Sunday, October 31, 2010

(216)-IMPORTANT NOTES FOR REDEMPTION OF DEBENTURES

Important Notes for Redemption of Debentures
  • The profit or loss on redemption of debentures, disclosed in the debenture redemption account, is the difference between the price paid on redemption and the nominal value. As the price paid on redemption includes accrued debenture interest, an adjustment made debiting debentures interest account and crediting debentures redemption account with the accrued interest. The amount of such interest, having being paid out of sinking fund cash, must be reimbursed thereto out of general cash, and reinvested.
  • If debentures are purchased or redeemed when they are ex-interest, the price paid will exclude interest from the date of purchase to the interest payment date; an adjustment can be made debiting debenture redemption account and crediting debenture interest account with interest on the debentures purchased or redeemed from the date of purchase to the interest payment date; general cash will be debited and sinking fund cash credited.
  • No purpose is served by apportioning the proceeds of sale of the investments between capital and income, as both the interest earned and any profit or loss on realization of the investments must be transferred to the sinking fund account.
  • An amount equal to the nominal amount of the debenture stock cancelled has been transferred from the sinking fund account to general reserved, as the assets representing it are now part of the general asset and are not include in the sinking fund investment account.
  • The discount allowed on the issue should be written off as soon as possible. The discount allowed on the issue of cancelled stock must be written off, as the debentures are no longer outstanding. As, however, the general reserve is available, it has been thought advisable to write off the whole discount against it immediately.

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