What is meant by redemption of debentures differentiate between capital redemption reserve account and debenture redemption reserve account?

Debentures can be redeemed either out of capital or out of profit. When debentures are redeemed out of current resources of the company and adequate profits are not transferred to debenture redemption reserve (DRR) from Profit & Loss Appropriation Account, it is termed as redemption out of capital.

What is CRR and DRR?

However, if an equivalent amount is transferred from general reserve/ P&l to CRR, the amount available for distribution to shareholders has reduced. Thus, this saves interest of creditors. Similarly, DRR is created to protect debentureholders against any possibilty of default by the company.

What is the capital redemption reserve?

A statutory, non-distributable reserve into which amounts are transferred following the redemption or purchase of a company’s own shares. Subject to the company’s articles, the capital redemption reserve may be: Used to pay up new shares to be allotted to members as fully paid bonus shares.

What is debenture redemption reserve?

A debenture redemption reserve (DRR) is a provision stating that any Indian corporation that issues debentures must create a debenture redemption service in an effort to protect investors from the possibility of a company defaulting.

How is debenture redemption reserve calculated?

The amount of transfer should be calculated as follows: ten per cent of the outstanding debentures (till 15.08. 2019 it was 25%) less the amount available in the DRR. For HFCs and NBFCs, the rate used will be15% instead of 10%. The transfer should be made before 30th April.

How is capital redemption reserve created?

Whenever a company redeems its preference shares then the nominal value or face value of the shares is put into capital redemption reserve fund. Capital Redemption Revere is also created when a company buys it owns shares which reduces its share capital. …

Is DRR a free reserve?

No. The capital reserves, revaluation reserves, debenture redemption reserves, securities premium and statutory reserves do not form a part of free reserves.

When should DRR be created?

Further, the Rules require that companies that are required to create DRR should also set aside 15 per cent of the amount of debentures maturing during the financial year in bank deposits or certain other specified securities. The said amount has to be invested before 30 April of the financial year.

Can you reduce a capital redemption reserve?

Reduce capital redemption reserves You can reduce the capital redemption reserves and re-denomination reserve to zero.

Is it compulsory to maintain a debenture redemption reserve?

Debenture Redemption Reserve (DRR) is a fund maintained by companies that have issued debentures. It ensures that the company has enough liquidity to make the repayment. The requirement to create a DRR was compulsory for all companies.

What is the treatment of capital redemption reserve in cash flow statement?

Increase in Balance of Capital Reserve: Increase in the balance ofcapital reserve generally relates to profit/gain on the sale of fixed assets. Since, this does not involve any change in the cash balance (inflow/outflow), consequently it won’t affect the Cash Flow Statement.

Is capital redemption reserve included in net worth?

The querist has stated that ‘capital reserve’ should not form part of ‘net worth’. Besides, it should not include reserves created out of amalgamation, restructure, etc. The intention itself is clear that only earned profits should form part of the ‘net worth’.

What is the purpose of creating capital redemption reserve?

When a company decides to redeem the redeemable preference shares out of the profits that are otherwise available for paying dividends, it needs to create the Capital Redemption Reserve A/c. The amount in the Capital Redemption Reserve is equal to the nominal value of the redeemable preference shares.

Why is DRR transferred to general reserve?

Answer: It is transferred in G/R because, DRR is created out of profits of the company & is debited to the statement of P&L(which means profit is reduced). now at the time of redemption of debentures, DRR is transferred to general reserve to give effect to the earlier reduction in profit.

Why capital redemption reserve is created?

When a company decides to redeem the redeemable preference shares out of the profits that are otherwise available for paying dividends, it needs to create the Capital Redemption Reserve A/c. The company has to transfer the profits available for dividends to the CRR.