c 37,000 Dec. 31 By Balance c/d 78,499
(4% × 75,480)
78,499 78,499
2014 2014
Jan. 1 To Balance b/d 78,499 Dec. 31 By Balance c/d 1,20,119
Dec. 31 To Bank A/c 37,000 (policy matured) 1,63,404
(4% × 1,15,499)
1,20,119 1,20,119
2015 2015
Jan. 1 To Balance b/d 1,20,119 Dec. 31 By Bank A/c 1,63,404
(4% × 1,57,119)
1,63,404 1,63,404
2016 2016
Jan. 1 To Balance b/d 1,63,404 Dec. 31 By Bank A/c (policy matured) 2,08,420
(4% × 200, 404)
2,08,420 2,08,420
Note: The policy is taken out on 1st January, 2012. The increase in first year (4% × 37,000 = 1,480) is credited to the Sinking Fund
A/c on 31.12.12. Similarly, the 4% increase in 1991 is of ` 75,480 (38,480 + 37,000); in 1992 is on ` 1,15,499 (73,499 +
37,000); in 1993 on ` 1,57,119 (1,20,119 + 37,000) and in 1994 on ` 2,00,404 (1,63,404 + 37,000).
Illustration 9 (Conversion): On 10th January, 2010, X Ltd. issued 10,000 6% Debentures of
` 100 each redeemable at par after 15 years. The term of issue, however, provided that the debentures
could be redeemed by giving 6 months notice at any time after 5 years at a premium of 4% either by
payment in cash or by allotment of Preference Shares and/or other debentures according to the option
of the debentureholders.
On 10th April, 2014, the company informed the debentures holders to redeem the debentures on
1st October, 2014 either by payment in cash or by allotment of 8% Preference Shares of ` 100 each at
`130 per share or 7% 2nd debenture of ` 100 each at ` 96 per debentures.
Holders of 4,000 debentures accepted the offer of the Preference Shares, holders of 4,800
debentures accepted the offer of 7% 2nd debentures and the rest demanded cash.
Give journal entries recording the above redemption. (CA Modified)
Solution: Journal of X Ltd.
Date Particulars Debit ` Credit `
1 6% Debentures A/c Dr. 10,00,000
Premium on Redemption of Debentures A/c Dr. 40,000
[Being amount payable on redemption of 10,000 debentures at
premium of 4%)
2 Debentureholders A/c Dr. 4,16,000

To 8% Preference Share Capital A/c 3,20,000
To Share Premium A/c 96,000
[Being preference shares of ` 100 each at a premium of ` 30 each
allotted to 4,000 debentureholders]
Discount on Issue of Debentures A/c Dr. 20,800
To 7% Debentures of ` 100 5,20,000
[Being 7% debentures of ` 100 each at a discount of 4% allotted to
4,800 debentureholders]
[Being amount paid to 1,200 debentureholders on redemption]
5 Share Premium A/c Dr. 60,800
To Discount of Issue of Debentures A/c 20,800
[Being premium on redemption of debentures and discount on issue
of debentures written off]
6 Profit and Loss (Appropriation) A/c Dr. 1,20,000
redeemed in cash]
Notes:
1. Conversion into Preference Shares: `
Total Amount Due: Holders of 4,000 debentures × ` 104 4,16,000
Preference Share Capital: 4,16,000 × 100/130 3,20,000
Premium on issue of Preference Shares: Balance 96,000
2. Conversion into New Debentures: `
Total Amount Due: Holders of 4,800 Debentures × ` 104 4,99,200
New Debentures: 4,99,200 × 100/96 5,20,000
Discount on Issue of New Debentures: Balance 20,800
3. Cash Paid: Holders of 1,200 Debentures × ` 104 1,24,800
Illustration 10: Hindustan Manufacturing Limited gave notice of its intention to redeem its 6%
Debentures, amounting to ` 4,00,000 of ` 100 each at ` 102 and offered the debentureholders the
following three options, to apply the redemption money to subscribe for:
(a) 5% cumulative preference shares of ` 20 each at ` 22.50 per share
(b) 6% debentures at ` 96 and
(c) to have their holdings redeemed for cash.
Debentureholders for ` 1,71,000 accepted the proposal (a)
Debentureholders for ` 1,44,000 accepted the proposal (b)
Remaining debentureholders accepted the proposal (c)
Pass the necessary journal entries to record the above transactions in the books of the company.
(T.Y.B.Com., Modified, M.U., April 96)
Solution: Journal of Hindustan MFG. Co. Ltd.

[Being amount payable on redemption of debentures at premium of 2%]
To 5% Cumulative Preference Share Capital A/c 1,55,040
[Being 7,752 shares of ` 20 issued at premium of ` 2.50 against redemption of
debentures worth ` 1,71,000]
Discount on Issue of 6% Debentures A/c Dr. 6,120
To 6% Debentures (New) A/c 1,53,000
[Being new debentures of ` 100 issued @ ` 96 each against redemption of
debentures worth ` 1,44,000)
4 Debentureholders A/c Dr. 86,700
To Bank A/c 86,700
[Being amount paid on redemption of part debentures in cash]
5 Profit and Loss Appropriation A/c Dr. 85,000
To General Reserve A/c 85,000
[Being transfer of amount equal to face value of debentures redeemed in cash]
Notes:
1. Options for Redemption: `
(a) Preference Shares of ` 20 @ ` 22.50:
Face value of Debentures redeemed against Preference Shares 1,71,000
Add: 2% Premium 3,420
Total Amount Due 1,74,420
No. of Preference Shares Issued (1,47,420/22.50) = 7,752 1,55,040
Face value of Preference Shares (7,752 × ` 20) 19,380
Premium on issue of Preference Shares (7,752 × ` 2.50) 1,74,420
(b) 6% Debentures of ` 100 @ ` 96:
Face value of Debentures redeemed against New Debentures 1,44,000
No. of Debentures Issued (1,46,880/96) = 1,530 1,53,000
Face value of Debentures (1,530 × 100) 6,120
Less: Discount on Issue of Debentures (1,530 × ` 4) 1,46,880
(c) Cash:
Face value of Debentures redeemed against Cash (balance) 85,000
(4,00,000 – 1,71,000 – 1,44,000)
Total Amount Due and Paid in Cash 86,700
2. Entry (5) is passed to transfer the amount equal to face value of debentures redemption in cash
to general reserves assuming redemption out of profits; if redemption is assumed to be out of
capital, it will not be passed.
Illustration 11: Beeta Limited had issued 5,000 12% Debentures of ` 100/- each redeemable on
31st December, 1995 at a premium of 5%. The company offered three options to Debentureholders as
follows: (i) 14% Preference Shares of ` 10 at ` 12; (ii) 15% Debentures of ` 1,500 debentures;
(iii) Redemption in cash.
The option were accepted as under: (i) option by holders of 1,500 debentures; (ii) option by
holders of 1,500 debentures; (iii) option by holders of 2,000 debentures. The redemption was carried
out by the company. Show journal entries. (T.Y.B.Com./BAF, Modified, M.U., Oct. 2006)
Solution: Journal of Beeta Ltd.
1995 Particulars Debit ` Credit `
Dec. 31
[Being amount payable on redemption of 5,000 debentures at premium of 5%]
To 14% Preference Share Capital A/c 1,31,250
[Being shares issued at premium against redemption of 1,500 debentures]
[Being new debentures issued against redemption of existing 1,500 debentures]
4 Debentures A/c Dr. 2,10,000
[Being amount paid on redemption of 2,000 debentures in cash]
5 Share Premium A/c Dr. 25,000
To Premium on Redemption of Debentures 25,000
[Being premium on redemption of debentures adjusted]
Notes:
1. Options for Redemption: `
(a) Preference Shares of ` 10 @ ` 12:
Face value of Debentures redeemed against Preference Shares (1,500 × 100) 1,50,000
No. of Preference Shares Issued (1,57,500/12) = 13,125
Face value of Preference Shares (13,125 × ` 10) 1,31,250
Premium on issue of Preference Shares (13,125 × ` 2) 26,250
1,57,500
(b) 15% Debentures of ` 100 at par:
Face value of Debentures redeemed against New Debentures (1,500 × 100) 1,50,000
No. of Debentures Issued (1,57,500/100) = 1,575
Face value of Debentures 1,575 × 100 1,57,500
(c) Cash:
Face value of Debentures redeemed against Cash (balance) 2,00,000
(5,00,00 – 1,50,000 × 1,50,000)
Total Amount Due and Paid in Cash 2,10,000
Illustration 12: M/s Solvent Ltd. intends to redeem its Secured Debts on 1st April, 2014 when
its financial position indicated:
Particulars ` in lakhs
SOURCES
I. Own Fund:
1. Equity Share Capital 7.00
2. Preference Share Capital 1.00 8.00
3. Reserves and Surplus:
Sinking Fund 3.85
Profit and Loss Account 0.90 4.75 12.75
II. Owed Fund:
1. 10% Debentures Stock Redeemable @ Premium of 10%
(Secured against Fixed Assets) 4.00
2. Public Deposits 0.25 4.25
Total Fund 17.00
APPLICATIONS
I. Fixed Assets: 10.00
II. Sinking Fund Investments:
` 80,000, 5% Infrastructure Bonds 0.76
` 90,000, 6% National Defence Bonds 1.00
` 70,000, 7½% State Finance Corporation Bonds 0.70
` 1,90,000, 7% IDBI Securities 1.85 4.31
Working Capital 2.69
Total Assets 17.00
The Debentureholders were given option to get:
1. Cash on Redemption OR
2. Equity Shares of ` 10/- each @ premium of ` 5/- per share OR
3. 15% Debentures of ` 100/- each @ premium of ` 10 per debenture.
Accordingly:
(a) 50% Debentureholders opted for 1st option.
(b) 30% Debentureholders opted for 2nd option.
(c) 20% Debentureholders opted for 3rd option.
(d) All investments were sold @ 15% below cost.
Pass necessary journal entries and prepare revised Balance Sheet after redemption.
(T.Y.B.Com., Modified, M.U.)
Solution: Journal of Solvent Limited
No. Particulars Debit ` Credit `
1 10% Debentures Stock A/c Dr. 4,00,000
[Being amount due on redemption]
2 Cash/Bank A/c Dr. 3,66,350

Sinking Fund A/c (loss) Dr. 64,650
To Sinking Fund Investments A/c 4,31,000
[Being amount received on sale of sinking fund investments]
To Cash/Bank A/c 2,20,000
[Being amount paid on redemption to 50% of debentureholders]
To Equity Share Capital A/c 88,000
[Being shares issued at premium against redemption to 30% of
debentureholders]
5 Debentureholders A/c Dr 88,000
To 15% Debentures A/c 80,000
To Debenture Premium A/c 8,000
[Being debentures issued at premium against redemption to 20% of
debentureholders]
6 Sinking Fund A/c Dr. 3,20,350
To Profit and Loss A/c 3,20,350
[Being transfer on redemption of debentures: 3,85,000 – 64,650]
7 Share Premium A/c Dr 40,000
[Being premium on redemption of debentures adjusted]
Balance Sheet as on 1st April, 2014
Particulars ` ` `
SOURCE OF FUNDS
I. Own Fund:
1. Share Capital:
Authorised: ?
Issued, Subscribed and Paid up:
(i) Preference Shares 1,00,000
(ii) 78,800 Equity Shares of ` 10 each 7,88,000 8,88,000
2. Reserves and Surplus:
(i) Sinking Fund: b/d 3,85,000
Less: Loss on SF Investment 64,650
3,20,350
Less: Tfd. To P & L A/c 3,20,350 Nil
(ii) Share Premium A/c: b/d Nil
Add: Fresh issue 44,000
Less: Premium on redemption of debentures written off 40,000 4,000
(iii) Profit and Loss A/c: b/d 90,000
Add: Tdf. from Sinking Fund 3,20,350 4,10,350
(iv) Debentures Premium (during the year) 8,000 4,22,350
14,15,350
II.Owned Funds
(1) 15% Debentures 80,000
(2) Public Deposits 25,000 1,05,000
APPLICATION OF FUNDS
I. Fixed Assets 10,00,000
II. Working Capital (see note) 4,15,350
14,15,350
Notes:
1. Working Capital: ` `
Balance b/d 2,69,000
Add: Cash/Bank A/c balance:
Cash received on sale of investments 3,66,350
Less: Cash paid to Debentureholders 2,20,000 1,46,350
Balance 4,15,350
2. It is assumed that the Sinking Fund is for redemption of debentures
Illustration 13: Bharat Ltd. issued 50,000 15% debentures of ` 1,000 each at ` 952 per
debenture. The debentures are redeemable in five annual instalments of ` 200 each. It is decided to
writ off discount in proportion to the amount of debenture finance usage over the various years.
You are asked to:
(i) Prepare statement for write off of discount over the five year period.
(ii) Pass appropriate journal entries in year 1 and year 2.
(iii) Show the disclosure in final accounts of year 1 and year 2.
(T.Y.BAF/B.Com., Modified, M.U., Apr. 98/2008)
Solution: Journal of Bharat Limited
Year 1
1 Bank A/c Dr. 4,76,00,000
Discount on Issue of Debentures A/c Dr. 24,00,000
To 15% Debentures A/c 5,00,00,000
[Being 50,000 debentures of ` 1,000 each issued @ ` 952 each vide
Board resolution dt....]
2 Debenture Interest A/c Dr. 75,00,000
To Bank A/c 75,00,000
[Being Interest @ 15% p.a. on debentures of ` 5,00,00,000]
3 Profit and Loss A/c Dr. 83,00,000
To Debenture Interest A/c 75,00,000
To Discount on Interest of Debenture A/c 8,00,000
[Being above expenses transferred]
4 15% Debentures A/c Dr. 1,00,00,000
To Bank A/c 1,00,00,000
[Being 1st instalment of ` 200 each on 50,000 debentures repaid]
Year 2
5 Debenture Interest A/c Dr. 60,00,000
To Bank A/c 60,00,000
[Being interest @ 15% p.a. on debentures of ` 4,00,00,000]
6 Profit and Loss A/c Dr. 66,40,000

To Debenture Interest A/c 60,00,000
To Discount on Issue of Debenture A/c 6,40,000
[Being above expenses transferred]
7 15% Debentures A/c Dr. 1,00,00,000
To Bank A/c 1,00,00,000
[Being 2nd instalment of ` 200 each on 50,000 debentures repaid]
Profit and Loss Account for the Year Ended (Extracts)

Year 2 Year 1
Expenses 60,00,000 75,00,000
Debenture Interest 6,40,000 8,00,000
Balance Sheet as on ... [Extracts]

Particulars Year 2 Year 1
SOURCES OF FUNDS
Owed Funds
Secured Loans:
50,000 15% Debentures of ` 600 each
(previous year ` 800 each); repayable in yearly instalments of ` 200 per
debentures 3,00,00,000 4,00,00,000
APPLICATION OF FUNDS
Misc. Expenditure (to the extent not adjusted)
Discount on Issue of Debentures 9,60,000 16,00,000
Note:
Statement Showing Discount Write-off
Year Proportion Discount W/O
1 24,00,000 × 5/15 8,00,000
2 24,00,000 × 4/15 6,40,000
3 24,00,000 × 3/15 4,80,000
4 24,00,000 × 2/15 3,20,000
5 24,00,000 × 1/15 1,60,000
24,00,000
Illustration 14 (Redemption by Conversion): Hindustan Ltd. had issued 5,000 – 12%
debentures of ` 100 each redeemable on 31st December, 2007 at par.
The company offered three options to the debentureholders as under:
(i) 14% preference shares of ` 10 each at ` 12
(ii) 15% debentures of ` 100 each at par
(iii) Redemption in cash
The options were accepted as under:
Option 1 by holders of 1,500 debentures
The redemption was carried out by the company.

Pass Journal Entries in the books of Hindustan Ltd. without narration.
(T.Y.BAF, Modified, M.U. March 2008)
Solution: Hindustan Ltd. Journal
To 12% Debentureholders A/c (5,000 × 100) 5,00,000
2 12% Debentureholders A/c Dr. 1,50,000
To 14% Preference Share Capital (12,500 × 10) 1,25,000
To Securities Premium A/c 25,000
To 15% Debentures A/c (1,500 × 100) 1,50,000
To Bank A/c (2,000 × 100)
Working Note:
1,50,000
1. Number of Preference Shares Issued = = 12,500
12
2. Redemption in cash is assumed to be out of capital.
Illustration 15 (Sinking Fund Method): A company issued 10,000 – 8% debentures of ` 100
each at par on 1st January, 2012; redeemable on 31st December, 2015 at par. The company decided to
invest money outside business to provide funds for redemption. The outside investments were made @
5% p.a. on the last day of each year.
On 31st December, 2015, the company sold all investments for ` 7,25,000 and redeemed the 8%
debentures. The sinking fund value of ` 1 @ 5% interest for 4 years is 0.23012.
Prepare for all the four years:
1. 8% Debentures Account
2. Sinking Fund Account
3. Sinking Fund Investment Account. (T.Y.BAF, Modified, M.U., 2006)
Note: Calculations to be rounded off to the nearest rupee.
Solution:
1.
2012 2012
Dec. 31 To Balance c/d 10,00,000 Jan. 1 By Cash/Bank A/c 10,00,000
10,00,000 10,00,000
2013 2013
10,00,000 10,00,000
2014 2014
10,00,000 10,00,000
2015 2015
Dec. 31 To Bank A/c 10,00,000 Dec. 31 By Balance b/d 10,00,000
10,00,000 10,00,000
2.
Dr. Sinking Fund A/c Cr.
2012 2012
Dec. 31 To Balance c/d 2,30,120 Jan. 1 By Profit and Loss Appr. A/c 2,30,120
2,30,120 2,30,120
2013 2013
Dec. 31 By Profit and Loss Appr. A/c 2,30,120
Dec. 31 By Bank A/c (interest) 11,506
4,71,746 4,71,746
2014 2014
Dec. 31 By Profit and Loss Appr. A/c 2,30,120
Dec. 31 By Bank A/c (Interest) 23,587
7,25,453 7,25,453
2015 2015
Dec. 31 To Sinking Fund 453 Jan. 1 By Balance b/d 7,25,453
Investment A/c
Dec. 31 To General Reserve A/c 9,91,393 Dec. 31 By Profit and Loss Appr. A/c 2,30,120
Dec. 31 By Bank A/c (interest) 36,273
9,91,846 9,91,486
3.
Dr. Sinking Fund Investment A/c Cr.
2012 2012
Dec. 31 To Bank A/c 2,30,120 Dec. 31 By Bank c/d 2,30,120
2,30,120 2,30,120
2013 2013
Jan. 1 To Balance b/d 2,30,120 Dec. 31 By Balance c/d 4,71,746
Dec. 31 To Bank A/c 2,41,626 –
4,71,746 4,71,746
2014 2014
Jan. 1 To Balance c/d 4,71,746 Dec. 31 By Balance c/d 7,25,453
Dec. 31 To Bank A/c 2,53,707 –
7,25,453 7,25,453
2015 2015
Jan. 1 To Balance b/d 7,25,453 Dec. 31 By Bank A/c 7,25,000
– Dec. 31 By Sinking Fund A/c(loss) 453
7,25,453 7,25,453
Interest
18,000
12% of ` 1,50,000 for 2 months = × 2 = 3,000
12
Illustration 16 (Sinking Fund Method): The following balances appeared in books of Sidney
Potier Ltd. as on 31st March, 2014:
10% First Mortgage Debentures: ` 5,00,000.
Income received on Sinking Fund Investment: ` 50,000
Discount on Issue of Debentures: ` 25,000
Sinking Fund Account: ` 4,00,000
Sinking Fund Investment:
` 90,000 15% Government of Maharashtra Loans: ` 85,000.
` 1,00,000 14% Konkan Railway Bonds: ` 90,000
` 80,000 12% Krushna Valley Loan: ` 75,000
` 1,30,000 10% Central Government Securities: ` 1,50,000
On the same day, the investments were sold as follows:
15% Government of Maharashtra Loans @ ` 90
14% Konkan Railway Bonds at par
12% Krushna Valley Loan @ ` 90
10% Central Government Securities @ ` 120
On 1st April, 2014, debentures of ` 4,00,000 were redeemed at a premium of 5%. On the same
day, Maharashtra Road Development Corporation Bonds of ` 1,00,000 were purchased at 10%
premium annual contribution for sinking fund was ` 90,000. Ignore interest.
You are required to prepare:
1. Debentures Account.
2. Sinking Fund Account.
3. Sinking Fund Investment Account.
4. General Reserve Account. (T.Y.BAF Modified, M.U.)
Solution: In the Books of Sidney Potier Ltd.
2014 2014
April To Debentures A/c 4,00,000 April 1 By Balance b/d 5,00,000
2015
Mar. 31 To Balance c/d 1,00,000
5,00,000 5,00,000

2014 2014
April 1 To Debentureholders A/c 20,000 April 1 By Balance b/d 4,00,000
April 1 To General Reserve A/c 4,00,000 April 1 By Bank A/c 50,000
By Sinking Fund Investment 9,000
2015
Mar. 31 To Balance c/d 1,29,000 Mar. 31 By Profit and Loss A/c 90,000
5,49,000 5,49,000
Dr. Sinking Fund Investment A/c Cr.

2014 2014
April 1 To Balance b/d 4,00,000 April 1 By Bank A/c 4,09,000
April 1 To Sinking Fund A/c 9,000 2015
April 1 To Bank A/c 1,10,000 Mar. 31 By Balance c/d 1,10,000
5,19,000 5,19,000
Dr. Debentureholders A/c Cr.

2014 2014
April 1 To Bank A/c 4,20,000 April 1 By Debentures A/c 4,00,000
April 1 By Sinking Fund A/c 20,000
4,20,000 4,20,000
Dr. General Reserve A/c Cr.

Date Particular ` Date Particulars `
2015 2014
Mar. 31 To Bank A/c 4,00,000 April 1 By Sinking Fund A/c 4,00,000
4,00,000 4,00,000
Illustration 17 (Redemption by Conversion): A company gave notice of its intention to redeem
its outstanding ` 50,000 10% Debentures of 100 each at a premium of 5% and offered the holders the
following options:
1. To accept 12% Cumulative Preference Shares of ` 20 each at ` 25 per share.
2. To accept 10% Debentures stock at 96%
3. To have their holding redeemed for cash accordingly.
(i) ` 25,000 debentureholders accepted the Proposal 1
(ii) ` 20,000 debentureholders accepted the Proposal 2
(iii) Remaining debentureholders accepted the Proposal 3.
Pass the Journal Entries in the books of the company to record only the above transactions.
(T.Y.B.Com., Modified, M.U., April 2002)
Solution: Option 1:
Journal of Company
Premium on Redemption of Debentures A/c Dr. 1,25,000
[Being the amount transferred to Debentureholders A/c]
To 12% Cumulative Preference Shares A/c (1,05,000 × 20) 21,00,000
To Securities Premium A/c (1,05,000 × 5) 5,25,000
[Being preference shares allotted to debentureholders on redemption of
debentures]
Option 2:
Journal of Company
Premium on Redemption of Debentures A/c Dr. 1,00,000
2 Debentureholders A/c (21.875 × 96) Dr. 21,00,000
Discount on Issue of Debentures A/c (21,875 × 4) 87,500
[Being 21,875 debentures issued to debentureholders at a discount
of ` 4 for redemption]
Option 3:
Journal of Company
To Cash/Bank A/c 5,25,000
[Being the debentureholders paid off]
Illustration 18 (Sinking Fund Method): Indosys Ltd. issued on 1st April, 2011; 4,000, 14%
redeemable debentures of ` 100 each at par redeemable at a premium of 10% after 4 years. The
company decided to set up a sinking fund for the redemption of the debentures setting aside necessary
amount every year and investing it in investments carrying 12% interest per annum. The sinking fund
factor for 4 years @ 12% was ` 0.20964. On 31st March, 2015, the sinking fund investments were
sold for ` 3,15,000,
You are required to show the ledger accounts in the books of Indosys Ltd. to carry out the
redemption of debentures. (T.Y.BAF. Modified, M.U., October 2011)
Solution: Ledger of Indosys Ltd.
Y1-2011-12 Y1-2011-12
Mar. 31 To Balance c/d 92,242 Mar. 31 By Profit and Loss Appr. A/c 92,242
92,242 92,242
Y2-2012-13 Y2-2012-13
Mar. 31 To Balance c/d 1,95,553 Apr. 1 By Balance b/d 92,242
Mar. 31 By Profit and Loss Appr. A/c 92,242
1,95,553 1,95,553
Y3-2013-14 Y3-2013-14
Mar. 31 To Balance c/d 3,11,261 Apr. 1 By Balance b/d 1,95,553
Mar. 31 By Bank (interest) 23,466
3,11,261 3,11,261
Y4-2014-15 Y4-2014-15
Mar. 31 To General Reserve A/c 4,44,593 Apr. 1 By Balance b/d 3,11,261
Mar. 31 By Bank (interest) 37,351
Mar. 31 By Sinking Fund Investment A/c 3,739
4,44,593 4,44,593
Dr. Sinking Fund Investments A/c Cr.
Y1-2011-12 Y1-2011-12
Mar. 31 To Bank A/c 92,242 Mar. 31 By Balance c/d 92,242
92,242 92,242
Y2-2012-13 Y2-2012-13
April 1 To Balance b/d 92,242 Mar. 31 By Balance c/d 1,95,553
Mar. 31 To Bank A/c 1,03,311
1,95,553 1,95,553
Y3-2013-14 Y3-2013-14
April 1 To Balance b/d 1,95,553 Mar. 31 By Balance c/d 3,11,261
Mar. 31 To Bank A/c 1,15,708
3,11,261 3,11,261
Y4-2014-15 Y4-2014-15
April 1 To Balance b/d 3,11,261 Mar. 31 By Bank A/c 3,15,000
Mar. 31 To Sinking Fund A/c 3,739
(profit)
3,15,000 3,15,000
Dr. Interest on Debentures A/c Cr.

Y1-2011-12 Y1-2011-12
Mar. 31 To Bank A/c 56,000 Mar. 31 By Profit and Loss A/c 56,000
56,000 56,000
Y2-2012-13 Y2-2012-13
56,000 56,000
Y3-2013-14 Y3-2013-14
56,000 56,000
Y4-2014-15 Y4-2014-15
56,000 56,000
Dr. Loss on Issue of Debentures A/c Cr.
Y1-2011-12 Y1-2011-12
Apr. 1 To Premium on 40,000 Mar. 31 By Profit and Loss A/c 10,000
Redemption of
Debentures A/c
Mar. 31 By Balance c/d 30,000
40,000 40,000
Y2-2012-13 Y2-2012-13
Apr. 1 To Balance b/d 30,000 Mar. 31 By Profit and Loss A/c 10,000
– Mar. 31 By Balance c/d 20,000
30,000 30,000
Y3-2013-14 Y3-2013-14
– Mar. 31 By Balance c/d 10,000
20,000 20,000
Y4-2014-15 Y4-2014-15
10,000 10,000
Working Note:
1. Annual appropriation set aside:
Sinking Fund Factor for 4 years @ 12% 0.20964
Redeemable Debentures ` 4,00,000
Add: Premium @ 10% ` 40,000
Amount to be paid after 4 years ` 4,40,000
 0.20964 × 4,40,000 92,241,60
 Annual Appropriation 92,242
2. Interest on debenture is payable once in a year, i.e., at the end of the accounting year.
3. Loss on issue of debentures is equally written off to Profit and Loss A/c in 4 years.
EXERCISES
Objective Type Questions
(I) Fill in the Blanks:
1. Interest on Sinking Fund Investment is credited to __________ Account.
2. Sinking Fund Account always shows __________ balance.
3. Sinking Fund Investment Account always shows __________balance.
4. Profit on cancellation of own debentures is __________profit.
5. If debentures are to be redeemed at a premium, such premium must be provided as a
liability at the time of __________ (issue/redemption).
6. Redemption of debentures out of capital may happen if the debentures are for a period of
__________ (less than/more than/equal to) 18 months.
7. A company which issues debentures must create a __________(Debenture Redemption
Reserve/Debenture Redemption Sinking Fund), for redemption of such debentures, out of
its profits, every year, until such debenture are redeemed.
8. A company __________(can/cannot) purchase its own debenture.
9. Interest on Debenture Redemption Sinking Fund Investments is transferred to
__________ (Debenture Redemption Sinking Fund Investments/Profit and Loss Account).
10. Debenture Redemption Reserve is __________ (to/not to) be created if debentures are
redeemed through conversion.
11. Debenture Redemption Reserve is __________ (to/not to) be created in respect of the
non-convertible portion of the convertible debentures.
12. After cancellation of own debentures, the debentures __________ (can/cannot) be

reissued.
13. Profit on cancellation of own debentures is transferred to __________ (Capital
Reserve/Capital Redemption Reserve).
14. Loss on cancellation of own debentures is transferred to __________ (Goodwill Profit
and Loss Account).
15. Profit on cancellation of own debentures held as sinking fund investments is transferred
to __________ (Sinking Fund Account/Capital Reserve).
16. Interest on Sinking Fund Investment is credited to __________ A/c (Profit and Loss,
Sinking Fund).
17. If the own debentures purchased in the open market are not cancelled, these will appear
on the __________ side of the balance sheet (assets, liabilities).
18. Sinking Fund A/c shall always show a __________ balance (debit, credit).
19. Sinking Fund Investment A/c shall always show a __________ balance (debit, credit).
20. Profit on the cancellation of own debentures is __________profit (revenue, capital).
[Ans.: 1. Sinking Fund, 2. Credit, 3. Debit, 4. Capital, 5. Issue, 6. less than, 7. Debenture
Redemption Reserve, 8. Can, 9. Debenture Redemption Sinking Fund Investments, 10. to,
11. to, 12. cannot, 13. Capital Reserve, 14. Profit and Loss Account, 15. Capital Reserve,
16. Sinking Fund, 17. assets, 18. credit, 19. debit, 20. capital]
(II) State Whether the Following Statements are True or False:
1. A company cannot purchase its own debenture.
2. Interest on Debenture Redemption Sinking Fund Investments is transferred to Profit and
Loss Account.
3. After debentures are redeemed, balance of Debenture Redemption Reserve is transferred
to Capital Reserve.
4. Whenever debentures are redeemed out of profits, an equivalent amount will be
transferred to Debenture Redemption Reserve.
5. Debenture Redemption Reserve is to be created even if debentures are redeemed through
conversion.
6. The balance of Debenture Sinking Fund Investment A/c is transferred to Debenture
Sinking Fund A/c.
7. The balance of Debenture Sinking Fund A/c is transferred to Debenture Sinking Fund
Investment A/c.
8. A debentureholder is an owner of the company.
9. A debentureholder can get his money back only on the liquidation of the company.
10. A debenture issued at a discount can be redeemed at a premium.
11. A debentureholder receives interest only in the event of profits.
12. Debentures can be redeemed by payment in lumpsum at the end of a specified period.
13. Debentures cannot be redeemed during the lifetime of the company.
14. Debentures can be redeemed by payments in annual instalments.
15. Debentures can be purchased in the open market for cancellation.
16. When all the debentures are redeemed, balance in the Debenture Redemption Fund
Account is transferred to General Reserve.
17. The nominal and book values of Debenture Redemption Fund Investments Account are
respectively ` 50,000 and ` 48,000. The company sold investments of the 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 investments is ` 3,000.
[Ans.: True: 5, 6, 7, 10, 12, 14, 15, 16, 19
False: 1, 2, 3, 4, 8, 9, 11, 13, 17, 18, 20, 21
17. False; ` 4,200
18. False; the company purchases from the market and keeps them as investments.
20. False; to Debenture Redemption Reserve.
21. False; to Debenture redemption fund account.]
(III) Match the Columns:
(A) Group A Group B
1. Debenture Redemption Reserve Account (a) Shown under ‘Reserves and Surplus’
in balance sheet
2. Balance of Debenture Redemption (b) Transfer to Capital Redemption
Reserve Account after redemption Reserve
3. Interest received on Non-cumulative (c) S.117C of the Companies Act
Sinking Fund Investments
4. Interest received on Cumulative (d) Shown under ‘Investments’ in
Sinking Fund Investments balance sheet
5. Loss on sale of Cumulative Sinking (e) Credited to Profit and Loss Account
Fund Investments
6. Balance of Sinking Fund for (f) Sec. 81 of the Companies Act
redemption of debentures
(g) Debited to Sinking Fund Account
(h) Credited to Sinking Fund Account
(i) Credited to General Reserve
[Ans.: 1. (c), 2. (e), 3. (i), 4. (h), 5. (g), 6. (a)]
(B) Group A Group B
1. Annual Instalment in Sinking Fund for (a) Capital Reserve Account
Redemption of Debentures
2. Profit on Cancellation of Debenture (b) Cum-interest price
is transferred to
3. Loss on Cancellation of Debentures is (c) The amount credited to own
transferred to Debenture A/c is equal to price
received Less Interest accrued till date
of sale
4. Price paid by company for purchase (d) The amount credited to Own
of own debentures excluding the Debentures A/c is equal to Price
accrued interest received
5. Price paid by company for purchase of (e) Amount of Redemption × Factor in
own debentures including the S.F. Table
accrued interest
6. If a company resells its debentures in (f) Profit and Loss Account
open market at ex-interest price
7. If a company resells its debentures in (g) Amount of Redemption/Factor in

open market at cum-interest price S.F. Table
(h) is ignored
(i) ex-interest price
[Ans.: 1. (e), 2. (a), 3. (f), 4. (i), 5. (b), 6. (d), 7. (c)]
(IV) Multiple Choice Questions:
1. Debentures can be redeemed __________.
(a) only out of the proceeds of the fresh issue of debentures
(b) only out of divisible profits
(c) only out of capital
(d) out of capital or profits
2. When debentures are redeemed out of profits, an amount equal to the nominal value of
debentures redeemed should be transferred to __________.
(a) Capital Reserve Account (b) Capital Redemption Reserve Account
(c) General Reserve Account (d) Profit and Loss Account
3. When debentures are redeemed out of profits, the amount be transferred to General
Reserve should be equal to __________.
(a) Premium payable on redemption
(b) Amount payable on redemption
(c) The nominal value of debentures redeemed
(d) None of the above
4. Which of the following statements is wrong in respect of Debenture Redemption Reserve
(DRR)?
(a) A company which issues debentures for a term 18 months, or more must create a DRR
(b) The amount shall be transferred out of profits to DRR in the year of redemption
(c) The transfer to DRR is to be made every year
(d) Transfer to DRR must be made in respect of non-convertible portion of convertible
debentures
5. In case of Cumulative Sinking Fund, the following statement is true.
(a) Interest received on Sinking Fund Investments is credited to Profit and Loss Account
(b) Interest received on Sinking Fund Investments is added back to the sinking fund and
reinvested
(c) Sinking fund Investments are made in cumulative preference shares
6. In case of cumulative sinking fund for redemption of debentures, interest received
__________.
(a) is credited to Profit and Loss A/c
(b) is credited to Sinking Fund Investment A/c
(c) is credited to Sinking Fund A/c
(d) is credited to Interest A/c
7. Loss on sale of Non-Cumulative Sinking Fund Investments __________.
(a) is debited to Profit and Loss A/c
(b) is debited to Sinking Fund Investment A/c
(c) is debited to Sinking Fund A/c

(d) is credited to Sinking Fund A/c
8. Balance of Sinking Fund, after redemption of debentures __________.
(a) is transferred to Profit and Loss A/c
(b) is transferred to Debenture Redemption Reserve
(c) is transferred to Capital Redemption Reserve
(d) is transferred to General Reserve
9. Balance of Sinking Fund for redemption of debentures is __________.
(a) Shown under ‘Long-term Borrowings’ in balance sheet
(b) Shown under ‘Investments’ in balance sheet
(c) Shown under ‘Reserves and Surplus’ in balance sheet
(d) Shown under ‘Current Liabilities’ in balance sheet
10. Annual Instalments in Sinking Fund for Redemption of Debentures is equal to
__________.
(a) Face Value of Debentures × Factor in S.F. Table
(b) Amount of Redemption × Factor in S.F. Table × Period of Debentures
(c) Amount of Redemption × Factor in S.F. Table
(d) Amount of Redemption ÷ Factor in S.F. Table
11. Debentures of ` 100 issued at a discount of 5% __________.
(a) cannot be converted into shares of ` 100, ` 95 paid up
(b) can be converted into shares of ` 100, ` 95 paid up
(c) must be converted into shares having face value and paid-up value of ` 95 only
(d) can be converted into shares having face value of ` 95 and paid-up value of ` 100
12. If debentures are redeemed by conversion into equity shares, then the amount transferred
to General Reserve is __________.
(a) nil
(b) equal to the face value of debentures redeemed
(c) equal to the face value of the equity shares issued
(d) equal to difference between the face value of the debentures redeemed and the equity
shares issued
13. Interest received on Debenture Redemption Fund Investment will be __________.
(a) Credited to Profit and Loss A/c
(b) Credited to Debenture Redemption Fund A/c
(c) Credited to Profit and Loss Appropriation A/c
14. The balance of Debenture Sinking Fund is transferred to __________.
(a) Profit and Loss Account
(b) Debenture Redemption Fund Investment Account
(c) General Reserve Account
(d) Capital Reserve Account
15. Loss of sale of Sinking Fund Investment will be debited to __________.
(a) Profit and Loss Account (b) Sinking Fund Account
(c) Sinking Fund Investment Account (d) General Reserve Account
16. A company issuing debentures is required to create Debenture Redemption Reserve if the
maturity period is more than __________.
(a) 12 months (b) 18 months
(c) 24 months (d) none of the above
17. A compony may redeem debentures out of capital if the maturity period is less than
__________.
(a) 12 months (b) 18 months
(c) 24 months (d) none of the above
18. Which of the following statements is true?
(a) A debentureholder is an owner of the company
(b) A debentureholder can gets his money back only on the liquidation of the company
(c) A debenture issued at a discount can be redeemed at a premium
(d) A debentureholder receives interest only in the event of profits
19. When interest on own debentures becomes due, it will be credited to __________.
(a) Profit and Loss Account (b) Own Debenture Account
(c) Debenture Interest Account (d) Interest on Own Debenture Account
20. Which of the following statements is false?
(a) Debentures can be redeemed by payment in lumpsum at the end of a specified period.
(b) Debentures cannot be redeemed during the lifetime of the company.
(c) Debentures can be redeemed by payments in annual instalments.
(d) Debentures can be purchased in the open market for cancellation.
21. The periodical interest received from investments against Debenture Redemption Fund is
credited to __________.
(a) Interest Income Account (b) Debentureholders Account
(c) Debentures Account (d) Debenture Redemption Fund Account
22. When debentures become due for redemption, the entry is __________.
(a) debit Debentures A/c; credit Bank A/c
(b) debit Debentureholders A/c; credit Bank A/c
(c) debit Debentures A/c; credit Debentureholders A/c
(d) none of the above
23. Till debentures are redeemed, loss on issue of debentures is __________.
(a) shown on the liability side of balance sheet
(b) credited to P & L A/c
(c) Shown on the asset side of balance sheet
(d) none of the above
24. The premium payable on the redemption of debentures is __________.
(a) Written off from the accumulated profit (b) Written off from the capital profit
(c) Not be written off at al (d) None of the above
25. According to SEBI guidelines, the company is required to create a debentures redemption
reserve equivalent to __________.
(a) 50% of the issue size (b) 15% of the issue size
(c) 100% of the issue size (d) none of the above
26. For the redemption of debentures, sinking fund is created out of __________.
(a) Capital reserve (b) Share capital
(c) Secured loans (d) Current year profits
27. When interest on own debentures becomes due, it will be credited to __________.
(a) Own Debentures A/c (b) Interest on Own Debentures A/c
(c) Profit and Loss Appropriation A/c (d) None of the above
28. A Ltd. purchased its own 10% debentures from the open market and later on cancelled
them. The gain on redemption of its own debentures by cancellation is to be credited to
__________.
(a) Capital Reserve (b) Profit and Loss Appropriation A/c
(c) Capital Redemption Reserve (d) None of the above
29. The profit or loss on cancellation of own debentures is calculated at the time of
__________.
(a) Issue of own debentures (b) Cancellation of own debentures
(c) Purchase of own debentures (d) None of above
30. Till the date of redemption of debentures, ‘Premium on Redemption of Debentures’
appears on the __________.
(a) Asset side of balance sheet (b) Credit side of Profit and Loss account
(c) Liabilities side of balance sheet (d) None of the above
31. Following balances are given in trial balance:
Debenture redemption fund 50,000
Debenture redemption fund investments 50,000
Interest on debenture redemption fund investment 3,000
Increase in debenture redemption fund by 10,000
Debenture Redemption Fund in Balance Sheet will be __________.
(a) ` 60,000 (b) ` 63,000
(c) ` 50,000 (d) ` 65,000
32-34. On March 31, 2005, the balance of 12% Debentures of ` 100 each of C Ltd. was
` 5,00,000. The company reserves the right to redeem the debentures in any year by
purchase in the open market. Interest on debentures is payable on September 30 and
March 31, every year.
On July 1, 2005, the company purchased 1,000 of its 12% Debentures as investment at
` 99 cum-interest. On August 01, 2005, it purchased another 1,000 of its debentures at
` 98 ex-interest. The company cancelled 2,000 own debentures on September 01, 2005.
32. Amount debited to Own Debentures Account at the time of purchase on 01-07-2005 = ?
(a) ` 1,00,000 (b) ` 99,000
(c) ` 98,000 (d) ` 96,000
33. Amount debited to Own Debentures Account at the time of purchase on 01-08-2005 = ?
(a) ` 1,00,000 (b) ` 99,000
(c) ` 98,000 (d) ` 97,000
34. The profit/loss on cancellation of own debentures is __________.
(a) ` 1,000 (Loss) (b) ` 6,000 (Profit)
(c) ` 3,000 (Profit) (d) ` 2,000 (Loss)
[Ans.: 1. (d), 2. (c), 3. (c), 4. (b), 5. (b), 6. (c), 7. (a), 8. (d), 9. (c), 10. (c), 11. (b), 12. (a), 13. (b),
14. (c), 15. (b), 16. (b), 17. (b), 18. (c), 19. (d), 20. (b), 21. (d), 22. (c), 23. (c), 24. (a), 25. (a),
26. (d), 27. (b), 28. (a), 29. (b), 30. (c), 31. (b), 32. (d), 33. (c), 34. (b)]
Short Problem
1. On 31-1-2015, Janta Ltd. converted its ` 88,00,000, 6% debentures into equity shares of ` 20
each at a premium of ` 2 per share.
Pass necessary journal entries in the books of the company for redemption of debentures.
Debentures Redemption Value 88,00,000
[Hint: No. of Equity Shares = = = 4,00,000 Shares]
Share Issued Value 20  2
2. On 1-2-2015, Janta Ltd. converted 9,000, 8% debentures of ` 100 each into 8% preference
shares of ` 100 each issued at a discount of 10%.
Pass necessary journal entries for redemption of debentures.
[Ans.: Preference Shares issued = 10,000]
3. Pass necessary journal entries in the books of the company in the following cases for
redemption of 6,000, 12% Debentures of ` 10 each issued at par:
(a) Debentures redeemed at par by conversion into 10% preference shares of ` 50 each.
(b) Debentures redeemed at a premium of 20% by conversion into equity shares issued at par.
(c) Debentures redeemed at a premium of 20% by conversion into equity shares issued at a
premium of 20%
4. Y Ltd. redeemed ` 50,00,000, 8% debentures at a premium of 10% out of profits on 31-3-2015.
Pass necessary journal entries for the redemption of debentures.
5. Z Ltd. issued ` 20,00,000, 8% debentures on 1-4-2010 at a premium of 5%. On 31-3-2015, out
of these ` 2,00,000, 8% debentures were redeemed by converting them into equity shares of ` 100
each issued at par and ` 5,00,000, 8% debentures were converted into 10% preference shares of ` 100
each issued at a premium of 25%.
Pass necessary journal entries in the books of Z Ltd. for the redemption of debentures.
6. White Ltd. issued 8,00,000, 8% debentures of ` 100 each redeemable at a premium of 10%.
According to the terms of redemption, the company redeemed 25% of the above debentures by
converting them into shares of ` 50 each issued at a premium of 60%. Pass journal entries regarding
issue and redemption of debentures.
` 2,20,00,0 00
[Hint: No. of shares to be issued = = 2,75,500 shares]
` 80
7. Ekta Ltd. issued 60,000, 9% debentures of ` 100 each redeemable at a premium of 10% after
three years. Pass the necessary journal entries for the issue of 9% debentures.
8. Thandak Refrigerators Ltd. has an outstanding balance of 5,000, 6% debentures of ` 100 each
redeemable at a premium of 10%. According to the terms of redemption, the company redeemed 10%
of these debentures by converting them into 8% preference shares of ` 100 each issued at a premium
of 10%. Calculate the number of shares to be issued on conversion and record journal entries for the
redemption in the books of the company.
[Hint: No. of shares = 55,000 = 500 shares]
110
Practical Problems
1. R Ltd. has issued ` 12,00,000 8% Debentures at a discount of 6% payable over a period of 10
years by Annual Drawings of ` 1,20,000 without creating Debenture Redemption Reserve. Write up
the Cash Book, Debentures Account and Discount on Debenture Accounts for the first three years.
2. On 1.4.2013, Reliance Ltd. issued 2,000 Debentures of ` 100 each at a discount of 5%. These
debentures were repayable at par on 31.3.2014 and a Sinking Fund was to be created out of profits by
setting aside an equal amount of ` 15,900 on 1st March every year to be invested in 5% securities.
You are requested to show the Sinking Fund Account and the Investment Account in the books
for five years. (CA Modified)
3. P Ltd. issued ` 2,00,000 in 5% Debentures of ` 100 each at par, repayable at the end of 5 years
at a premium of 6%. A Sinking Fund at 4% compound interest is created for the redemption of
debentures.
Draw up the Debenture Redemption Fund Account for the 5 years.

(` 1 p.a. at 4% compound interest amounts to ` 5.4163 in 5 years) (CMA Modified)
4. Power Flow Ltd. company issued 4% Debentures of the face value of ` 1,00,000 at a discount
of 5%.
A Sinking Fund was created for repayment of the debentures and at the end of ten years
` 1,00,000 had been invested.
The sale proceeds of the investment realised ` 1,00,500 and the debentures were repaid.
Show the entries and the necessary ledger accounts. (T.Y.B.Com., Modified, P.U.)
5. On January 1, 2012, Alpha Ltd. gave notice of its intention to redeem its ` 10,00,000 8%
Debentures on 31, March, 2012 at 105% and offered the debentureholders the following options:
(a) To apply the redemption money in subscribing:
(i) 11% Cumulative preference shares of ` 100 each at 110 (opted by the holders of
` 1,10,000 debentures) or
(ii) 9% Debentures at 95% (opted by the holders of ` 7,12,500 debentures)
(b) To get their holding redeemed for cash if neither of the options under (a) was accepted.
Show as on 31st March, 1993, the Journal entries to record the redemption and allotments
involved in the above transactions. Also show the Debenture Redemption account.
6. M/s Dimple Ltd. has ` 60,000 7% Debentures showing balance on 1st January, 2012. The
Debenture Redemption Fund Account shows the balance of ` 50,000 represented by investments in
3% Government Securities worth ` 59,000/-. The company appropriates every year ` 8,230/- to
Sinking Fund Account.
The Directors of Dimple Ltd. decided to redeem the debentures on 31st December, 2013 by
selling out investments at 83%. The balance at Bank amounted to ` 12,500/-.
You are required to show necessary ledger accounts in the books of Dimple Ltd. for the year
2013. (T.Y.BAF Modified, M.U.)
7. The summarised Balance Sheet of Jayadev Ltd. on March 31. 2014 was as follows:
Share Capital: Fixed Assets at Cost less Depreciation 5,12,000
6% Redeemable preference shares of ` 10 each 2,00,000 Goodwill 1,00,000
Equity Shares of ` 10 each 4,00,000 Stock 3,50,000

6% Debentures 3,00,000 Sundry Debtors 3,15,000
Profit and Loss A/c 2,50,000 Discount on Debentures 15,000
Current Liabilities:
Bank Loan 50,000
Creditors 92 000
12,92,000 12,92,000
Wanting to redeem the preference shares and the debentures, the company offered to the
redeemable preference shareholders and the debentureholders the option to convert their holdings into
equity shares which are to be treated as worth ` 12.50. The half of the preference shareholders and
one-third of the debentureholders agreed to do this. The company issued 30,000 equity shares at
` 12.50 to the public for cash and with the fund available paid off the bank loan and redeemed the
remaining redeemable preference shares and debentures.
Journalise the transactions and show how the balance sheet will appear after the transactions have
been completed. (CA/CMA Modified)
[Ans.: Balance Sheet Total ` 13,17,000]
8. Hitech Refineries Ltd. issued 9% Debentures of ` 1.00,00,000 on 1st January, 2008. These
debentures were to be redeemed on 31st December, 2014. For this purpose, a sinking fund was
established. The investments were expected to earn @ 6% per annum. Sinking fund table shows that
` 0.119135 invested annually @ 6%, gives an amount of ` 1 in seven years. Give journal entries
assuming investments realised ` 73.33,400 on 31st December, 2014.
(Round off your calculations to the nearest rupee) (T.Y.B.Com., Modified, M.U.)
9. Inder Leasing Ltd. issued (10,000, 9% Debentures of ` 100 each redeemable after 3 years at par.
The company took an endowment insurance policy of ` 60,00,000/-. The annual premium is
` 16,60,000/-. The company received ` 60,00,000/- at the end of the third year on maturity of policy.
The debentures were redeemed. Give journal entries and show the necessary ledger accounts for three
years.
10. On 1st January, 2012, M/s Trishna Metals Corporation issued 20,000, 15% debenture of
` 100/- each at par redeemable also at par. The company desired to provide a fund for redemption of
debentures on 31st December, 2014. The directors took an insurance policy to provide the necessary
cash, the annual premium being ` 5,29,195/-. The company estimated the return of 12% p.a.
compound interest.
(While calculating, fraction of rupee is to be ignored).
Give necessary journal entries and show the ledger accounts. (T.Y.BAF Modified, M.U.)
11. On 1st January, 2011, X Limited issued 10,000 fifteen years debentures of ` 100 each
bearing interest at 10% p.a. One of the conditions of issue was that the company could redeem the
debentures by giving six month’s notice at any time after 5 years, at a premium of 4%, either by
payment in cash or by allotment of preference shares and/or other debentures at the option of the
debentureholders.
On 1st April, 2006, the company gave notice to the debentureholders of its intention to redeem
the debentures on 1st October, 2006 either by payment in cash or by allotment of 11% preference
shares of ` 100 each at ` 130 per share or 11% Second Debentures of ` 100 at ` 96 per debenture.
Holders of 4,000 debentures accepted the offer of the preference shares, holders of 4,800
debentures accepted the offer of the 11% second debentures and the rest demanded cash on 1st
October, 2006.
Given the journal entries to give effect to the above as of 1st October, 2006. Suggest how
debentures can be dealt in the accounts. (T.Y.B.Com./BAF Modified, M.U.)
[Ans.: Redemption of debentures in cash ` 1,24.800]
12. The summarised Balance Balance Sheet of Vasudha Ltd. as on 30th September, 2012 was:
Particulars ` Assets `
Issued and fully paid 5,000 equity shares
5,00,000 Investments:
of ` 100 each fully paid
6% Redeemable preference shares of
(Own Debenture of Nominal value of
` 100 each (less calls-in-arrears on 200 4,95,000 95,000
` 1,00,000)
shares)
Reserves and Surplus: Other Securities 1,00,000
Share Premium 1,00,000
Capital Reserve 1,00,000 Current Assets:
General Reserve 2,00,000 Stock 2,00,000
Profit and Loss Account 3,00,000 Debtors 1,00,000
10% Debentures 2,00,000 Cash at Bank 6,00,000
Creditors 7 00 000
25,95,000 25,95,000
On 30th September, 2014, the following were due for redemption:
(i) 5,000 6% Redeemable Preference Shares at a premium of ` 25 per share.
(ii) 2,000 10% Redeemable Debentures at a premium of 10%.
The Redemption was made on that date or subsequently thus:
(a) For the half year ending30th September, 1998, the debenture interest and Preference dividend
were paid out of the profits of the company
(b) On an offer made to the 10% Debentureholders, the outsiders agreed to take new 12%
Debentures at par in exchange of old debentures; the company also decided to assume the
new debentures.
(c) A fresh issue of 1,000 equity shares of ` 100 each were made at a premium of ` 50 per share
and subscribed in full. All moneys due were received forthwith.
(d) Redemption of all preference shares were made on 10th October, 2012.
You are required to show all journal entries for the above transactions and to give the company’s
opening Balance Sheet after giving effect to them. (T.Y.B.Com./BAF, Modified, M.U.)
[Ans: Balance Sheet ` 21,20,150]
13. The following three alternatives have been given to redeem 5,000 8% Debentures of ` 100
each at 5% premium.
(a) Payment in cash.
(b) 10% Redeemable Preference Share to be issued at ` 120 (face value ` 100)
(c) 9% New Debenture of ` 100 each at ` 90.
Holders of 2,000 Debentures accepted Preference shares; 1,800 holders accepted 9% new
Debentures and the remaining holders demanded cash.
Pass entries for the redemption of debentures. (T.Y.B.Com., Modified, M.U.)

[Ans.: Holders of 2,000 Debentures will get 1,750 Preference Shares at ` 120;
Holders of 1,800 Debentures will get 2,100 New Debentures at ` 90 and
the holders of remaining 1,200 Debentures will get ` 1,26,000 in cash]
14. On June 30, 2014, the following balances stood in the books of S Ltd.:
`
10% Debentures 3,00,000
Debenture redemption reserve fund 2,80,000
Bank balance 45,000
The above fund was invested in the following securities:
` 1,00,000 6% Gujarat Govt. Loan
` 1,80,000 5% Central Govt. Loan.
To redeem the debentures on June 30, 2014, the above investments were sold on the same day as
under:
6% Gujarat Govt. Loan at par
5% Central Govt. Loan at ` 95.
The debentures were paid immediately after the selling of the securities.
Give Journal entries to record the above transactions. (T.Y.B.Com., Modified, M.U.)
[Ans.: Finally, the balance of Debenture Redemption Fund ` 2,71,000 transferred to General
Reserve Account]
15. On 30th June, 2014, the following balance stood in the books of Samor & Co. Ltd.:
`
13% First mortgage debentures 4,50,000
Debenture redemption reserve fund 4,79,430
The above fund was invested in the following securities:
` 2,70,000 7½% Govt. Loan (2002) ` 2,72,835
` 2,13,750 8% Narmada Bonds (2004-2009) ` 2,06,595
To redeem the debentures on June 30, 2014, the above investments were sold on the same day as
under:
7½% Govt. Loan, 1994 at par
8% Narmada Bonds (2004-2009) at ` 96
Draw up the necessary accounts (T.Y.BAF, Modified, M.U.)
[Ans.: Finally, the balance of Debenture Redemption Fund ` 4,75,200 transferred to General
Reserve Account]
16. The following were the balance in the books of S Limited as on 31st December, 2014:
`
12% Mortgage Debentures 5,00,000
Debenture Redemption Fund 5,50,000
Debenture Redemption Fund Investments:
(i) 6% Gujarat Govt. Loan (Purchased at par) 3,00,000
(ii) 5% National Defence Bonds (Face value ` 2,00,000) 1,90,000 4,90,000

On 31st March, 2015, 6% Gujarat Govt. Loan was sold at ` 105 and 5% National Defence Bonds
at ` 98. On the same date, debentures were redeemed at ` 106 together with accrued interest, The
interest on debentures had been paid up to 31st December, 1989.
Pass Journal entries in the books of S Limited. (CA Modified)
[Ans.: Debenture Redemption Fund Account closed by transferring ` 5,56,000 to
General Reserve]
17. On 30th September, 2014, the following balances stood in the books of P Limited:
`
5% First Mortgage Debentures 2,00,000
Debenture Redemption Reserve Fund 2,13,080
The above fund was invested in the following securities and shares:
`
` 70,000 3½% Government Loan, 2009 71,260
` 80,000 3% Government Loan 2009-10 64,068
` 22,000 3% Conversion Loan 16,042
600 Second Preference Shares of ` 100 each fully paid of
Tata Iron & Steel Co. Ltd. 61,716
The above investments were sold net on the same day as under:
3½% Governments loan, 2009 at par
Government Loan 2009-10 at ` 91
3% Conversion Loan at ` 75
Second Preference Shares of Tata Iron & Steel Co. Ltd. at ` 109.
On 1st October, 2014, the company redeemed the debentures at a premium of 5%.
Draw up the necessary accounts (other than cash), bring down their balances, if any after
recording the above transactions and state how they will be disclosed in the Balance Sheet of the
company as at 31st December, 2014. (CMA Modified)
[Ans.: Transfer balance of Debenture Redemption Fund ` 2,14,700 to General Reserve and
show it in Balance Sheet under the heading “Reserves and Surplus”]
18. A company issued debentures of ` 1,00,000 on 1st January, 2014 repayable at par at the end of 5
years. It was resolved to establish a sinking fund for the purpose and invested in tax-free securities.
Show the ledger accounts for five years, assuming that the interest received on the investments
representing the sinking fund was at the rate of 5% on the cost, and that the interest was received
yearly and immediately invested. Finally all the investments were sold at a loss of ` 500 to repay the
debentures.
The sinking fund table shows that ` 0.180975 invested at the end of each year at 5% compound
interest will produce ` 1 at the end of 5 years. (CS Modified)
[Ans.: Transfer ` 18,098 annually from Profit and Loss Appropriation Account
to Debenture Redemption Fund Account]
19. (i) “ABC” Limited issued 5,000 Debentures of ` 200 each on 1-1-2014 at 10% discount and
5% premium payable at the time of redemption. Interest to Debentures is payable half-yearly at 12%.
Debentures are of 10 years.
The company decided to transfer ` 1,00,000 to Debenture Redemption Fund Account and to
invest the same in 8% Government Securities ever year.
Journalise all the transactions regarding debentures in the books of the company for the first year
only.
(ii) Balances (1-1-2015):
`
Debentures 4,00,000
Debenture Redemption Fund 3,00,000
12% D.R.F. Investments 3,00,000
The company transfers ` 1,00,000 to Debenture Redemption Fund A/c every year. On 31-12-2015,
the company sold out investments in ` 2,75,000 and redeemed the debentures.
Give Journal entries for redeeming debentures. Prepare Debenture Redemption Fund Account
and Debenture Redemption Fund Investment Account. (T.Y.BAF, Modified)
[Ans.: (1) ` 1,00,000 debited to Discount on Debentures A/c; ` 50,000 debited to Loss on Issue
of Debentures A/c; Interest on Debentures ` 60,000 Paid on 30th June and 31st December]
20. Z Ltd. issued 4,000, 15% Debentures of ` 100 each on 1-1-2003 at a discount of 10%
redeemable at a premium of 10% out of profits by creating Debenture Redemption Reserve in four
equal annual drawings. Journalise all the transactions for 2003. The company closes its book on
31st December every year. The interest on debentures is payable on half-yearly basis the dates being
30th June and 31st December. Ignore tax.
[Ans : Loss on issue w/o in 4 : 3 : 2 : 1]
21. (Red. @ Prem.; JV + Ledger A/c for 4 yrs; Inv. sold at profit): On 1st January, 1999,
A Ltd. issues 2,000 14% Debentures of ` 100 each repayable at the end of four years at a premium of
5%. It has been decided to institute a Sinking Fund for the purpose, the investments being expected to
realise 4% net. Sinking Fund tables show that ` 0.235490 amount to one at 4% in four years.
Investments were made in multiples of hundred only.
On 31st December, 2003, the balance at the bank was ` 59,000 and the investments realised
` 1,56,800. The debentures were paid off. Give journal entries and show ledger account (except the
debenture interest).
[Ans.: Amount of Annual Appropriation ` 49,452.90,
Profit on sale of investments ` 1,900]
22. (Red. @ Par; Ledger A/c for 6 yrs; Inv. sold at par/profit/loss): B. Co. issues 7%
Debentures of ` 1,35,000 on 1-1-98 with a condition that they should be redeemed by setting aside at
the end of every year 30,000 out of profits, investing the amount in 10% Govt. Securities. The interest
received at the end of the year should be invested in the same securities.
Securities were sold off on 30-6-2004 for ` 1,40,000 and the debentures were paid off.
Show the Debentures Redemption Fund Account and the Debentures Redemption Fund
Investments A/c.
[Ans.: Profit on sale of D.R.F. Investments ` 770; At the end, the balance of
Debenture Redemption Fund Account of ` 1,40,000 will be transferred to General Reserve]
23. (Red. @ Par; Ledger A/c for 5 yrs; Inv. sold at loss) : A company issued debentures of
` 1,00,000 on 1st January, 1999 repayable at par at the end of 5 years. It was resolved to establish a
sinking fund for the purpose and invested in tax-free securities.
Show the ledger accounts for five years, assuming that the interest received on the investments
representing the sinking fund was at the rate of 5% on the cost, and that the interest was received
yearly and immediately invested. Finally, all the investments were sold at a loss of ` 300 to repay the
debentures.
The sinking fund table shows that ` 0.180975 invested at the end of each year at 5% compound
interest will produce ` 1 at the end of 5 years. Investments were made at the nearest multiple ` 100.
[Ans.: Transfer ` 18,098 annually from Profit and Loss Appropriation Account to
Debenture Redemption Fund Account]
24. (Red. @ Par; Ledger A/c for last yr; Inv. sold at loss): M/s Dimple Ltd. has ` 60,000 15%
Debentures showing balance on 1st January, 2003. The Debenture Redemption Fund Account shows
the balance of ` 50,000 represented by Investments in 10% Government Securities worth ` 59,000.
The company appropriates every year ` 8,230 to Sinking Fund Account.
The Directors of Dimple Ltd. decided to redeem the debentures on 31st December, 2003 by
selling out investments at 83%. The balance at bank after receiving interest amounted to ` 15,640.
You are required to show necessary ledger accounts in the books of Dimple Ltd. for the year
2003.
25. (Red. @ Prem; Ledger A/c for last yr; Inv. sold at par/profit/loss): The following
balances appeared in books of Sidney Potier Ltd. as on 31-3-2004:
`
Income Received on Sinking Fund Investments 50,000
Discount on Issue of Debentures 25,000
Sinking Fund Account 4,00,000
Sinking Fund Investments:
(a) ` 90,000 15% Government of Maharashtra Loans 85,000
(b) ` 1,00,000 14% Konkan Railway Bonds 90,000
(c) ` 80,000 12% Krushna Vally Loan 75,000
(d) ` 1,30,000 10% Central Government Securities 1,50,00
On the same day, the investments were sold as follows:

(a) 15% Government of Maharashtra Loans @ ` 90
(b) 14% Kokan Railway Bonds at par
(c) 12% Krushna Vally Loan @ ` 90
(d) 10% Central Government Securities @ ` 120
On 1st April, 2004, Debentures of ` 4,00,000 were redeemed at a premium of 5%. On the same
day, Maharashtra Road Development Corporation Bonds of ` 1,00,000 were purchased at 10%
premium. Annual contribution for Sinking Fund was ` 90,000. Ignore interest:
You are required to prepare: (1) Debentures A/c, (2) Sinking Fund A/c, (3) Sinking Fund
Investment A/c and (4) General Reserve A/c. (Mumbai, Oct. 2002, Adapted)
[Ans.: Profit on sale of investment - ` 9,000]
26. (Red. @ Prem; Ledger A/c for last yr; Inv. sold at par/profits/loss): On 30th June, 2003,
the following balances stood in the books of P Limited:
`
Debenture Redemption Reserve Fund 2,13,080
The above fund was invested in the following securities and shares :
`
` 70,000 6% Government Loan 2005 71,260
` 80,000 5% Government Loan 2007 64,068
` 16,000 7% Conversion Loan 16,042
` 60,000 8% Government of India Loan 61,710
The above investments were sold net on the same days as under: 6% Government Loan at par;
5% Government Loan at ` 91.7% Conversion Loan at ` 103 and 8% Government Loan at ` 109.
On 1st July, 2003, the company redeemed the debentures at premium of 5%.
Draw up the necessary accounts (other than cash), bring down their balances, if any after
recording the above transactions and state how they will be disclosed in the Balance Sheet of the
company as at 31st December, 2003.
[Ans.: Profit on investment sold – ` 11,600]
27. (Red. @ Prem; JV for fast yr; Inv. sold at par; Bonus): The summarised Balance Sheet of
Successful Ltd. on 31st December, 2012 was:
Ordinary Shares of ` 1 each fully paid 2,00,000 Debenture Redemption Reserve
Fund Investments 50,000
General Reserve 80,000 Current Assets Including balance at Bank 2,40,000
Debenture Redemption Reserve Fund 50,000
Premium on Redemption of
Debentures A/c 1,000
5% Debentures 50,000
5,00,000 5,00,000
The directors decided to:
(a) Repay the debentures including premium of 2%.
(b) Make a bonus issue to the ordinary shareholders of one share for every two shares held in
order to capitalise part of the undistributed profits. The appropriate resolutions were passed,
the above transactions were duly completed. Debenture Redemption Reserve Fund
Investments were sold for ` 50,000.
You are required to show:

(a) The appropriate journal entries to record the transactions in the books of the company and
(b) The Balance Sheet as it would appear after the completion of the transactions.
[Ans.: Transferred to General Reserve from Debenture Redemption Reserve ` 50,000;
Bonus issue ` 1,00,000; B/S Total - ` 4,49,000]
28. (EQ @ Discount): C Ltd. redeemed 19,200 14% Debentures of ` 100 each which were
issued at par, at 110% by converting them into equity shares of ` 10 each issued at a discount of 4%.
Journalise.
[Ans.: Premium on redemption ` 1,92,000; Discount on issue of shares ` 88,000;
No. of shares issued 2,20,000]
29. (EQ @ Par/Cash/PS @ Prem./Deb. @ Dis.): On 10th January, 1998, X Ltd. issued 10,000
6% Debentures of ` 100 each redeemable at par after 15 years. The terms of issue, however, provided
that the debentures could be redeemable by giving 6 month’s notice at any time after 5 years at a
premium of 4% either by payment in cash or by allotment of Preference Shares and/or other
debentures according to the option of the debentureholders.
On 10th April, 2003, the company informed the debentureholders to redeem the debentures on
1st October, 2003 either by payment in cash or by allotments of 8% Preference Shares of ` 100 each
at ` 130 per share or 7% 2nd debentures of ` 100 each at ` 96 per debenture.
Holders of 4,000 debentures accepted the offer of the Preference Shares, holders of 4,800
debentures accepted the offer of 7% 2nd debentures and the rest demanded cash.
Give Journal entries recording the above redemption.
[Ans.: Conversion into Preference 4,000 Debentures × ` 104; Cash 1,200 × 104;
Converted in new debentures 4,800 × 104]
30. (Red. @ Prem./Cash/PS @ Prem./Deb. @ Dis.): On January 1, 2004, Alpha Ltd. gave
notice of its intention to redeem its ` 4,00,000 8% Debentures on 31st March, 2004 at 102% and
offered the debentureholders, the following options:
(a) To apply the redemption money in subscribing:
(i) 11% Cumulative Preference Shares of ` 20 each at 22.50 (opted by the holders of
` 1,71,000 debentures) or
(ii) 9% Debentures at 95% (opted by the holders of ` 1,44,000 debentures)
(b) To get their holding redeemed for cash if neither of the options under (a) was accepted.
Show as on 31st March, 2004, the Journal entries to record the redemption and allotments
involved in the above transactions. Also show the Debenture Redemption account.
31. (Red. @ Prem./Cash/PS @ Prem./Deb. @ Dis.): The following three alternatives have been
given to redeem 5,000 8% Debentures of ` 100 each at 5% premium.
1. Payment in cash.
2. 10% Redeemable Preference Shares to be issued at ` 120 (face value ` 100).
3. 9% New Debenture of ` 100 each at ` 90.
Holders of 2,000 Debentures accepted Preference shares; 1,800 holders accepted 9% new
Debentures and the remaining holders demanded cash.
Pass entries for the redemption of debentures.
[Ans.: Holders of 2,000 Debentures will get 1,750 Preference Shares at ` 120;
Holder of 1,800 Debentures will get 2,100 New Debentures at ` 90 and
the holders of remaining 1,200 Debentures will get ` 1,26,000 in cash]
32. (PS @ Prem.; Deb @ Par; Red. in Cash): Enkay Ltd.’s Summary Balance Sheet on
31st March, 2012 reads as under:
Share Capital (` 100 each) Fixed Assets 8,00,000
Equity 5,00,000 Investments 1,00,000
Less: Calls-in-arrears 10,000 4,90,000 Stock 80,000
10% Preference 3,00,000 Debtors 4,00,000
Less: Calls-in-arrears 10,0000 2,90,000 Bank 2,00,000
Security (Share) Premium 50,000
Capital Reserve 1,00,000
General Reserve 2,00,000
12% Debentures 3,00,000
Creditors 1,50,000
15,80,000 15,80,000
On the same date, Preference Shares are redeemable at premium of 10% and Debentures are
repayable at par.
The calls-in-arrears on both classes of shares are @ ` 40 per share.
To enable redemption, company took the following measures:
1. The reminders for calls were sent to all shareholders. The shareholders holding 100 Equity
Shares and 150 Preference Shares paid the amount.
2. The remaining Preference Shares were forfeited and cancelled.
3. The remaining Equity Shares were forfeited and reissued later on receipt of ` 60 per share.
4. Investments were sold for ` 1,20,000.
5. 1,000 Equity Shares were issued for cash consideration at 20% Premium. The issue was fully
subscribed and paid for.
6. A special discount @ 5% was offered to customers for immediate payments. 50% of
customers in value accepted the offer.
7. Bank Overdraft was arranged for balance of funds required.
You are required to show Journal Entries and Revised Balance Sheet in compliance with
Companies Act. (Oct. 95, Adapted)
[Ans. Capital Reserve ` 9,000; CRR ` 1,90,000; B/S Total ` 11,10,000]
33. (PS @ Prem.; Deb. @ Prem.; Red. in Cash): Resale Ltd., a retail trading company, decided
that the value of its freehold properties could be used to provide additional working capital.
The summarised Balance Sheet of the company as on 31st March, 2012 showed the following:
5,000 6% Preference Shares of ` 10 each 50,000 Freehold Properties at cost 2,00,000
10,000 Equity Shares of ` 10 each 1,00,000 Less: Prov. for Depreciation 40,000 1,60,000
Security Premium Account 5,000 Furniture and Equipment, at cost 90,000
Profit and Loss Account 1,30,000 Less: Proc. for Depreciation 30,000 60,000
8% Debentures (secured on freehold Stock 58,000
properties) 70,000
Creditors 40,000 Debtors 52,000

Bank 65,000
3,95,000 3,95,000
Note: Depreciation on the freehold properties has been provided at 2% p.a. on cost.
The following action was taken:
1. The freehold properties were sold for ` 2,20,000 to an insurance company.
2. The 8% Debentures were discharged at premium of 10%.
3. The 5,000 6% Preference Shares were redeemed at premium of 10%.
You are required to show the Journal entires necessary to record the above transactions
(including cash) in the company’s books.
[Ans.: CRR ` 50,000]
34. (PS @ Par; Deb. @ Prem.; Red. in Cash; Bonus): The summarised Balance Sheet of
Reflex Ltd. on December 31, 2012 was:
Share Capital: Freehold Property 2,80,000
6% Preference Shares of ` 1 each 1,00,000 Other Fixed Assets 2,05,000
Equity Shares of ` 1 each 2,00,000 Current Assets 2,90,000
General Reserve 1,00,000
Profit and Loss Account 2,05,000
5% Debenture 50,000
5,00,000 5,00,000
The Directors decide to:
1. Redeem the Preference Shares at par;
2. Redeem the Debenture at a premium of 2%.
3. Make a bonus issue to the Equity Shareholders of one ` 1 share for every two ` 1 shares held
in order to capitalise part of the undistributed profits.
The appropriate resolutions having been passed, the above transactions were completed.
You are required to show:
(a) The appropriate Journal entries to record the transactions in the books of the company; and
(b) The Balance Sheet as it would appear after the completion of transactions.
[Ans.: CRR ` 1,00,000; Bonus ` 1,00,000; B/S Total ` 6,24,000]
35. (PS @ Prem; Deb. @ Prem; Conversion in EQ @ Prem.): The summarised Balance Sheet
of Didnot Ltd. as at 31st March, 2012 was as follows:
6% Redeemable preference shares of 2,00,000 Fixed Assets at cost less depreciation 4,12,000
` 10 each
Equity Shares of ` 10 each 4,00,000 Goodwill 2,00,000
Profit and Loss Account 2,50,000 Stock 4,50,000
6% Debentures 3,00,000 Sundry Debtors 2,15,000
Bank 50,000 Discount on Debentures 12,000
Creditors 89,000
12,89,000 12,89,000
For redemption of Preference shares and Debentures, the company offered to the Redeemable
Preference shareholders and the Debentureholders the options to convert their holdings into equity
share, which are to be treated as worth ` 12.50 each.
Half the Preference shareholders and 1/3rd of the Debentureholders agreed to do this. The
company issued 30,000, Equity shares at ` 12.50 to the public for cash and with the funds available
paid off the Bank Loan and redeemed the remaining redeemable Preference shares and Debentures.
Journalise the above transactions and recast the Balance sheet. (Mumbai, Oct. 2000, Adapted)
[Ans.: Debentureholders Cash 2,00,000; Equity 80,000 + Premium 20,000; Preference Holder
Cash 1,00,000;Equity 80,000 + Premium 20,000; B/S Total ` 13,02,000]


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3

2. Debentures Issued for Cash at Premium:

[Being 400 Debentures of ` 1,000 each issued at discount of 5%

3.6 REDEMPTION OUT OF PROFITS

[Being amount payable on redemption of debentures at premium of

Debentureholders A/c Dr. 1,00,000

Dr. 6% Debentures A/c Cr.

Dr. Discount on Debentures A/c Cr.

Dr. Debenture Interest A/c Cr.

3.8 DEBENTURE REDEMPTION RESERVE

Profit and Loss Appropriation A/c Dr. 34,893

Dr. Sinking Fund Investment Account Cr.

Debentures A/c Dr. 50,000

Balance Sheet as on 31st March, 2014

Less: Debentures redeemed 51,000

2 Debentureholders A/c Dr. 4,16,000

Solution: Journal of Hindustan MFG. Co. Ltd.

2 Cash/Bank A/c Dr. 3,66,350

6 Profit and Loss A/c Dr. 66,40,000

Profit and Loss Account for the Year Ended (Extracts)

Balance Sheet as on ... [Extracts]

The redemption was carried out by the company.

Dr. Sinking Fund A/c Cr.

Dr. Sinking Fund Investment A/c Cr.

Dr. Debentureholders A/c Cr.

Dr. General Reserve A/c Cr.

Dr. Interest on Debentures A/c Cr.

12. After cancellation of own debentures, the debentures __________ (can/cannot) be

7. If a company resells its debentures in (g) Amount of Redemption/Factor in

(c) is debited to Sinking Fund A/c

Draw up the Debenture Redemption Fund Account for the 5 years.

Equity Shares of ` 10 each 4,00,000 Stock 3,50,000

Pass entries for the redemption of debentures. (T.Y.B.Com., Modified, M.U.)

(ii) 5% National Defence Bonds (Face value ` 2,00,000) 1,90,000 4,90,000

On the same day, the investments were sold as follows:

You are required to show:

Creditors 40,000 Debtors 52,000

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