Issue and redemption of debentures are processes that make debentures functional in an organisation. The issue of debenture means issuing a certificate under the organisational seal that acknowledges debt. On the other hand, redeeming means paying the principal amount back to the debenture holder. So, debenture redemption discharges an organisation’s debt liability of debentures. Redemption of debentures can take place in various ways like redemption by payment in instalments, lump sum, etc. Here, our focus will not be on redemption by payment in instalments but instead on payment in a lump sum.  

What is Payment in Lump Sum?

This type is one of the options for redeeming debentures. It is simpler than redemption by payment in instalments and other redemption methods. In redemption by payment in a lump sum, debenture holders receive their promised sum on the fixed date. The lump-sum refers to the total amount of principal of all the debentures whose redeeming does not occur at a premium or discount. There is a fixed date in the issue and redemption of debentures with a lump-sum payment. This date is the maturity date you can find on the debenture agreement. There is also an option for organisations to pay the debentures before maturity. The organisation knows the payment amount and date beforehand. As such, proper management of the resources can take place.

Accounting Entries for Payment in Lump Sum

Just like accounting entries for redemption by payment in instalments, there are also accounting entries for lump-sum payments.  

Out of Profits

Here, there is no special provision for the redeeming of the debentures. Their redeeming can take place either on maturity or before it.

Accounting Entries

Before commencing redemption of debentures, the creation of ‘Debentures Redemption Reserve’ is mandatory for the organisation. The organisation must do it at 50% or half of the amount of the total debentures.

1. For DRR creation

Profit & Loss Appropriation A/c    Dr.

           To Debenture Redemption Reserve A/c

2. For Debenture Amount Due

(a) When redeeming of debentures takes place at par:

Debentures A/c Dr. (with the debentures nominal value)

           To Debenture holders A/c

(b) When redeeming of debentures takes place at a premium:

Debentures A/c Dr. (with debenture par value)

Premium on redeeming Debentures A/c Dr. (with the premium)

           To Debenture holders A/c (with the total)

(c) At Discount redeeming:

When the redeeming of debentures takes place at a price less than the face value, it results in the ‘redemption at a discount.

Debentures A/c Dr. (with nominal value)

          To Debenture holders’ A/c (with the amount that is payable)

To Profit on Redemption of Debenture A/c (with the profit or discount that comes on redeeming)

3. On Paying

Debenture holders A/c  Dr.

           To Bank A/c

4. After redeeming all the debentures, a transfer of DRR takes place to General Reserve

Debenture Redeeming Reserve A/c Dr.

           To General Reserve A/c

5. Organisations may utilise profit on redeeming debentures to write off capital losses. Another option for organisations is to transfer it to Capital Reserve.

Profit on Redemption of Debentures A/c   Dr.

           To General Reserve A/c

           To Preliminary Expenses A/c

           To Discount on Debentures or Shares A/c

Conclusion

Issue and redemption of debentures are processes that make the working of debentures in an organisation. So, debenture redemption means discharging an organisation’s debt liability of debentures. Redemption of debentures can occur in several ways, one of which is the redemption by payment in a lump sum. Here, debenture holders receive their promised sum on the fixed date.