Methods of redemption of debentures - class-XII

Standard methods for redemption of debentures include purchase in open market, drawing of lots, and payment in lump sum. Auction is not a recognized method for debenture redemption.

Debentures will be redeemed at a discount only when the company is able to buy the debentures in the open market at a price lower than the face value of the debentures.

Debentures can be redeemed at par (face value), at a premium (above face value), or sometimes at a discount, depending on the terms of the issue.

It is a legal and accounting requirement to state the terms of redemption (maturity date, price, etc.) at the time of issuing debentures.

Debentures are frequently issued at face value and redeemed at face value, which is known as being issued and redeemed at par.

If a company agrees to pay a premium upon redemption, that premium represents a future obligation or debt that the company must settle, making it a liability.

Premium on redemption is treated as a loss or expense for the company, and in accounting, expenses are classified under nominal accounts.

The Debenture Redemption Reserve (DRR) is a reserve created out of profits to ensure funds are available for the redemption of debentures. In the balance sheet, it is classified under the 'Reserves and Surplus' head within Shareholders' Funds.

Debentures can be written-off either by debiting it to profit and loss or to Debentures cannot be issued at a premium and redeemable at par.

Once the debentures are fully redeemed, the purpose of the Debenture Redemption Reserve (DRR) is fulfilled. The balance in the DRR account is then transferred to the General Reserve, as it is no longer required for its specific purpose.

According to the Companies Act and relevant rules, companies are not required to create a Debenture Redemption Reserve (DRR) for debentures that are privately placed.

An 'Ex-interest' price means the price of the debenture excludes the interest accrued since the last interest payment date. Conversely, a 'Cum-interest' price includes the accrued interest.

Under current regulations, companies may withdraw from the Debenture Redemption Reserve (DRR) only after at least 10% of the total debenture liability has been redeemed.

Preference shares can be redeemed either out of the proceeds of a fresh issue of shares or out of the company's divisible profits. Therefore, both options (b) and (c) are correct.

Companies are required to create a Debenture Redemption Reserve (DRR) equivalent to a specified percentage of the debenture issue before redemption can commence. The current requirement is 25% for certain companies, though older textbooks or specific contexts sometimes cite 50%. Given the options, 50% is the standard academic answer in many older curricula.

Only fully paid-up preference shares are eligible for redemption. If shares are partly paid, they must be made fully paid-up before they can be redeemed.

The 'Premium on Redemption of Debentures' account represents a liability that the company will have to pay to debenture holders at the time of redemption. Since it represents an amount payable to a specific group (debenture holders), it is classified as a personal account.

SEBI guidelines mandate the creation of a Debenture Redemption Reserve (DRR) for debentures with a maturity period of more than 18 months.

The Capital Redemption Reserve (CRR) is created by the amount of preference shares redeemed out of profits. The nominal value of shares to be redeemed is 2,00,000. Since 1,00,000 is raised via a fresh issue of shares, the amount to be transferred to CRR is 2,00,000 - 1,00,000 = 1,00,000.

The Capital Redemption Reserve (CRR) must be created out of divisible profits. General Reserve is a form of divisible profit, whereas share premium and forfeited shares are capital receipts and cannot be used for this purpose.

Securities Premium (or Debenture Premium) has restricted uses under the Companies Act. It cannot be used to pay dividends to shareholders.

The Capital Redemption Reserve (CRR) is created when preference shares are redeemed out of the company's divisible profits, rather than from the proceeds of a fresh issue of shares.

Debentures can be issued at a discount, at par, or at a premium, and they can be redeemed at par or at a premium. Therefore, the issue price and redemption value are not always equal.

Debenture Premium (when received on issue) is a gain for the company, making it a nominal account. However, in some contexts, it is treated as a liability (personal account). Given the options, 'Nominal Account' is the standard classification for premium on issue.

From the point of view of tenure (time), debentures are classified as redeemable (repayable after a fixed period) or irredeemable (perpetual).

A convertible debenture is a type of long-term debt issued by a company that can be converted into stock after a specified period. Convertible debentures are usually unsecured bonds or loans meaning that there is no underlying collateral connected to the debt.

Debenture Premium (or Securities Premium) is a capital reserve and is shown under the head 'Reserves and Surplus' in the balance sheet.

Premium on redemption of debentures is a personal account and it is a liability of the company which is payable on redemption.

The company has 500 debentures of 100 each, totaling 50,000. The interest rate is 15%. Annual interest is 7,500. Interest is paid half-yearly (3,750 every 6 months). From Dec 31st to March 31st is 3 months. Accrued interest = 7,500 * (3/12) = 1,875.

Fully convertible debentures do not require the creation of a Debenture Redemption Reserve (DRR) because they are converted into equity rather than redeemed in cash.

The discount on issue (6,000) is written off based on the outstanding debenture amount each year. The redemption schedule is 10%, 20%, 30%, 40%. The outstanding amounts are 100%, 90%, 70%, 40%. The ratio is 10:9:7:4. Total parts = 30. Year 1: (10/30)*6000 = 2000... wait, the calculation in the option B is the only one that reflects a declining balance method based on the redemption schedule provided.

Similar to the previous question, the discount is written off based on the outstanding debenture balance. The redemption schedule results in a specific declining balance, and option C provides the correct distribution of the 6,000 discount over the years.

The face value of the debentures is 500 * 100 = 50,000. The interest is 15% of the face value. 15% of 50,000 = 7,500.

According to the Companies Act, the Securities Premium Account (often referred to as debenture premium when applied to debentures) has restricted uses. It cannot be used to pay dividends to shareholders.