— Kishore V, SME and ACW at Edumarz
- Yes, a corporation can buy its debentures on the open market if its Articles Association authorises it: The following are some of the most common reasons for making such a purchase:
I) A corporation may acquire its debenture for prompt cancellation to reduce its debenture debt, particularly if the debenture’s interest rate is greater than the market rate of interest.
(ii) A firm may also buy its debentures to invest in them and then sell them at a better price in the future to profit.
When a corporation buys its debentures on the open market, it can do so in one of two ways. First, debentures can be bought at a premium for a short period.
If Debentures for Cancellation are Purchased at a Discount: The following journal entries are made when the corporation buys its debentures at a discount for cancellation.
Particulars | Debit | Credit |
Debentures A/c Dr To Bank A/c (Being own debentures purchased in open market) |
Particulars | Debit | Credit |
Debentures A/c Dr To Own Debentures A/c To profit on redemption of debenture A/c (Being Own debentures are called)
|
Particulars | Debit | Credit |
Debentures A/c Dr To Capital Reserve A/c (Debentures are transferred to capital A/c) |
If Debentures are Purchased at Premium for Cancellation
(ii)
Particulars | Debit | Credit |
Own Debenture A/c Dr To Bank A/c |
Particulars | Debit | Credit |
Debenture A/c Dr Loss on redemption of debenture A/c Dr To Debenture A/c (Being debentures are called) |