Question

X Ltd. were to redeem 8,000 10% debentures of Rs. 100 each on April 1, 2017, at a premium of 5%. The company has a surplus of Rs. 9,00,000 in the statement of profit and loss. The company closes its books on December 31 every year. What journal entries the company will be recording to redeem the above debentures?

Answer 1

Journal of X Ltd.
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2016
Dec 31	Surplus in Statement of Profit & Loss A/c   ...Dr.		2,00,000	-
	To Debenture Redemption Reserve (DRR) A/c		-	2,00,000
	(Being DRR created equal to 25% of the nominal value of debentures out of profits)
2017
Apr 01	10% Debentures A/c   ...Dr.		8,00,000	-
	Premium on Redemption of Debentures A/c   ...Dr.		40,000	-
	To Debentureholders A/c		-	8,40,000
	(Being the amount due to debentureholders on redemption at a 5% premium)
Apr 01	Debentureholders A/c   ...Dr.		8,40,000	-
	To Bank A/c		-	8,40,000
	(Being the final payment made to the debentureholders)
Apr 01	Debenture Redemption Reserve A/c   ...Dr.		2,00,000	-
	To General Reserve A/c		-	2,00,000
	(Being the total accumulated DRR balance transferred to General Reserve after complete redemption)

Working Notes:

Total Nominal (Face) Value to be Redeemed = 8,000 × 100

= 8,00,000

Premium on Redemption = `8,00,000 xx 5/100`

= 40,000

Total Amount Due to Debentureholders = 8,00,000 + 40,000

= 8,40,000

Required DRR = `8,00,000 xx 25/100`

= Rs. 2,00,000