ACCOUNTANCY FORM 6 – COMPANY ACCOUNT 1.2

CAPITAL REDEMPTION RESERVE

The balance on this A/c can be utilized in paying up the unissued shares of a company as fully paid Bonus shares.

ISSUE OF BONUS SHARES

The receive to provide for the Bonus shares may be used in the following order:-

(i)`      Capital Redemption Reserve.

(ii)       Share premium.

(iii)     Other Reserves (e.g. profit /loss balance, general reserve).

ENTRIES REDEMPTION OF SHARES

A)  Declaration of redemption

     Dr.  Redeemable preference share capital A/c

          Cr.  Preference share redemption A/c

B) Premium payable on redemption

      Dr.  Share premium A/c or P & L appropriation A/c

           Cr.  Preference share Redemption A/c

C) Redemption of shares

          Dr.  Preference share Redemption A/c

         Cr. Cash / Bank/c

D) Transfer of the nominal value of the shares being redeemed

          Dr.  P&L appropriation.  A/c

           Cr.  Capital Redemption Reserve  A/c

Example:

Mpenetecho Co. Ltd had 800,000 % redeemable preference shares of Tshs.1 each in issue originally issue at a premium of act 40 per share.  The company new proposes to redeem 200,000 of these shares at Tshs. 1/60 per share financed partially by the issue of 160000 ordinary shares of sh. 1 per share at Tshs. 1/20.  Prior to the issue of replacement shares the share premium A/c had a credit balance of Tshs. 242,000. 

Show the amount of premium payable on redemption to be approached from;-

(a)   Share premium A/c

(b)   Distribute profit

Solution

Given:  Premium on original issue = 0.40

            Premium on fresh issue = 1 – 1.20 = 0.20

            Premium on original issue = 0.4 x 200,000

                                                           =   80,000

            Premium on redemption = 0.6 x 200,000

                                                     = 120,000

            Premium on fresh issue = 0.2 x 160,000

                                                      = 32,000

REDEMPTION OF DEBENTURES

Strictly used, Debenture is a written acknowledgement of a debit, by a limited company providing terms and conditions as for its security, interest and repayment.

Or

It can loosely be defined as an account borrowed by a limited company.

An issue of debenture (i.e obtain of loan from the public) may be documented under seal, (with the added formality of being executed in Deed form).

SECURITY:-

The security may take the form of fixed assets which may be applied for the benefit of the debenture holders on a breach of the debenture deed.  (E.g. failure to pay interest, involvement).  That is why we have mortgage debentures and simple or married debentures.

Mortgage debentures are the debentures in which assets have been pledged.

Naked debentures are the debentures without security. The security may be described as fixed or floating.

Fixed charge:-

Granted on fixed assets which can be applied for the benefit of the debenture holders on a breach of the debentures deed.  While the charge is operative, the security may neither be traded nor exchanged.  On the breach of the debenture deed, the assets can then be applied for the benefit of the debentures holders.

Floating charge:-

Granted so as to apply to all assets, and while the charge is operative, the assets can either be traded or exchanged.  On the breach of the debenture deed, the charge crystallizes and assets the priority of the debenture holders.

TRUSTEE

The Debenture Deed will appoint a trustee for the debenture holders whose work is to safe guard the interest of the debenture holders.  On the breach of the Trust deed, the trustee will appoint a receiver who will seize the security (property) and apply if for the benefit of the debenture holders’ arrangement for the repayment of the debenture issue.

REDEMPTION OF DEBENTURES

Debentures can be bought back (redeemed) using the following methods:-

(a)              Sinking fund method / Debenture Redemption fund method.

Under this method a fixed sum calculated from the sinking fund tables is set aside and invested in outside securities which together with interest compounded annually and calculated using a fixed rate, a sufficient sum will them be available to redeem (repay & the debentures on their maturity.

(i)   At the end of the first year:-

(a)  Dr. P & L appropriation A/c  with the annual appro.

       Cr.  Sinking fund A/c / Debenture redemption sum set aside.

(b) Dr. Sinking fund investment A/c / Debenture Redemption fund

            Investment A/c.

     Cr. Cash / Bank A/c  with the equipment amount invested. 

(ii)    At the end of the second and subsequent years.

Dr.  P. & L appropriation A/c  with interest received on investment

    Cr.  Sinking Fund A/c 

(b)  Dr.  Cash  / Bank A/c with interest received on investment.

Cr.  Sinking Fund  A/c 

(c)Dr.  Sinking Fund investment A/c with both the fixed sum (+)

Cr.  Cash / Bank A/c  interest now being re invested.

(iii)     At the end of the final year (the year of redemption:-

            (a)       Dr.  P& L appropriation A/c  with the fixed sum set a side

                        Cr.  Sinking fund A/c  investment

(b)       Dr.  Cash / Bank A/c  with interest received on investment

            Cr.  Sinking fund A/c

NB:     At the end of the final years, no further investment is made instead of security will be sold out.

Entries :-

(i)  Dr.  Cash  / Bank A/c with cash received on sale of the 

Cr. Sinking fund investment A/c  investment.

(ii)Dr.  Sinking Fund Investment A/c with profit on sale of the investment

Cr.  Sinking fund A/c

NB:  The balancing figure on the sinking fund A/c after the debentures have been redeemed, will be transferred to the general reserve.

Entry:-

Dr.  Sinking fund A/c with transfer of the balance

   Cr. Reserve A/c           

EXERCISE

Debentures of Tshs. 30000 are issued on 1^st Jan. 2003.  Redemption is to take place on equal terms four years later. The company decided to set aside an equal amount to be invested at 5% which will provide Tshs. 30000 on maturity.  Tables show that Tshs. 0.232012 invested annually will produce sh. 1 in 4 years time.

You’re required to show:-

(a)Debenture redemption reserve A/c (sinking fund / Debentures redemption A/c)

(b)Debenture sinking fund investment A/c

(c)Debentures

(d) Profit and Loss extracts

DR                       SINKING   FUND ACCOUNT                                  CR