Understanding Redemption of Debentures for help in account

Among every other topic in the Accounts which makes students turn towards accounting assignment help, comes redemption of debentures as well. 

Written acknowledgement of debt which is taken by the Company and which are issued under the company’s seal is known as Debentures. It includes securities of a company, stock and bonds, whether they have charge on the asset or not. Debenture contains a contract which is used for the repayment of principal sum and at a specified date.

A specified rate of interest is used for issuing debentures. Interest is given to the debenture holder on his debenture at the specifies rate. After every six months, payment of interest is made, regardless of profit. The asset of the company is mortgaged to secure a debenture.

Which means that if the company fails to pay back the debentures according to the term of issue, the debenture holders can go to the court and get their money realized by selling the assets of the company. Funds which are raised by issuing debentures carries a long-term nature and often the repayment of debentures is after the long period of time, say seven years or ten years or twelve years. 

The amount of debentures to debenture holders, which is repaid is called redemption of debentures. In other words, a liability is discharged for debentures by the repayment of the amount of debentures kept on due.

The prospectus that invites application for the issue of debentures contains the terms and conditions of redemption. The debenture certificate also includes the terms related to redemption.

Therefore this is the basic concept of redemption of debentures, and students must keep this in mind if they need assignment help. Now we will discuss about the types of debentures which is yet another complex topic that makes students turn towards accounting assignment help:

  • Secured or mortgaged debentures- The debentures which are either secured on any Company’s asset or on all the company’s asset in general are called secured debentures. The company cannot deal with the mortgaged asset if it has a fixed charge on it, whereas the company can use the asset if it has a floating charge on it. The debentures which have a first claim on the assets charged are known as first mortgaged debentures. And one with the second claim are known as second mortgaged debentures. 
  • Unsecured or naked debentures- The debentures which do not have any security are known as unsecured or naked debentures.
  • Registered debentures- In this type of debentures, the addresses and names of such debenture holders are recorded in the company’s register as ‘Register of Debenture holders’. These types of debentures cannot be transferred freely and requires a  proper transfer deed. The person whose name appears in the register of the company has been paid a principal amount and interest on such type of debenture.
  • Bearer debentures- These debentures do not record the names and addresses of the holders of such debentures in the company and a mere delivery is done to transfer these debentures. Interest and principal amount are paid to the debenture holders of such debentures. These debentures have a coupon attached with them and the payment of interest is done to the persons who give the coupons in the specified bank.
  • Redeemable debentures- The debentures of which the repayment is done by the company either by instalments during the company’s lifetime or in lump sum when a specified period ends, are called redeemable debentures.
  • Irredeemable or perpetual debentures- These debentures are not repaid by the company during their lifetime and are repaid at the time of company’s liquidation.
  • Convertible debentures- The debentures which can be converted either into any type of security or into equity shares, at the rate of exchange which is stated either at the company’s option or at the option of debenture holders, after a specified period, are called convertible debentures. When certain part of the amount of debentures is converted into shares, such debentures are known as Partly Convertible Debentures. The debentures whose amount is fully converted into shares are called Fully Convertible Debentures. 

A company manages the amount required for the redemption of debentures in the following ways: 

  • Redemption done from the proceeds of fresh issue of debenture and share: The company may decide to issue preference shares or debentures or new equity shares when a company requires additional funds for redemption of debentures. The proceeds from fresh issue of debentures and shares are required for redemption of old debentures. The company’s financial position is not unfavorably affected in such types of debentures.
  • Redemption of debentures out of capital: This means that no profits are kept aside for redemption of debentures. Profits are not transferred to Debenture Redemption Reserve in such a case. 
  • Redemption of debentures out of profits: This is the amount which is equal to debentures issued, is transferred from surplus in Statement of Profit and Loss to an account which is opened newly by the name of Debenture Redemption Reserve Account. It is so called as the profit which is transferred to Debenture Redemption Reserve helps to reduce the amount of profit which is available for dividend. It states that the profits which are kept aside for Debenture Redemption Reserve are not available to be paid as dividend but surely would be used for redemption of debentures.

The redemption is done when the company wishes to present the options to resell the debentures. But after a few months or years, it can also decide to cancel the debentures which are held with the company.

After cancellation, the debentures are not to be resold and so they are to be redeemed. The company has a choice of redemption of debentures on only a small portion of the debentures by purchasing it from the open market.

This was all about the redemption of debentures and students may refer to these points for assignment help.

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