Suppose a company has issued 8% debentures for 10,00,000, interest being payable on 31st March and 30th September. The company purchases 50,000 debentures at 96 on 1st August 2012. This means that the company will have to pay 48,000 as principal plus 1,333 as interest for 4 months Entry Own Debentures Dr. 48,000 Interest Account Dr. 1,333 To Bank 49.333 It should be noted that even though 50,000 debentures have been purchased for 48.000 there is no profit. On purchase of anything, profit does not arise; only on sale, and in this case 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 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, 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. i2 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: 1st March, 2013 (1) Bank Dr. 29.400 To Own Debentures A/c 28,400 To Interest Alc 1,000 (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 Dr. 400 To Own Debentures Alc 400 (The loss on 30,000 Own Debentures whose purchase price was 28,800 at 96) 31st March, 2013 8% Debentures Alc Dr. 20,000 To Own Debentures Alc 19,200 To Capital Reserve Alc 800 (Cancellation of 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 100 each interest at 60% per annum in accordance with the aware in the deed the directors acquired in the Suppose a company has issued 8% debentures for 10,00,000, interest being payable on 31st March and 30th September. The company purchases 50,000 debentures at 96 on 1st August 2012. This means that the company will have to pay 48,000 as principal plus 1,333 as interest for 4 months Entry Own Debentures Dr. 48,000 Interest Account Dr. 1,333 To Bank 49.333 It should be noted that even though 50,000 debentures have been purchased for 48.000 there is no profit. On purchase of anything, profit does not arise; only on sale, and in this case 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 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, 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. i2 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: 1st March, 2013 (1) Bank Dr. 29.400 To Own Debentures A/c 28,400 To Interest Alc 1,000 (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 Dr. 400 To Own Debentures Alc 400 (The loss on 30,000 Own Debentures whose purchase price was 28,800 at 96) 31st March, 2013 8% Debentures Alc Dr. 20,000 To Own Debentures Alc 19,200 To Capital Reserve Alc 800 (Cancellation of 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 100 each interest at 60% per annum in accordance with the aware in the deed the directors acquired in the