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FAQs on Class 12 Accountancy TS Grewal Solutions Volume 2 Chapter 10 Redemption of Debentures
1. What is redemption of debentures?
It is typically defined as the process of a firm repaying its debenture holders for debentures it has issued. In other words, it is the process of repaying debenture holders the principal amount owed to them. For most businesses, it's a significant transaction because the redemption amount is relatively large.
When debentures are redeemed, the issuing company is relieved of its portion of the liability and the liability is removed from the balance sheet. As a result, firms collect money for reclaiming debentures and develop a strong provision out of their gains.
The redemption terms are usually indicated in the debenture certificate. To know more about this topic, click here.
2. What is payment in lump sum and payment in installments?
Payment in lump sum and payment in installments in explained below:
Payment in lump sum: As per the terms and conditions of issue, the firm reclaims the debentures by paying the fund in a round sum to the debenture holders upon maturity.
Payment in installments: Under this technique, debentures are normally redeemed in installments on a specific date during the debentures' holding period. The total number of years is divided by the total amount of debenture liability. It is important to note that the authentic reclaimable debentures are recognised by the sources for pulling the requisite number of lots from the outstanding debentures for payment.
3. What is purchase in the open market or conversion into shares or new debentures?
Purchase in the open market or conversion into shares or new debentures is explained below:
Purchase in the open market: When a company buys its own debentures with the intention of canceling them, the act of buying and canceling the debentures is referred to as redemption of debentures by purchase in the open market.
Conversion into shares or new debentures: A company can reclaim its debentures by converting them into shares or new debentures. If holders of debentures find the offer useful, they can use their entitlement to convert their debentures into new classes of debentures or shares. These new shares or debentures might be issued at a premium, a discount, or at face value. This strategy is only relevant to convertible debentures, it should be emphasized.
4. Explain the issue of debentures as collateral security
When a business takes out a loan, it may have to put up primary security in the form of its assets. The lending institution, on the other hand, may require additional assets as supplementary or collateral security. The corporation may issue debentures to the lender as secondary or collateral security in this case; this type of debenture issue is known as debentures issued as collateral security.
Only in the event that the company fails to return the loan in full, including interest, and the primary security is insufficient to repay the loan, is the lender free to use the debentures as collateral security. The lender has the option of redeeming the debentures or selling them on the open market.
5. How to prepare for the lesson Redemption of Debentures?
It is important for students to have a strong base knowledge in the subject of debentures to understand this subject better. As having a strong foundation is important for students to acquire further knowledge on this subject. Students need to be thorough with concepts like payment in lump sum, payment in installments, purchase in the open market and conversion into shares or new debentures. Students can also practice with sample papers and solve problems related to the topic. The Vedantu app and website contain free study materials.