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Redemption of Debentures

Redemption of Debentures is defined as the settlement of borrowed funds by a company or a firm to their debenture holders after the date of maturity. After the funds are repaid, the liability on the debenture account is discharged.

There are 4 ways by which the debentures can be reclaimed. Namely :

  1. Payment in a lump sum
  2. Payment in installments
  3. Purchase in the open market
  4. By conversion into shares or new debentures

Methods of Redemption of Debentures

There are several methods by which the redemption of debentures can take place. Each method follows a unique accounting treatment. These approaches can be classified under the following categories:

  • Payment in lump sum: The enterprise reclaims the debentures by paying the fund in a lump sum to the debenture holders during the maturity hereof as per the terms and conditions of issue.
  • Payment in installments: It is usually the redemption of debentures that are paid in installments on a particular date during the time in the position of the debentures. The total amount of debenture liability is divided by the total number of years. This must be noted that the authentic debentures reclaimable are recognized by the sources of drawing the required number of lots out of the debentures outstanding for the payment.
  • Purchase in the open market: When an enterprise buys its debentures with the aim of cancellation, such an act of buying and canceling the debentures comprises redemption of debentures by purchase in the open marketplace.
  • Conversion into shares or new debentures: An enterprise can reclaim its debentures by transforming them into a new class of debentures or shares. If debenture holders find that the proffer is useful to them, they can exercise their right of transforming their debentures into a new class of debentures or shares. These new shares or debentures can be either circulated at a premium, at a discount, or par. It may be noted that this method applies only to convertible debentures.

Redemption of Debentures

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