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CSEET · Fundamentals of Accounting · Introduction to Company Accounts

Arjun Ltd has Rs 5,00,000 of 9% debentures. When issued, the company created a Debenture Redemption Reserve (DRR) of Rs 1,00,000 out of profits. On redemption, debentures of Rs 5,00,000 are repaid from a Debenture Redemption Investment and bank. As per Section 71(4), which statement about the DRR amount is correct?

The Debenture Redemption Reserve may be used only for redeeming debentures. Section 71(4) says it is created out of profits available for dividend and that the amount credited shall not be utilised except for redemption. The bonus share option relates to Capital Redemption Reserve under Section 55, not DRR.

  1. AIt can be freely used to pay dividends
  2. BIt may be used only for redemption of debenturesCorrect
  3. CIt may be used to write off preliminary expenses
  4. DIt may be used to issue bonus shares

Explanation

Section 71(4) requires the DRR to be created out of profits available for dividend, and the amount credited shall not be utilised except for redemption of debentures. Dividend, writing off expenses and bonus issue are all other uses. The bonus share use applies to the Capital Redemption Reserve under Section 55(4), not DRR.

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