ACCOUNTANCY FORM 6 – COMPANY ACCOUNT 1.2

PURCHASE IN THE OPEN MARKET

At times a company can buy its own debentures in the open market. This practice should be allowed by the terms of issue.

This brings a financial sense if the market value is below the present value of the further interest payments plus the sum payable on redemption.

The debentures can be bought back for cancellation. The purchase of debentures in the open market can be ex-int or cum – int.

If it is ex – int, then this means it is without interest, and therefore interest has to be calculated and added to the purchase price.

And if it’s cum – int, then this means it is with interest and therefore for recording purpose, the interest included should be deducted from the total price paid.

 Entries:-

Purchases of debentures for cancellation

(i)Purchase of own debentures in the open market.

Dr.  Investment in own debentures A/c

    Cr. Cash / Bank A/c

(ii)Pre – acquisition interest included in the purchase price.

Dr.  Debenture interest A/c

     Cr.  Investment in own debentures A/c

(iii)Cancellation of the debentures (Nominal value)

Dr.  Redeemable debentures

      Cr.  Investment in own debentures A/c

(iv)Profit on cancellation of the debentures.

Dr.  Investment in own debentures A/c

      Cr.  Sinking fund A/c / Debenture Redemption fund A/c

(v)The balance on the sinking fund A/c after all the debentures has been cancelled.

Dr. sinking fund A/c

Cr.  Reserve A/c

Example:-

Super Mnyanyue Company had some years ago issued Tshs. 400,000 12% redeemable debentures.  Under the terms of the trust deed the debentures would be redeemed or bought back on the open market at anytime.  A sinking fund had been established for this purpose.

On 1^st January 1998 the balance on debenture redemption fund was Tshs. 152400 and on debenture redemption fund investment Tshs. 112800.

The following transactions occurred during 1999:-

Jan. 14: Sinking fund investment bought Tshs. 38100.

May 16:  Sinking fund investment income received Tshs. 8700

June 30:  Debenture interest paid for half year Tshs. 24000

Sept. 15: Sinking fund investment sold (costing Tshs. 57000), Tshs. 61200

Sept. 30: Tshs. 60000/- debenture bought back on open moment at 97 and cancelled Tshs. 58200.

Oct. 16: Sinking fund income received Tshs. 5100.

Nov. 21:         Sinking fund investment sold (cost Tshs. 43200) Tshs. 40,000.

Nov. 30:         Tshs. 40000 debentures redeemed at 96 ci on open market and cancelled Tshs.

               38400.

Dec.31: Debenture interest paid Tshs. 18000

Dec 31: Annual appropriation Tshs. 32000

Open, post and balance the appropriate accounts to record the above.

Solution:-

          DR        DEBENTURE REDEMPTION FUND ACCOUNT            CR

 DR        DEBENTURE REDEMPTION FUND INVESTMENT ACCOUNT     CR

  DR            12%DEBENTURE INTEREST ACCOUNT             CR

    DR            INVESTMENT IN OWN DEBENTURE ACCOUNT           CR

Interest included = 3 month    60,000 x 12   x   3   = 1800

                                                            100       12

Interest included = 5 month:  40,000 x 12   x 5   = 2000

                                                               100   12

 DR            12% REDEEMABLE DEBENTURE ACCOUNT           CR

EXERCISE

1.      Eight years ago Trafalgar Co.  Ltd had issued Tshs. 300,000 12% Debentures.  Interest was payable on both June 30^th and Dec. 31^st.  Under the terms of the trust deed, the debentures could be redeemed on bought back on the married at any time after 1^st Jan. 1999.  A sinking fund had been established for this purpose.

On 1^st Jan. 1994, the balance on debentures redemption fund Tshs 246,250 and on debenture redemption fund investment Tshs. 203,500.

The following transactions took place for the year 1994:-

Jan:  Sinking fund investment bought for Tshs.  42,600

May 25:  Sinking fund investment income received Tshs.   9230.

June 30:  Debenture interest paid          800

Aug. 14:  Sinking fund investment sold (cost Tshs. 71,200) for Tshs. 79600.

Aug. 31 Tshs.  100,000 debentures bought back on open market at 97 cum – int and cancelled.

Sept. 30:  Tshs. 100,000 debentures bought back on open market at 96 cum-int and cancelled.

Oct. 24: Sinking fund investment income received Tshs. 8920.

Dec.  19:  Sinking fund investment sold (cost Tshs. 82500) for Tshs. 81000

Dec.  31:  Debenture interest paid

Dec 31:  Annual appropriation Tshs.  44,000

Required: 

Open post and balance the appropriate ledger accounts to record the above transactions.

  DR                         DEBENTURES REDEMPTION ACCOUNT                  CR

     DR      DEBENTURES REDEMPTION FUND INVESTMENT ACCOUNT   CR

        DR             12% DEBENTURE INTEREST ACCOUNT                 CR

       DR              INVESTMENT ON DEBENTURE ACCOUNT              CR

       DR            REDEEMABLE DEBENTURES ACCOUNT                CR

Interest 30/6:  300,000 x  12  x   6  = 18,000

                                        100     12

            31/12:  100,000 x  12    x    6    =        6000

                                           100       12

2.            Some years ago Mplc had issued 375,000 of 10% debenture.  2000/2010 at par.  The term of the issue allow the company the right to purchase these debentures for collection at or below per with an option to redeem at a premium of 1 percent, on 30 Sept. 2006.  The exercise this option the company must give three months notice which it dully did on 30 June 2003 indicating its intention to redeem all the debenture outstanding at 30^th Sept. 2006.

MPLC had established a sinking fund designed o accumulate the sum of Tshs. 378750 by 30 September 2006 and had appropriated profits annually and invested these, together with the interest from such investments and profits made on any realizations from time to time.

A special No. 2 bank account was established specifically to deal with the receipts and payments relating to the debentures and the sinking fund.

By 30 June 2006 annual contributions amounting to Tshs. 1334,485 together with the interest on the sinking fund investment of 39480 had all been invested except for 2475 which remained in the No. 2 account at the date.

The only investment sold, prior to 30^th June 2006 had cost 144,915 and realized 147,243.  This was used to re purchase debenture with a par value of 150,000.

Transactions accruing between 1 July and 30^th Sept. 2006 were:

(i)        Interest received on the sinking fund investment

            7^th July                  1,756

            13^th Sep.                1,455

(ii)       Proceeds from the sale of investments:-

            2^nd Aug.                  73,215   (Book value was 69322)

            25^th Sept.              160,238 (remaining investment)

(iii)   Redemption of all debentures on 30^th Sept. with the exception of 15,000 held by B. Limited.  The company had received notice of a gamishee order.

(iv)    MPLC deposited with the W. Bank P/C the sum of 15,150 on 30^th Sept. 2006.  (You are required to ignore debenture interest and income tax).

Required:-

From the information given above to prepare the ledger accounts (Including the No. 2 bank A/c/0 in the books of MPLC for the period 30^th June to 30 Sept. 2006.

Showing the transfer:

Solution

       DR                 BANK   ACCOUNT                 CR

DR               SINKING   FUND ACCOUNT                  CR

     DR        SINKING   FUND   INVESTMENT ACCOUNT        CR

     DR             DEBENTURE ACCOUNT                CR

     DR           DEBENTURE REDEMPTION ACCOUNT             CR

(iii)     Annual drawings out of profit:-

In this case, an amount equal to the nominal value of the debenture to be redeemed is debited to the P & L appropriation A/c and credited to the Debenture redemption reserve A/c, the balance of which will be transferred to the capital.  Reserve A/c once all the debentures have been redeemed.

Accounting entries:-

(a)       Annual appropriation of the nominal value of the debentures redeemed:-

            Dr.  P & L Appropriation a/c

                  Cr.  Debenture redemption reserve A/c

(b)       Director’s approval of the redemption of the debenture (Nominal value):-

            Dr.  Redeemable debenture A/c

                  Cr.  Debenture redemption   A/c

(c)       Premium payable on redemption:-

            Dr.  Share premium and or P&L appropriation

                 Cr.   Debenture redemption   A/c

(d)       Redemption of the debentures:-

            Dr.  Debenture redemption A/c

                 Cr.  Cash / Bank   A/c

(e)       Profit on the redemption:-

            Dr.  Debenture redemption A/c

                 Cr.  P&L A/c

Example:-

Champwili P&L had  issue Tshs. 200,000 8% Redeemable Debentures.  Under the terms of issue, redemption was to be effected by equal annual drawings over 10 years on 31^st December each year starting 1996.

Eight years offer on 1^st Jan. 2004, balance on 8% redeemable Debenture and on debenture redemption reserve accounts were Tshs. 400,000 and Tshs. 160,000 respectively.  A further redemption took place in 2004 at 96 and the final redemption in 2005

Open, post and balance the appropriate accounts for the years 2004 and 2005.

 EXERCISE

1.  Kapirimposhi P&L had issued 500,000 12% Redeemable debentures in 1990 on which interest was paid half yearly on 30^th June and 31/12 under the terms of the issue they were to be redeemed by equal annual drawings over 10 years on 31/12 from the year 1996 onwards.

8 years later on 1^st Jan. 2004 the balances on debenture redemption reserve and 12% redeemable debentures were Tshs. 400,000 and Tshs. 100,000 respectively.  A further redemption was affected in 2004 at 95 ex- int and the final redemption, 2005 at par ex- int – pen, post and balances the appropriate accounts to record the above transactions for each of the years 2004 and 2005.

   DR                       12% REDEEMABLE DEBENTURE ACCOUNT                          CR

  DR                     DEBENTURE REDEMPTION RESERVE ACCOUNT               CR     

      DR                DEBENTURE REDEMPTION ACCOUNT                     CR

          DR              DEBENTURE   INTEREST   ACCOUNT                          CR

(iv)      Insurance Policy method:-

Instead of investing the sum in securities, the same is paid by way of an Insurance premium to an Insurance company which issues an endorsement policy of the amount equal to the sum payable on redemption and maturing on the date when the debentures become repayable.

The premium paid annually is debited to the debenture redemption fund policy A/c and credited to the cash / Bank A/c, and the premium is paid at the beginning of a period.

The same amount will be set aside out of profit & loss appropriation A/c through debiting profit and loss appropriation A/c and crediting debenture redemption fund A/c.

On the maturity of the policy:-

Dr.  Cash / Bank A/c

     Cr.  Debenture Redemption fund policy A/c ) with sum received on the maturity of the policy and any balance on the Insurance policy A/c shall be taken to the debenture Redemption fund (Deb. Red. Reserve) A/c

If a Cr. Balance – Dr.  Deb.  Fund policy A/c

                                  Cr. Deb. Red. Fund A/c

If a De.  Balance  – Dr. Deb.  Red.  Fund A/c

                             Cr.  Deb.  Fund policy A/c

On the redemption of the debentures:-

Dr.  Redeemable Debenture A/c / Debenture Redemption

           Cr.  Cash / Bank A/c

The credit balance on the deb. Redemption Fund A/c shall be transferred to a Reserve A/c.

Entry:  Dr.  Deb.  Redemption Fund A/c

                   Cr.  Reserve A/c

Example:-

A company has a debenture on issue of Tshs. 150,000 on 1^st Jan. 1990.  It decided to provide for the redemption of the debentures for Tshs. 1,500,000 for 3 years.  The annual premium is Tshs. 47,500. Show the necessary ledger accounts to record the above using the Insurance policy method.

          DR                       REDEEMABLE       DEBENTURE                       CR

       DR          DEBENTURE RED.FUND INSURANCE POLICY ACCOUNT     CR

    DR           DEBENTURE REDEMPTION FUND ACCOUNT          CR

       DR            DEBENTURE REDEMPTION ACCOUNT            CR

EXERCISE

1.         A Ltd company issued Debentures of Tshs. 600,000 on 1^st Jan. 1992 and decided to provide for the redemption by means of an Insurance policy for Tshs. 600,000. The annual premium was Tshs. 190000.  Prepare the necessary ledger accounts assuming that the amount of policy was dully released and debentures were paid.

2.         The following balances appeared in the books of a limited company on 31^st Dec. 1997:-

                                                                                       Dr.                             Cr.

6% Debentures.                                                                              Tshs. 500,000

         Debentures redemption Insurance policy.    Tshs.  460’000

         Debenture redemption fund                                                         Tshs. 460’000

         The policy amount was Tshs. 500,000 and the annual premium were received, and the debentures were redeemed.

           -You are required to prepare the necessary ledger accounts in the books of the company.

            OUT OF CAPITAL METHOD:-

            Example:-

            A Ltd co. had a debenture on issue of Tshs. 15000 on 1^st Jan. 1990 at a discount of 5%, repayable at par by annual drawings of Tshs. 3000 for five years.  Show the necessary ledger accounts for the first year to record the above.

            Solution:-

            Discount on debenture = 5/100 x 15000 = 750.

        DR                          CASH ACCOUNT                 CR

   DR               DEB.APPLICATION & ALLOTMENT              CR

      DR            REDEEMABLE DEBENTURES ACCOUNT           CR

          DR              DISCOUNT ON ISSUE DEBENTURE ACCOUNT         CR

         DR               DEBENTURE    REDEMPTION   ACCOUNT                CR

Discount on deb.  Written off = 5/15 x 750 = 250.

COMPANY FINAL ACCOUNTS

They consist of the trading A/c and Profit and Loss A/c.  The trading and profit and loss A/c of a company are similar to those of a sole proprietorship, except that in the profit and loss A/c of the company, the following items can be seen to have been debited to it, there are:-

(a)       Debenture Interest

(b)       Directors salaries or fees or emoluments

(c)       Audit fees or charges

And to the credit side there can be shown a part from the gross profit made other gains such as Dividends received.

In this section / A/c the nglish-swahili/distribution” target=”_blank”>distribution of profit is shown.  It is in this A/c that appropriation items such as corporation tax payable, proposed dividend interim dividend, reserve  transfer etc are listed.

Corporation tax:-

It is a tax levied on a company’s profit.