- In the draw of lots method, debentures are redeemed yearly through a lottery system.
- Unlisted companies must transfer 10% of outstanding debentures to DRR before redemption.
- A part of DRR is shifted to General Reserve as debentures are redeemed.
- DRI is not realised if debentures will be redeemed in future years.
- If the current year's redemption is more than last year's, 15% of the new amount must be invested.
Key Points
Key Points: Redemption of Debentures
- Redemption of debentures means repaying the amount due to debentureholders.
- Debentures are usually redeemed on the due date, but may be redeemed earlier if permitted.
- Redemption can be done through full payment, in instalments by draw of lots, or by conversion.
- The amount paid on redemption may be the face value or face value plus premium.
- Redemption must follow the terms stated in the prospectus and the debenture certificate.
Key Points: Debentures Redemption Reserve (DRR)
- Debenture Redemption Reserve (DRR) is a reserve created out of the profits available for dividends to ensure funds are available for the redemption of debentures.
- The transfer of profit to DRR is an appropriation of profit and is not treated as an expense in the accounts.
- According to Section 71(4) of the Companies Act, 2013, the amount in DRR can be used only for redeeming debentures.
- Companies such as listed companies, banking companies, AIFIs, NBFCs, HFCs, and other financial institutions are not required to create a DRR.
- Only unlisted companies (excluding NBFCs and HFCs) are required to create a DRR, and the amount must be at least 10% of the outstanding debentures' value.
Journal Entries: Debentures Redemption Reserve
1. For transferring amount to Debenture Redemption Reserve:
General Reserve A/c ...Dr.
Dividend Equalisation Reserve A/c ...Dr.
Surplus,i.e., Balance in Statement of Profit & Loss A/c ...Dr.
To Debentures Redemption Reserve A/c
(Being the amount transferred to DRR)
2. When all Debentures are Redeemed together
Debentures Redemption Reserve A/c ....Dr.
To General Reserve A/c
Journal Entries: Debentures Redemption Investment (DRI)
1. For Income Received with TDS Deducted:
Bank A/c ...Dr.
TDS Collected (Receivable) A/c ...Dr.
To Interest Earned A/c
2. On Investment or Deposit being made in specified securities:
Debentures Redemption Investment A/c ...Dr.
To Bank A/c
3. On Realising the Investment:
Bank A/c ...Dr.
Loss on Realisation of Debenture Redemption Investment A/c (in case of loss) ...Dr.
To Debentures Redemption Investment A/c
To Gain on Realisation of Debenture Redemption Investment A/c (in case of gain)
4. Interest Income and TDS on Interest:
Bank A/c ...Dr.
TDS Collected A/c ...Dr.
To Interest Earned A/c
5. Gain on Realisation (Sale) of Investment:
Gain on Realisation of Debentures Redemption Investment A/c ...Dr.
To Settlement of Profit & Loss
6. Loss on Realisation (Sale) of Investment:
Statement of Profit & Loss ...Dr.
To Loss on Realisation of Debenture Redemption Investment A/c
Key Points: Debentures Redemption Investment (DRI)
- DRI means investing at least 15% of debentures maturing by 31st March of next year.
- This investment must be made on or before 30th April of the current year.
- AIFIs, banks, NBFCs (unlisted), HFCs (unlisted) and some financial institutions are exempt.
- Investment is made in specified securities like bank deposits and government bonds.
- If debentures are redeemed in instalments, the investment remains until the final instalment is paid.
Journal Entries: Applicable at Time of Redemption (Par or Premium)
A. If Reddemed at Par:
1. On debentures becoming due:
...% Debentures A/c ...Dr.
To Debentureholders A/c
2. On payment:
Debentureholders A/c ...Dr.
To Bank A/c
B. If Redeemed at Premium:
1. On debentures becoming due:
...% Debentures A/c ...Dr.
Premium on Redemption of Debentures A/c ...Dr.
To Debentureholders A/c
2. On payment:
Debentureholders A/c ...Dr.
To Bank A/c
Journal Entries: Preparation Before Redemption (Mandatory for Unlisted Companies)
A. On 31st March of the previous year :
On transfer of profits by an unlisted Company@ 10% of the face value of debentures outstanding :
Surplus, i.e., Balance in Statement of Profit & Loss ...Dr.
Dividend Equalisation Reserve A/c ...Dr.
General Reserve ...Dr.
To Debenture Redemption Reserve
B. At the beginning of the financial year (Upto 30th April):
On making Investment by all unlisted as well as listed Companies @15% of the face value of debentures to be redeemed :
Debenture Redemption Investment A/c ...Dr.
To Bank A/c
C. At the time of redemption: On Encashing Investment
Bank A/c ...Dr.
To Debenture Redemption Investment A/c
D. On redemption of debentures :
1.On Debentures becoming due:
Debentures A/c ...Dr.
To Debentureholder A/c
2. On Payment:
Debentureholder A/c ...Dr.
To Bank A/c
E. On transfer of amount of DRR to General Reserve:
Debenture Redemption Reserve (DRR) A/c ...Dr.
To General Reserve A/c
Key Points: Redemption of Debentures in Instalments by Draw of Lots
Journal Entries: Redemption by Payment in Instalments by Draw of Lots
1. When debentures are due for redemption:
Debentures A/c ...Dr.
To Debentureholders A/c
2. When payment is made to debentureholders:
Debentureholders A/c ...Dr.
To Bank A/c
Concepts [6]
- Concept of Redemption of Debentures
- Sources of Redemption of Debentures
- Debentures Redemption Reserve (DRR)
- Debenture Redemption Investment (DRI)
- Methods of Redemption of Debentures> Redemption by Payment in Lump Sum
- Methods of Redemption of Debentures> Redemption by Payment in Instalments by Draw of Lots
