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Question
What is meant by the conversion of debentures? Describe the method of such a conversion.
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Solution
When a debenture holder can convert his/her debentures into shares or new debentures after the expiry of a specified period of time, then it is known as the redemption of debentures by conversion. As the company does not need to pay any funds for the redemption, so there is no need to maintain Debenture Redemption Reserve (DRR). The new shares or debentures may be issued at par, premium or at discount.
If a debenture holder exercises the conversion option, then the issue price of shares must be equal to or less than the amount actually received from debentures.
Accounting Treatment
- For amount due to debenture holders
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Debenture A/c |
Dr. |
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To Debenture holders A/c |
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(Debentures redeemed) |
||
- For discharging liability to the debenture holders
|
Debenture holders A/c |
Dr. |
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To Shares/Debentures (New) A/c |
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(Debenture holder amount discharged) |
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RELATED QUESTIONS
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Statement 2 - "Bond and debentures are not same in terms of contents and texture."
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Statement 1 - "No DRR is required for debentures issued by All India Financial Institutions, regulated by RBI and Banking Companies for both public as well as privately placed debentures".
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