Accounts Shares, Debenture

Meaning of Redemption of Debenture
As we know debenture are the liability of the company and debenture holders are the lenders of the company. So company has to repay the loans and discharge the liability. So redemption means “repayment of debentures according to the terms and conditions and the method of repayment which are prescribed at the time of issue of debenture.

Sources of finance for the Redemption of the Debenture
Company requires large amount of money for the redemption of the debenture. A company has the following options to collect the required funds for redemption:-

1. Raise fresh capital
2. Utilise the profits
3. Sale of assets
4. Surplus fund

Debenture Redemption Resetve (D.R.R)
SEBI has issued guidelines whereby companies must create DRR before the debenture is redeemed. A company is required to create a DRR up to at least 50% of the amt. of debentures issued of before the commencement redemption of debentures. D.R.R. is created for debentures redeemable after a period of MORE THEN 18 MONTHS. After the redemption of the all debentures DRR A/C is closed by transferring it to GENARAL RESERVE

Remember :- If the maturity period b/w issue of debenture & redemption of debenture is less than18 months then DRR cannot be created

Methods of Redemption of Debentures

Debentures may be redeemed:-

1. On maturity in lump-sum
2. In instalments by draw of lots
3. By purchase in open market and
4. By conversion

(A) Accounting treatment when debentures are redeemed out of profit and DRR is created.

1. On creation of DRR PROFIT & LOSS APPROPRIATION A/C__________DR. TO D.R.R.A/C
   
   
2. On amount due to Debenture holders on Redemption
   
   

   If redeemed at par	If redeemed at premium	If redeemed at Discount
   Debentures a/c____________dr To Debenture holder Redemption of debentures	Debentures a/c____________drholder Prem.on Redemption of debentures To Debenture holders a/c	Debentures a/c____________drTo Profit. On To Debenture holders a/c

   
   
3. On Payment to Debentureholder Debenture holder a/c _____________dr To Bank a/c
   
   
4. D.R.R Transfer to General Reserve D.R.R a/c ______________dr To General Reserve

Note: - It is noted that D.R.R.a/c is shown on the liabilities side of the Balance Sheet.