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
Used.
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
Contribution
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
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
format
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
