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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) |
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- For discharging liability to the debenture holders
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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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Short Answer Question
Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet?
Differentiate between redemption of debentures out of capital and out of profits.
Can a company purchase its own debentures in the open market? Explain.
X.Ltd. purchased a Machinery from Y. Ltd. at an agreed purchase consideration of Rs. 4,40,000 to be satisfied by the issue of 12% debentures of Rs. 100 each at a premium of Rs 10 per debenture. Journalise the transactions.
A company issued 10% Debentures of the face value of Rs,1,20,000 at a discount of 6% on April 01, 2011. The debentures are payable by annual drawings of Rs 40,000 commencing from the end of third year.
How will you deal with discount on debentures?
Show the discount on debentures account in the company ledger for the period of duration of debentures. Assume accounts are closed on March 31 every year.
What journal entries will be made in the following cases when company redeems debentures at the expiry of period by serving the notice: (a) when debentures were issued at par with a condition to redeem them at premium; (b) when debentures were issued at premium with a condition to redeem that at par; and (c) when debentures were issued at discount with a condition to redeem them at premium?
Which of the methods can be adopted to write off discount/loss on issue of debentures against the revenue profits?
Which of the following column indicated in the statement given below is to be debited?
"Purchase of own debentures by the company for cancellation" ·
Consider the following statements.
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".
Statement 2 - 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"
Give the necessary journal entries at time of redemption of debentures
"X Ltd. issued 500, 9% debentures of Rs.100 each at par and redeemable at par at the end of 5 years out of capital."
No Debenture Redemption Reserve is required for debentures issued by ______.
According to SEBI guidelines, what percentage of the amount of debentures must be transferred to Debenture Redemption Reserve, before the commencement of redemption of debentures, in the case of convertible debentures?
Which of the following is not true about Debenture Redemption Reserve (DRR)?
Premium on Redemption of Debentures Account is a ______.
Sources of finance for the redemption of debentures are ______.
What is the nature of Premium on Redemption of Debenture Account?
