Accountancy · Ch 6 — Issue and Redemption of Debentures
Redemption by Payment in Lump Sum
Redemption by Payment in Lump Sum
Redemption by Payment in Lump Sum
When a company redeems all its debentures at once on the due date, it is called redemption by payment in lump sum. The entire amount payable to debentureholders is paid in a single instalment. The accounting treatment depends on whether the debentures are redeemed at par or at a premium.
1. Redemption at Par
If debentures are redeemed at par, the amount payable equals the face value of the debentures. Two journal entries are needed:
Entry (a): To record the amount due to debentureholders on redemption.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Debentures A/c Dr. | Face Value | |||
| To Debentureholders A/c | Face Value | |||
| (Amount due on redemption of debentures) |
Why this entry? The Debentures account (a liability) is being closed — it is debited to reduce the liability to zero. The credit to Debentureholders account creates a liability to pay them.
Entry (b): To record the actual payment.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Debentureholders A/c Dr. | Face Value | |||
| To Bank A/c | Face Value | |||
| (Payment made to debentureholders) |
Why this entry? The Debentureholders account is debited to settle the liability created earlier. Bank is credited because cash goes out.
2. Redemption at Premium
If debentures are redeemable at a premium (e.g., at 110% of face value), the company must pay more than the face value. The extra amount is the premium on redemption.
Entry (a): To record the amount due.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Debentures A/c Dr. | Face Value | |||
| Premium on Redemption of Debentures A/c Dr. | Premium Amount | |||
| To Debentureholders A/c | Total Amount Due (Face Value + Premium) | |||
| (Amount due on redemption of debentures) |
Why this entry? The Debentures account is debited with face value to close it. The Premium on Redemption of Debentures account is debited because it is an expense/loss for the company — the company is paying extra to redeem. The credit to Debentureholders is for the total amount payable.
Entry (b): Payment to debentureholders.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Debentureholders A/c Dr. | Total Amount Due | |||
| To Bank A/c | Total Amount Due | |||
| (Payment made to debentureholders) |
Summary of Journal Entry Pattern for Lump Sum Redemption
| Scenario | Entry 1 (Amount Due) | Entry 2 (Payment) |
|---|---|---|
| Redemption at par | Debentures A/c Dr. (Face Value) To Debentureholders A/c | Debentureholders A/c Dr. To Bank A/c |