Redemption of Debentures means repayment of the amount of debentures to the debenture holders. It implies the principal amount as well as interest due on debentures to the debenture holders. In other words, it refers to the discharge of liability on debentures in accordance with the terms of the issue.

 Journal entries at the time of redemption of debentures:

Redemption of Debentures at Par

Debentures A/C Dr

To Debentureholders’ A/C

(Being debentures due for redemption)

Debentureholders’A/C Dr

To Bank A/C

 (Being amount paid on redemption)

Redemption of Debentures at Premium

 Debentures A/C Dr

 Premium on Redemption of Debentures A/C Dr

To Debentureholders’A/C

(Being debentures due for redemption at a premium)

(b) Debentureholders’ A/C Dr

To Bank A/C

 (Being amount paid on redemption)

 TIME OF REDEMPTION

 Debentures are normally redeemed at the expiry of their time period by making payments to the debenture holders as per the term of issue.

AMOUNT OF REDEMPTION

The amount to be paid on the redemption of debentures depends upon the terms and conditions as stated in the debenture certificate.

THE CONCEPT OF DRR & DRI

Debenture Redemption Reserve (DRR) - According to section 71(4) of the Companies Act 2013 and the Securities and Exchange Board of India (SEBI) guidelines requiring the creation of a Debenture Redemption Reserve equivalent to at least 25% of the amount of debentures issued before redemption commences, it is not possible to redeem debentures purely out of capital. Hence, a Company cannot redeem its debentures purely out of capital. At least 25% of debentures issued must be redeemed out of profits by creating a “Debentures Redemption Reserve” and the balance of debentures issued may be redeemed out of profits or out of capital.

Conditions of Investing 15% of Debentures maturing during the year:

 As per Rule 18 (7) (C) of the Companies Rules 2014, every company required to create DRR shall before the 30th day of April of each year, deposit or invest, a sum which shall not be less than 15% of the amount of its debentures to be redeemed during the year ending on the 31st March of the next year. The amount so invested is known as Debenture Redemption Investment (DRI).

Journal entries:

For transfer of profit to Debenture Redemption Reserve

Surplus, i.e. Balance in Statement of Profit and Loss Dr

To Debenture Redemption Reserve A/C

 (Being profit equal to 25% of debentures transferred to DRR)

 For making an investment or deposits in specified securities

Debenture Redemption Investment A/C Dr

To Bank A/C

 (Being investment equal to 15% of debentures made in specified securities)

 At the time of redemption for encashment of Investment

 Bank A/C Dr

To Debenture Redemption Investment A/C

 (Being investment encashed consequent upon redemption of debentures)

 When all Debentures are redeemed

Debenture Redemption Reserve A/C Dr

 To General Reserve A/C

(Being DRR transferred to General Reserve)