Journal Entries for Cancellation of Debentures

The cancellation of debentures involves the redemption of outstanding debt securities issued by the company. In this case, X Ltd has purchased 5000, 8% debentures of Rs 100 each from the open market at Rs 103 and intends to cancel them. The following are the journal entries required for the cancellation of debentures:

1. Purchase of Debentures
Debit: Debentures - 5000 x Rs 100 = Rs 5,00,000
Debit: Brokerage Paid = Rs 2,000
Credit: Bank - Rs 5,10,000

2. Cancellation of Debentures
Debit: Debenture Redemption Reserve - Rs 40,000 (8% of Rs 5,00,000)
Debit: Loss on Cancellation of Debentures - Rs 5,000 (Rs 510,000 - Rs 500,000)
Credit: Debentures - Rs 5,00,000
Credit: Bank Charges - Rs 10,000 (Rs 510,000 - Rs 500,000)

Explanation:

● The first entry records the purchase of debentures from the open market. The debentures are debited at their face value of Rs 5,00,000, and the brokerage paid is also debited at Rs 2,000. The bank account is credited with the total amount paid, i.e., Rs 5,10,000.

● The second entry records the cancellation of debentures. The debentures account is credited at their face value of Rs 5,00,000, and the debenture redemption reserve is debited at 8% of the face value, i.e., Rs 40,000. The bank charges are also credited at Rs 10,000, which is the difference between the amount paid and the face value of debentures. The loss on cancellation of debentures is debited at Rs 5,000, which is the difference between the amount paid and the face value of debentures minus brokerage.

Conclusion:

The above journal entries illustrate the process of cancellation of debentures. It is essential to maintain a debenture redemption reserve as per the Companies Act, 2013, to ensure that the company has sufficient funds to redeem its debentures. The loss on cancellation of debentures may arise due to the difference between the amount paid and the face value of debentures, including brokerage and other charges.