Redemption of Debentures by Sinking Fund Method

Dear,
When company requires finance, it has different options to finance the specific objective, debenture is one of those options.
Since the finance amount is much on the higher side in most of the cases, and accordingly company anticipates that it will not be able to payoff the whole of the amount borrowed by way of debenture at the time of its redumption, so it plans to pay the same by setting aside a certain amount every year from its profit (which is transfered to the account called "Debenture Redumption Reserve"), in this way, company becomes able to pay the whole of the amount to the debentureholders by utilizing the Debenture Redumption Reserve account when it is to be redeemed.
The aforementioned method is called redumption by sinking fund.

With regard to your second query, Sometimes company plans to redeem the debentures after a specified time period with the help of its investment, which is created through investing a certain fixed sum after a specific time period to acquire a desired sum at the time of requisition of sum( Explained method is called Annuity method), in this way, company also earns interest on its principal amount.( I expect you to have sufficient knowledge with regard to Annuity Method, let me know if this is not the case)

Cum Interest means interest is also included in the price of debenture upto the date of purchase of debenture. similarly, Ex Interest means interest is not included in the price of debenture while purchasing.
Your blank should be filled in with Price Cum Interest.

I hope you have been satisfied with the answer, otherwise let me know if you have any further issue.

Best Regards,

Desperado.

Hi Desperado. Thnx so much. I need solution for this Q. Please consider this practical Q of CA Inter and get me the logic behind this Q and pl send solution. Out of 4 methods of Redemption, this belongs to which method ? 

QGaurav ltd has issued 12% 10,00,000 debentures @ Rs. 100 each in the past. For the purpose of redemption, it maintains a DRF with an Annual Contribuition of Rs. 90,000. On 1.4.08, the fund stood at Rs. 4,50,000 represented by 6%, Rs. 5 lac Govt. Loan. 

On 31.03.2009 Rs. 2,00,000 Govt. Loan was sold @ Rs. 93.50 and the proceeds were utilised to purchase debentures for cancellation @ Rs. 85 each. Assume that Rs. 20,000 debentures have been redeemed out of capital and the balance with face value of Rs. 1,80,000 has been redeemed out of DRF A/c.

Prepare Debenture A/c, DRF A/c and Debenture Redemption Fund Investment A/c.

regards,