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CS Executive · Corporate Accounting and Financial Management · Accounting for Debentures

Kaveri Ltd. has Rs 5,00,000 of 9% debentures redeemable at par. It purchases 1,000 of its own debentures of Rs 100 each in the open market at Rs 96 each, for immediate cancellation. What is the profit on cancellation to be transferred to capital reserve?

The profit is Rs 4,000. Debentures with nominal value of Rs 1,00,000 were bought for Rs 96,000 and cancelled, so the difference between nominal value and cost is the gain, which is credited to capital reserve.

  1. ARs 4,000Correct
  2. BRs 96,000
  3. CRs 1,00,000
  4. DRs 40,000

Explanation

Nominal value cancelled = 1,000 x 100 = Rs 1,00,000. Cost paid = 1,000 x 96 = Rs 96,000. Profit on cancellation = 1,00,000 - 96,000 = Rs 4,000, credited to capital reserve. Rs 96,000 is the cost, not the profit.

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