Question

Can a company purchase its own debentures in the open market? Explain.

Answer 1

Yes, a company can purchase its own debentures provided it is authorised by its Article of Association. As per the Company Act, if a company is authorised by its Article of Association, only then it may purchase its own debentures from the open market. The main purposes of such purchase are as follows:

1. For immediate cancellation of debenture liability, if the interest rate on its debenture is higher than the market rate of interest.
2. A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and thereby earn profit.

A company may purchase its own debentures at discount or at premium for cancellation.

1. If Debentures are purchased at Discount for Cancellation

When the company purchases its own debentures at discount for cancellation, then the following Journal entries are recorded.

Own Debentures A/c		Dr.
	To Bank A/c
(Own debentures purchased)
	Own Debentures A/c		Dr.
		To Bank A/c
	(Own debentures purchased)

 

Debentures A/c		Dr. (with the face value)
	To Own Debentures A/c	(with the amount paid)
	To Profit on Cancellation of Own Debentures A/c	(with the difference between the face value and amount paid)
(Own debentures cancelled)

 

Profit on Cancellation of Own Debentures A/c		Dr.
	To Capital Reserve A/c
(Profit on Cancellation of Own Debentures transferred to Capital Reserve)

2. If Debentures are Purchased at Premium for Cancellation

Own Debentures A/c		Dr.
	To Bank A/c
(Own debentures purchased)

 

Debentures A/c		Dr. (with the face value)
Loss on Redemption of Debentures A/c		(with the difference between Amount paid and face value)
	To Own Debentures A/c
(Own Debentures cancelled)