Debenture Redemption Methods - Class XII

Debentures are debt instruments and cannot be forfeited for non-payment of call money in the same way shares can be, as they represent a loan rather than equity ownership.

Once debentures are redeemed, the sinking fund is no longer needed, so the balance is transferred to the General Reserve account.

If Sinking fund investments are sold—at loss:

Sinking fund a/c Dr. (with amount of loss)

To Sinking fund investment a/c (with book value of investments sold)

(Being sinking fund investments sold at loss)

Similar to the previous question, the balance in the debenture sinking fund after redemption is transferred to the General Reserve account.

The provision for the redemption of debentures via a sinking fund involves appropriating profits. The Profit and Loss Appropriation account is debited to set aside funds, and the Sinking Fund account is credited.

Once the debentures are redeemed, the purpose of the sinking fund is fulfilled. The remaining balance in the Sinking Fund account is a free reserve and is transferred to the General Reserve.

Debenture Redemption Reserve (DRR) is a statutory requirement created by companies to ensure funds are available for the redemption of debentures.

A sinking fund method is a technique for depreciating an asset in bookkeeping records while generating money to purchase a replacement for the assets when it reaches the end of its useful life. 

Similar to previous questions, the balance of the sinking fund after the redemption of debentures is no longer required for its specific purpose and is transferred to the General Reserve.

A sinking fund involves setting aside assets (investments) and creating a reserve (liability/equity). Both the investment (non-current asset) and the sinking fund reserve (non-current liability/equity) are non-current items.

The sinking fund method involves periodic contributions to a fund that earns interest. It does not involve paying a premium in advance at the beginning of the year.

In the sinking fund method, the final amount depends on the interest earned on the investments, which can fluctuate, making the final value variable rather than fixed.

Redemption by conversion allows debenture holders to exchange their debentures for shares or new debentures of the company.

Debentures are classified as Registered (where the company maintains a register of holders) or Bearer (where the holder is the owner by possession).

Similar to question 412249, paying a premium in advance at the beginning of the year is not a feature of the sinking fund method.

In the sinking fund method, interest earned on the sinking fund investments is credited to the Sinking Fund account, but the interest on the debentures themselves is an expense charged to the Profit and Loss account.

This is a duplicate of question 412251. In the sinking fund method, the amount received at the end of an asset's life is NOT fixed because it depends on investment returns that fluctuate with market interest rates. If the amount were fixed, it would be characteristic of an annuity or insurance policy method. The variability of the final amount is specifically due to interest rate fluctuations affecting the accumulated sinking fund.

Profit or loss on sale of investments is transferred to sinking fund. After the redemption of all debentures, balance left in sinking fund is transferred to general reserve but the portion of the profit on sale of sinking fund investment is preferably transferred to capital reserve.

A sinking fund is always created for a specific purpose, such as the redemption of debentures or the replacement of a specific asset.

After the redemption of all debentures, balance left in sinking fund is transferred to general reserve but the portion of the profit on sale of sinking fund investment is preferably transferred to capital reserve.