Redemption of Debentures

Redemption of Debentures

Meaning: Repayment of the amount borrowed by a company is called redemption of debentures. The amount required for the redemption can come from the following ways:
- Out of the profits.
- Through a sinking fund set up for the purpose of such redemption.
- Out of the proceeds of new shares/debentures issue.

Redemption may be at par, at a discount, or at a premium. For example:
(1) A denture loan of $250,000 is redeemed at par. The double entries are:
Dr Debenture Loan Account $250,000
Cr Bank Account $250,000

(2) A debenture loan of $200,000 is redeemed at 98 (ie, $98 out of $100). The double entries are:
Dr Debenture Loan Account $200,000
Cr Discount on Redemption of Debentures $4,000
Cr Bank Account $196,000

(3) A debenture loan of $100,000 is redeemed at 103 (ie, $103 out of $100). The double entries are:
Dr Debenture Loan Account $100,000
Dr Premium on Redemption of Debentures $3,000
Cr Bank Account $103,000
(The Premium on Redemption of Debentures is written off to the profit and loss account or to the share premium account)