On 30th September, the company will have to pay Rs. 38,000 as interest to outsiders, le 8% on Rs. 9,50,000 for six months. But since the company is keeping the debentures alive, it means, it has saved interest for two months. Therefore, Rs. 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 Rs. 40,000 which is interest for six months on Rs. 10 lakhs. This should be so since in the balance sheet it will be a liability of Rs. 10,00,000 Rs. 50,000 own debentures will be shown on the assets side of the Balance Sheet However, in the amount column only Rs. 48,000 will be entered. Suppose out of those debentures Rs. 30,000 is sold at Rs. 98 cum interest on 1st March, 2006 and the remaining Rs. 20,000 is cancelled on 31st March, 2006. The ournal entries to be passed will be the following Rs. Rs. 25 1st March, 2006 (1) Bank Dr. 29,400 To Own Debentures Alc 28,400 To Interest Alc (Sale of Rs. 30,000 Debenture @ Rs. 98 cum interest for 5 months credited to Interest Alc the balance being the sale price proper) (2) Profit and Loss A/C Dr 400 To Own Debentures Alc 400 (The loss on Rs. 30,000 Own Debentures whose purchase price was Rs. 28,800 at 96 C25 1,000 31st March, 2006 8% Debentures A/C Dr. 20,000 To Own Debentures Alc 19,200 To Capital Reserve Alc 800 (Cancellation of Rs. 20,000 Debentures) 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 Rs. 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 Rs. 5,000 at Rs. 98.00 (cum interest) Aug. 1 Rs. 10,000 at Rs. 100.25 (cum interest) Dec 15 Rs. 2,500 at Rs. 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