by Redemption of Debentures involves specific financial adjustments to ensure accurate accounting and compliance with legal requirements. The key adjustments are as follows:
1. Debenture Redemption Reserve (DRR) Adjustment
A company must create a Debenture Redemption Reserve (DRR) as per regulatory requirements before redeeming debentures. This reserve is built using profits and ensures that sufficient funds are available for redemption. Once redemption is completed, the DRR can be transferred back to the General Reserve. The journal entry for creating the DRR is:
Profit & Loss A/c Dr.
To Debenture Redemption Reserve A/c
This adjustment safeguards investors by ensuring financial discipline and reducing the risk of default in debt repayment.
2. Investment in Specified Securities (Debenture Redemption Investment – DRI)
Regulatory norms may require companies to invest a percentage of the redemption amount in specified securities before debenture repayment. These investments ensure that the company has liquidity when the debentures mature. The investment is made in risk-free government bonds or fixed deposits. Once the redemption process is complete, the investments are liquidated. The entry for this adjustment is:
Debenture Redemption Investment A/c Dr.
To Bank A/c
This adjustment ensures that companies have adequate financial backing for smooth redemption.
3. Transfer of Debenture Liability to Redemption Account
When a company decides to redeem debentures, the liability is transferred from the Debentures Account to a separate Debenture Redemption Account to track the repayment process. The journal entry is:
Debentures A/c Dr.
To Debenture Redemption A/c
This step helps in proper accounting and ensures that the outstanding liability is recorded separately. It provides transparency in financial statements and allows better monitoring of debt repayment.
4. Payment to Debenture Holders
Once the redemption process is initiated, the company makes payments to debenture holders. The payment can be made in cash or by issuing new securities. The journal entry for cash redemption is:
Debenture Redemption A/c Dr.
To Bank A/c
For redemption through issue of new shares or debentures:
Debenture Redemption A/c Dr.
To Equity Share Capital A/c (or New Debenture A/c)
This adjustment ensures that the financial statements reflect the reduction in liabilities post-redemption.
