debenture redemption accounting

Redemption of debentures

When it is issued :

Bank account debit

To debenture account

But when it is redeemed

Debenture account debit

To bank account

But at the time of redemption fund may not be sufficient. Hence sinking fund investment will be


Journal entries

Appropriation :

Profit and loss appropriation account debit

To debenture fund or sinking fund

Sinking fund created

Investment purchase

Debenture sinking fund investment account debit

To bank account

In first year only principal amount will be invested

Second and subsequent years

Bank account debit

To debenture sinking fund

Interest on sinking fund is received

Profit and loss appropriation account debit

To debenture fund or sinking fund

Sinking fund created

Debenture sinking fund investment account debit

To bank account

Principle and interest both are invested

Last year

Interest received

Bank account debit

To debenture sinking fund


Profit and loss appropriation account debit

To debenture sinking fund

In a last year there is no new investment but existing investments are sold

Bank account debit

Loss on sale of investment account debit – if exist

To debenture fund investment

To profit sale of investment – if exist

Debentures repaid.

Debenture account debit

To debenture holder

Debenture holder account debit

To bank account

After sale of investment this account will be transferred to sinking fund

Debenture sinking fund account debit

To general reserve

Balance of sinking fund transfer to general reserve


There are various options for redemption 1 payment by company on due date

2 purchase from open market and cancelled

When debentures are available from open market below redemption value it should be purchased and cancelled

Debentures can be sold in the open market again or it can be cancelled.

When investments are sold, it is credited with cost. Difference will be adjusted in sinking fund account


For the presentation if own debenture investment are not immediately cancelled

Investment account will be prepared for own debentures.

For the understanding purpose interest income and interest expense both should be separately considered. Interest income account will be prepared in investment account. Interest expense account will be prepared separately interest on own debenture and sinking fund investment is an income but interest on debenture liability is an expense.

















Investment account

investment can be held as an asset by the Enterprise for earning dividend,interest and capital appreciation. which is arise from excess fund parked.

security held as a stock in trade and land and building will not be covered under this chapter


journal entries

investment purchased

investment account debit

interest expense account debit

to bank account

investment sold

bank account debit

to investment account

to interest expense account

accrued interest – when date of closing the account and due date of interest are not same.

it means right to receive is not arise. example closing of the account 31st December. interest due 31st March and 30 September. at the time of closing of the account 3 month interest is accrued

closing entry

accrued interest account debit

to interest income account

Being interest for the period between last received and closing of the account

opening entry

interest account debit

to accrued interest account

profit or loss on sale transfer to investment account to P and L account

profit / loss = sale value – cost of investment( fifo or average cost)

before recording any transaction see the due date of interest

interest will be paid always on face value

cost includes purchase price, acquisition charges, brokerage fees and stamp duty etc.

in case of purchase transaction brokerage will be added while in case of a sale transaction brokerage will be deducted.

stamp duty will be paid by purchaser

stamp duty will be added after brokerage

if percentage of brokerage or stamp duty is given, it will apply on Cost only

ex interest – when interest for the period in which investment was held by seller will be paid separately from the purchaser it is called as ex interest. it will be calculated given that

cum interest : when it is given that interest is included in total consideration