12 on cancellation of debentures, will the question of profit or loss could arise. On 30th September, the company will have to pay 38,000 as interest to outsiders, i.e. 8% on 39,50,000 for six months. But since the company is keeping the debentures alive, it means, it has saved interest for two months. Therefore, 667 should be debited to Debentures Interest Account and credited to the Profit and Loss Account. If this entry is passed, it will be noted that the debenture interest account will be debited by the full amount of 40,000 which is interest for six months on 10 lakhs. This should be so since in the balance sheet it will be a liability of 10,00,000. 50,000 own debentures will be shown on the assets side of the Balance Sheet. However, in the amount column only 48,000 will be entered. Suppose out of those debentures 30,000 is sold at 98 cum interest on 1st March, 2013 and the remaining 20,000 is cancelled on 31st March, 2013. The journal entries to be passed will be the following: Dr. 29.400 28,400 1.000 Dr. 400 1st March, 2013 (1) Bank To Own Debentures A/c To Interest Alc (Sale of 30,000 Debenture @ 98 cum interest for 5 months credited to interest A/c the balance being the sale price proper) (2) Profit and Loss A/C To Own Debentures A/C (The loss on 30.000 Own Debentures whose purchase price was 28,800 at 96) 31st March, 2013 8% Debentures Alc To Own Debentures Alc To Capital Reserve Alc (Cancellation of 20,000 Debentures) 400 Dr. 20,000 19.200 800 It should be noted that the profit on cancellation or redemption of debentures should be treated as a capital profit and therefore, credited to the capital reserve. Illustration 1 On January 1, Rama Ltd., had outstanding in its books 500 Debentures of 100 each interest at 6% per annum. In accordance with the powers in the deed, the directors acquired in the open market Debentures for immediate cancellation as follows: March 1 75,000 at 98.00 (cum interest) Aug. 1 10,000 at 100.25 (cum interest) Dec. 15 2,500 at 98.50 (ex-interest) Debenture interest is payable half-yearly, on 30th June and 31st Dec. Show ledger accounts of Debentures, Debenture interest and profit or loss on cancellation, ignoring income-tax