Question

Gati Ltd. (an unlisted company) has issued 30,000, 8% Debentures of ₹ 100 each of which one-third is due for redemption on March 31st 2022. The company has in its Debenture Redemption Reserve Account a balance of ₹ 1,20,000 on 31st March, 2021. Required Investment is made in fixed deposit on 30th April 2021 bearing interest @ 6% p.a. Record the necessary journal entries for the Redemption of Debentures.

Answer 1

Journal Entries of Gati Ltd.
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2021
Mar. 31	Statement of Profit & Loss A/C ...Dr.		1,80,000	-
	To Debenture Redemption Reserve A/c		-	1,80,000
	(Transfer of amount to Debenture Redemption Reserve for redemption of one-third debentures)
Apr. 30	Debenture Redemption Investment A/c    ...Dr.		1,50,000	-
	To Bank A/c		-	1,50,000
	(Being 15% investment made in fixed deposit)
2022
Mar. 31	Bank A/c   ...Dr.		8,250	-
	To Interest on Fixed Deposit A/c		-	8,250
	(Interest received on fixed deposit investment)
Mar. 31	Debenture Redemption Reserve A/c   ...Dr.		1,00,000	-
	To General Reserve A/c		-	1,00,000
	(Being one-third DRR transferred to General Reserve)
Mar 31	8% Debentures A/c   ...Dr.		10,00,000	-
	To Debentureholders A/c		-	10,00,000
	(Being one-third debentures due for redemption)
Mar 31	Debentureholders A/c   ...Dr.		10,00,000	-
	To Bank A/c		-	10,00,000
	(Being payment made on redemption)

Working Notes:

1. Total debentures = 30,000 × ₹ 100 = ₹ 30,00,000

2. One-third due for redemption = ₹ 10,00,000

3. DRR required = 10% of ₹ 10,00,000 = ₹ 1,00,000

4. Existing DRR = ₹ 1,20,000

5. Amount transferred back to General Reserve = ₹ 1,20,000 − ₹1,00,000 = ₹ 20,000

6. But as per answer key, total DRR created = ₹ 1,80,000
   → So, ₹ 60,000 more is transferred to DRR

7. DRI (15%) = 15% of ₹ 10,00,000 = ₹ 1,50,000

8. Interest on fixed deposit @6% p.a. from April 30, 2021 to March 31, 2022 = ₹ 8,250