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What is Meant by ‘Redemption Out of Capital? - Accountancy

Numerical

Short Answer Question

What is meant by ‘Redemption out of Capital?

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Solution

When debentures are redeemed out of capital and no profits are utilised for redemption, then such redemption is termed as redemption out of capital. In such a situation, no profits are transferred to the Debenture Redemption Reserve.

As per the guideline laid down by Securities and Exchange Board of India (SEBI) and the Section 117C of Company Act of 1956, the creation of Debenture Redemption Reserve is mandatory (DRR). Therefore, it is not possible to redeem debentures purely out of capital, as it reduces the value of assets. The following companies are exempted from the creation of DRR.

  1. Infrastructure companies (i.e. those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities)
  2. A Company that issues debentures with a maturity up to 18 months

The following are the necessary Journal entries that need to be passed, in case the debentures are redeemed out of capital.

  1. If  debentures are redeemedout of capital at Par

Debenture A/c

Dr.

 

To Debenture holder A/c

 

(Amount of debentures due to debenture holders)

 

     

 

Debenture holder A/c

Dr.

 

To Bank A/c

 

(Amount of debentures paid to debenture holders)

 
  1. If  debentures are redeemedout of capital at Premium

Debenture A/c

Dr.

Premium on Redemption A/c

Dr.

 

To Debenture holder A/c

 

(Amount of debentures due to debenture holders)

 

     

 

Debenture holder A/c

Dr.

 

To Bank A/c

 

(Amount of debentures paid to debenture holders)

 

     
  Is there an error in this question or solution?
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APPEARS IN

NCERT Class 12 Accountancy - Company Accounts and Analysis of Financial Statements
Chapter 2 Issue and Redemption of Debentures
Short Answer Question | Q 18 | Page 135
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