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CMA Intermediate · Corporate Accounting and Auditing · Redemption of Preference Shares, Issue and Redemption of Debentures

Tara Ltd has Rs 8,00,000 of debentures redeemable at par. It buys Rs 2,00,000 of its own debentures in the open market at Rs 96 per Rs 100 nominal and cancels them immediately. What is the profit on cancellation of own debentures credited in the books?

The profit on cancellation is Rs 8,000. The company pays Rs 1,92,000 (96% of Rs 2,00,000) to buy debentures with nominal value Rs 2,00,000, so the difference of Rs 8,000 is a gain on cancellation, transferred to Capital Reserve.

  1. ARs 8,000Correct
  2. BRs 16,000
  3. CRs 2,000
  4. DRs 4,000

Explanation

Cost of purchase = 2,00,000 x 96/100 = Rs 1,92,000. Nominal value cancelled = Rs 2,00,000. Profit = 2,00,000 - 1,92,000 = Rs 8,000, which is transferred to Capital Reserve. Rs 16,000 wrongly applies the 4% to Rs 4,00,000, and Rs 2,000 wrongly applies 1% of the nominal value.

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