Redemption of debentures means to pay off debentures or to return the amount of debentures.
When the redeemable debentures will be liquidated, it is decided at the time of issuance of debentures. These debentures are paid off at the end of the stipulated period. If the time of redemption is not fixed, then the company can liquidate these debentures at any time of its choice. Debentures can be redeemed in lump sum or in installments. It is thus clear that the purpose of redemption of debentures is to pay the amount of debentures or
The liability of the company in respect of debentures is to be abolished.
Methods of solvency of debentures (Methods of Redemption of Debentures)
Following are the methods of redemption of debentures
(1) Redemption of debentures by conversion – Under this method, the company gives this facility to the debenture holders that after a certain period they can return their debentures and exchange them with equity or preference share. Debentures can also be converted into new debentures, but this method is not very popular. The major advantage of this method is that the debentures are also redeemed and the company does not have to reduce its cash reserves. New shares can be issued by the company at par or at a premium. If the new shares are being paid at a premium, then the Security Premium a/c is credited.
(2) Liquidation after a certain period – Under this method, the company decides in advance that After such time the debentures will be liquidated or paid off. This time is communicated to the debenture holders at the time of issuance of debentures. Within this period, the company makes such arrangement of funds that the debentures are liquidated at the end of the specified period. When debentures have to be liquidated after a certain period, the company uses the following methods for this-
(A) Sinking Fund or Redemption Fund Method – When debentures are paid off after a certain date, it becomes necessary that some arrangement must be made for their solvency so that the company can pay the entire amount of debentures without any difficulty. Can you The best method for this is to create a purification fund. The fund which is created for the redemption of debentures is called redemption fund or sinking fund. In other words, a solvency fund is a fund created by periodically withdrawn money from the profit and loss account or profit and loss planning account, which is invested in external securities. There are two types of Redemption Fund or Sicking Fund.
(i) Cumulative Sinking Fund- Under this, a fixed amount is transferred every year from the profit and it is invested in securities with compound interest and after a certain period, the debentures are liquidated by selling the investments. Is.
(ii) Non-consolidated Sinking Fund- Under this, a certain amount out of the profit every year will be deposited in the sinking fund.
and is also appropriated in securities, but the amount of interest is directly credited to the profit and loss account without being appropriated therein. “Need of Redemption Fund” Often, liquidation funds are created for the following two purposes:
(1) for the payment of liabilities or for the payment of debentures, (2) for replacement of languishing assets.
Method of Making Redemption Fund—Generally makes the redemption angle of all the companies. The following procedure was adopted for the creation of such a liquidation fund.
(1) First of all, the annual amount is determined by the redemption fund table.
(2) The annual amount is withdrawn from the profit and loss planning account and transferred to the redemption fund table.
(3) The annual amount withdrawn from the profit and loss planning account is appropriated put out of business in various securities
(4) The interest accruing on the appropriations was also re-appropriated along with the annual installment goes.
This sequence continues until the date of purification is reached. By doing so, approximately the amount required to pay off the debentures gets accumulated in the solvency fund. The amount withdrawn from profit and loss planning account in the last year is not appropriated but sold to appropriations at the time of redemption. Gains or losses arising from the sale of investments are transferred to the liquidation fund. Finally, the debentures are rectified with the proceeds from the sale of appropriations.
(B) Insurance policy method – Sometimes in order to liquidate debentures, the premium of an insurance policy is to be paid, on which interest is not paid every year, but after a certain period, the amount along with principal and interest is received and debentures from that amount can be refined.
(3) Redemption of debentures by annual instalments The company resolves a specified number of debentures every year. Which debentures will be liquidated is determined by lottery. Redemption of debentures by annual installments does not mean that the face value of debentures will be rectified in installments. This payment is made out of profit or out of capital. When debentures are paid by annual withdrawal, debenture account is debited and bank account credited In this case the debentures can be paid at premium or deduction or at par. The details are subject to the terms and conditions of the debenture issue. If there is any profit on the payment of these, then Debenture Account is debited from the amount of profit and Profit Account on payment of Debentures is credited.
(4) Redemption by purchase of debentures in the open market – When the company finds that the value of its debentures in the stock exchange is less than the face value, it can buy them from the open market itself and thus the debentures are liquidated. Often the company later cancels such debentures gives.
(5) Payment of debentures at the will of the company When there is a condition of issue of debentures that after a certain period the debentures can be repaid at any time according to the wishes of the company, then such payment is called payment at the will of the company.