Accountancy · Ch 7 — Issue and Redemption of Debentures
Redemption by Payment in Instalments
Redemption by Payment in Instalments
Redemption by Payment in Instalments
When debentures are redeemed in instalments rather than all at once, the company pays off a portion of the total debentures each year, starting from a specified year. The actual debentures to be redeemed in each instalment are selected by draw of lots — a random selection method that ensures fairness.
The Basic Journal Entries
For each instalment of redemption, two journal entries are passed:
Entry 1 — To record the liability to debentureholders:
- Debit Debentures Account (with the face value of debentures being redeemed)
- Credit Debentureholders Account
Entry 2 — To record the payment:
- Debit Debentureholders Account (with the total amount payable, including any premium on redemption)
- Credit Bank Account
The Debentures Account is debited with the face value because the liability represented by those debentures is being extinguished. The Debentureholders Account acts as an intermediary — it is first credited to recognise the amount due, then debited when payment is made.
What Changes with Each Instalment
As debentures are redeemed in parts, the outstanding number of debentures keeps reducing. This affects:
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Interest payments — Interest is paid only on the debentures still outstanding. So the interest amount decreases after each instalment of redemption.
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Premium on redemption — If debentures are redeemable at a premium, the premium amount is calculated only on the debentures being redeemed in that particular instalment.
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Debenture Redemption Reserve (DRR) — When DRR is created, it is based on the outstanding debentures. As debentures are redeemed, a proportionate amount of DRR is transferred to General Reserve. …