AccountsISC Class 12 · Redemption of Debentures

Redemption of Debentures in a Lump Sum out of Profits or Capital: ISC Class 12 Accounts

Updated 16 October 2026 · Fact-checked

In lump-sum redemption all debentures are repaid together on the due date. Out of profits, an amount equal to the debentures redeemed is transferred from surplus to Debenture Redemption Reserve first, so profits are retained. Out of capital, no profits are set aside beyond any legally required DRR. After redemption, the DRR is transferred to General Reserve.

Out of profits, surplus is first moved to DRR and later to General Reserve; out of capital, funds are simply paid out and working capital falls.

Illustration drawn for QuestionBuddy.

Understand Redemption in Lump Sum out of Profits or Capital

Lump sum. The whole issue is repaid on the maturity date, usually 31 March in ISC questions. Entries:

Debentures A/c Dr (face value); Premium on Redemption A/c Dr (if any); To Debenture holders A/c.
Debenture holders A/c Dr; To Bank A/c.

Debentures are always debited at face value; the premium was recorded as a liability at the time of issue.

Out of capital. The company repays from its existing funds without retaining profits for the purpose. Working capital falls by the amount repaid. A listed company, which needs no DRR under the syllabus rules, can redeem its whole issue out of capital (it still makes the DRI).

Out of profits. Before redemption, an amount equal to the debentures to be redeemed is transferred from Surplus (Statement of Profit and Loss) to DRR. Profits that could have been paid as dividend are kept in the business, so the cash outflow is covered by retained profits. After redemption: DRR Dr; To General Reserve.

Partly out of profits. An unlisted company other than an NBFC or HFC must keep DRR of 10% of outstanding debentures; if it keeps only that, redemption is out of profits to 10% and out of capital for the rest. If it chooses to redeem a larger part out of profits, it tops up DRR to that amount.

DRI at redemption. Where DRI applies, it is realised on the redemption date, and any gain or loss goes through its own account to the Statement of Profit and Loss. Interest on DRI with TDS is recorded for the months held.

Interest on the redemption date. The last instalment of debenture interest is a separate entry: Debenture Interest Dr; To Debenture holders (net) and TDS Payable; it is not added to the Debentures A/c.

Out of syllabus. Calculation of ex-interest and cum-interest prices is not required.

Redemption in Lump Sum out of Profits or Capital: key facts

Amount payable on redemption: Face value of debentures + Premium on redemption; Credited to Debenture holders A/c.
Transfer to DRR (out of profits): Amount to transfer = Debentures redeemed out of profits − Existing DRR; From Surplus, before redemption.
Split of redemption: Out of profits = DRR balance used | Out of capital = Debentures redeemed − Out of profits
After redemption: DRR A/c Dr → General Reserve A/c; In proportion to debentures redeemed.
Interest on DRI: DRI × Rate × Months held ÷ 12; net of TDS to Bank; Closed to the Statement of P&L.

How to answer Redemption in Lump Sum out of Profits or Capital questions

ISC usually asks journal entries or ledger accounts for a lump-sum redemption, combined with DRR and DRI.

1Classify the company to see whether DRR and DRI are required.
2Decide how much is redeemed out of profits; top up DRR from Surplus to that amount.
3Record DRI, its interest with TDS, and its realisation with any gain or loss.
4Raise the amount due: Debentures and Premium on Redemption Dr; To Debenture holders.
5Pay the holders.
6Transfer DRR to General Reserve.

Redemption in Lump Sum out of Profits or Capital in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Repaying from this year's income or from savings

Suppose a family must repay a ₹3,30,000 loan in one go next March. They decide to keep aside ₹55,000 from this year's income and use existing savings for the rest.

How much of the repayment comes from savings?

Try it first, then show the solutionSolution

From this year's income (like profits): ₹55,000.
From savings (like capital): 3,30,000 − 55,000 = ₹2,75,000.

Answer: ₹2,75,000 comes from savings; ₹55,000 is 'out of profits'.

Memory hook: Profits kept back pay first; capital pays the rest.

Tricks to remember Redemption in Lump Sum out of Profits or Capital

Short memory aids. Say each one aloud once, then use it on a question the same day.

Equal amount to DRR
Out of profits: transfer to DRR an amount equal to the debentures redeemed.
Use it when: Full redemption out of profits.
DRR ends in General Reserve
Once the debentures are gone, the reserve is free: send it to General Reserve.
Use it when: Closing entry.
Face plus premium
Debenture holders are credited with face value plus premium; Debentures A/c only with face value.
Use it when: Redemption at a premium.

Redemption in Lump Sum out of Profits or Capital: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Meaning of redemption out of capital · 1 mark · MCQBoard level

Redemption of debentures out of capital means:
(a) issuing new shares to repay debentures
(b) repaying debentures without setting aside profits beyond any legally required DRR
(c) transferring the full amount to DRR before redemption
(d) converting debentures into capital

Try it first, then show the solutionSolution

Out of capital: the company's existing funds are used.
No profits are retained for the purpose beyond what the law requires.

Answer: (b) repaying debentures without setting aside profits beyond any legally required DRR

Example 2: Listed company redeeming out of capital · 3 marks · Short answerBoard level

Tamarind Ltd, a listed manufacturing company, redeems 17,000, 8% Debentures of ₹100 each at par on 31 March 2026, out of capital. State whether DRR is needed, calculate the DRI made on 30 April 2025, and pass the redemption entries. (3 marks)

Try it first, then show the solutionSolution

Listed: no DRR; DRI = 15% × 17,00,000 = ₹2,55,000.
8% Debentures Dr 17,00,000; To Debenture holders 17,00,000.
Debenture holders Dr 17,00,000; To Bank 17,00,000.

Answer: No DRR; DRI ₹2,55,000; ₹17,00,000 paid to debenture holders.

Example 3: Full redemption out of profits · 3 marks · Short answerHarder board level

Umbrella Pvt. Ltd (unlisted, manufacturing) has ₹9,00,000 Debentures redeemable at par and a DRR of ₹90,000. It decides to redeem the whole amount out of profits. Pass the DRR entries before and after redemption. (3 marks)

Try it first, then show the solutionSolution

Additional transfer = 9,00,000 − 90,000 = ₹8,10,000: Statement of P&L (Surplus) Dr; To DRR 8,10,000.
After redemption: DRR Dr 9,00,000; To General Reserve 9,00,000.

Answer: Transfer ₹8,10,000 to DRR; after redemption ₹9,00,000 to General Reserve.

Example 4: Redemption at a premium with DRR and DRI · 6 marks · Long answerHarder board level

Vetiver Pvt. Ltd (unlisted, manufacturing) has 13,000, 9% Debentures of ₹100 each redeemable at a 5% premium on 31 March 2026, out of capital except for the required DRR. DRI was made on 30 April 2025 at 8% p.a. (TDS 10%) and realised at par on 31 March 2026. Calculate DRR, DRI, interest on DRI and the amount paid to holders, and state the entries in order. (6 marks)

Try it first, then show the solutionSolution

DRR = 10% × 13,00,000 = ₹1,30,000: Surplus Dr; To DRR.
DRI = 15% = ₹1,95,000: DRI Dr; To Bank.
Interest = 1,95,000 × 8% × 11/12 = ₹14,300; Bank 12,870; TDS 1,430; closed to the Statement of P&L.
Bank Dr 1,95,000; To DRI 1,95,000 (realised at par).
Debentures Dr 13,00,000; Premium on Redemption Dr 65,000; To Debenture holders 13,65,000; holders paid ₹13,65,000.
DRR Dr 1,30,000; To General Reserve 1,30,000.

Answer: DRR ₹1,30,000; DRI ₹1,95,000; interest ₹14,300; holders paid ₹13,65,000; DRR to General Reserve.

Example 5: Half out of profits · 6 marks · Long answerHOTS / competency

Willow Pvt. Ltd (unlisted, manufacturing) has ₹16,00,000 Debentures and the required DRR. It decides to redeem 50% out of profits. Its surplus is ₹7,20,000. Calculate the transfer to DRR, the surplus left, and the amounts redeemed out of profits and out of capital. (6 marks)

Try it first, then show the solutionSolution

Existing DRR = 10% × 16,00,000 = ₹1,60,000.
DRR needed = 50% × 16,00,000 = ₹8,00,000; transfer ₹6,40,000.
Surplus left = 7,20,000 − 6,40,000 = ₹80,000.
Out of profits ₹8,00,000; out of capital ₹8,00,000; after redemption DRR ₹8,00,000 to General Reserve.

Answer: Transfer ₹6,40,000; surplus left ₹80,000; ₹8,00,000 redeemed out of profits and ₹8,00,000 out of capital.

Example 6: Comparing the two approaches · 3 marks · Short answerHOTS / competency

Explain one effect each of redeeming debentures out of profits and out of capital on (i) dividends and (ii) the company's working capital. (3 marks)

Try it first, then show the solutionSolution

Out of profits: profits are kept in DRR, so less is available for dividend; the cash paid out is matched by retained profits.
Out of capital: dividends are not restricted, but the repayment reduces the company's existing funds and working capital.

Answer: Out of profits restricts dividend but protects capital; out of capital leaves dividends free but reduces working capital.

Where students lose marks in Redemption in Lump Sum out of Profits or Capital

The slips examiners see most often, and what to write instead.

Mistake: Debentures debited with the premium included
Merging face value and premium.
Wrong working
Debentures Dr 13,65,000
Right working
Debentures Dr 13,00,000; Premium on Redemption Dr 65,000
Do this: ISC examiners in 2024 stressed that a debenture is debited only at face value.
Usually costs: 1 mark.
Mistake: Transferring the full amount when DRR already exists
Ignoring the existing balance.
Wrong working
Surplus Dr 9,00,000; To DRR
Right working
Surplus Dr 8,10,000; To DRR
Do this: Transfer only the shortfall.
Usually costs: 1 mark.
Mistake: Leaving DRR after redemption
Forgetting the closing entry.
Wrong working
DRR 1,30,000 still in Reserves
Right working
DRR Dr 1,30,000; To General Reserve
Do this: Once debentures are redeemed, DRR is freed.
Usually costs: 1 mark.
Mistake: Not closing Interest on DRI
Stopping at the receipt.
Wrong working
Interest on DRI left as a balance
Right working
Interest on DRI Dr; To Statement of P&L
Do this: ISC examiners in 2024 and 2025 asked students to close all incomes and expenses.
Usually costs: 1 mark.

Exam tips

Write a line on the company type and which rules apply before any entry.
Keep debenture interest separate from the redemption entry.
Show the DRR top-up as a working: needed − existing.
Date each entry; redemption questions turn on 30 April and 31 March.

Practice questions on Redemption in Lump Sum out of Profits or Capital

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
After redemption of debentures out of profits, the DRR is transferred to:
(a) Capital Reserve
(b) Securities Premium
(c) General Reserve
(d) Debenture holders
Hint
It becomes a free reserve.
Answer
(c) General Reserve
Q2 · 1 mark · MCQBoard level
A listed manufacturing company may redeem its debentures:
(a) only out of profits
(b) entirely out of capital
(c) only after creating 10% DRR
(d) only by conversion into shares
Hint
Listed companies need no DRR.
Answer
(b) entirely out of capital
Q3 · 3 marks · Short answerBoard level
6,500 Debentures of ₹100 each are redeemed at a 3% premium. Pass the entries. (3 marks)
Hint
₹103 each.
Answer
Debentures Dr 6,50,000; Premium on Redemption Dr 19,500; To Debenture holders 6,69,500. Debenture holders Dr 6,69,500; To Bank 6,69,500.
Q4 · 3 marks · Short answerHarder board level
Debentures of ₹11,00,000 are to be redeemed entirely out of profits. DRR has ₹1,10,000. How much must be transferred to DRR? (3 marks)
Hint
Shortfall only.
Answer
₹9,90,000.
Q5 · 3 marks · Short answerHarder board level
An unlisted manufacturing company keeps only the required DRR on ₹7,40,000 of debentures. How much of the redemption is out of profits and how much out of capital? (3 marks)
Hint
DRR is 10%.
Answer
Out of profits ₹74,000; out of capital ₹6,66,000.
Q6 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Redemption of debentures out of profits reduces the profits available for dividend.
Reason (R): An amount equal to the debentures redeemed is transferred from surplus to Debenture Redemption Reserve.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Profits are retained.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q7 · 6 marks · Long answerHarder board level
An unlisted manufacturing company redeems 8,500 Debentures of ₹100 each at par. DRR of ₹85,000 exists; the DRI is realised at 99%. Calculate the DRI and the loss on its sale, and pass the redemption and DRR entries. (6 marks)
Hint
DRI is 15% of ₹8,50,000.
Answer
DRI ₹1,27,500; sale ₹1,26,225; loss ₹1,275. Debentures Dr 8,50,000; To Debenture holders 8,50,000; Debenture holders Dr; To Bank 8,50,000. DRR Dr 85,000; To General Reserve 85,000.
Q8 · 3 marks · Short answerHarder board level
On the redemption date, the last half-year's interest on ₹6,40,000, 7% Debentures is due; TDS is 10%. Pass the interest entry. (3 marks)
Hint
Six months' interest.
Answer
Debenture Interest Dr 22,400; To Debenture holders 20,160; To TDS Payable 2,240.
Q9 · 6 marks · Long answerHOTS / competency
An unlisted manufacturing company with ₹35,00,000 of debentures and the required DRR decides to redeem 40% out of profits. Calculate the further transfer to DRR, and the amounts redeemed out of profits and out of capital. (6 marks)
Hint
Existing DRR is 10%.
Answer
DRR needed ₹14,00,000; existing ₹3,50,000; transfer ₹10,50,000. Out of profits ₹14,00,000; out of capital ₹21,00,000.
Q10 · 3 marks · Short answerHOTS / competency
A listed NBFC has ₹300 crore of non-convertible debentures maturing next year. How much can it redeem out of capital, and what investment must it make by 30 April? (3 marks)
Hint
Listed NBFCs: no DRR; DRI still applies.
Answer
All ₹300 crore can be redeemed out of capital; DRI of at least 15% = ₹45 crore.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Which account is credited with the amount due on redemption?Show answer
Debenture holders A/c.
2.Out of profits: transfer to DRR equals?Show answer
Debentures redeemed out of profits, less existing DRR.
3.Does a listed company need DRR?Show answer
No.
4.Are ex-interest and cum-interest calculations in the ISC syllabus?Show answer
No.
5.Premium on redemption: recorded at issue or at redemption?Show answer
At issue (as a liability); paid at redemption.

Redemption in Lump Sum out of Profits or Capital: frequently asked questions

Why transfer DRR to General Reserve after redemption?

The reason for holding it has ended, so it becomes a free revenue reserve.

Is DRR an expense?

No. It is an appropriation of profit from Surplus.

Can a company redeem before the due date?

Yes, if the terms of issue allow; ISC numericals normally use redemption on the due date.

What is the source of cash in redemption out of capital?

The company's existing funds, including the DRI realised and other cash, without retaining extra profits.