Yes, a company can purchase its own debentures provided it is authorised by its Article of Association. As per the Company Act, if a company is authorised by its Article of Association, only then it may purchase its own debentures from the open market. The main purposes of such purchase are as follows:
• For immediate cancellation of debenture liability, if the interest rate omits debenture is higher than the market rate of interest.
• A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and thereby earn profit.
A company may purchase its own debentures at discount or at premium for cancellation.
If Debentures are purchased at Discount for Cancellation When the company purchases its own debentures at discount for cancellation,
Then the following Journal entries are recorded:
Own Debentures A/c
To Bank A/c
(Being own debentures purchased)
Debentures A/c Dr
To Own Debentures A/c
To Profit on Cancellation of Own Debentures A/c
(Being own debentures cancelled)
Profit on Cancellation of Own Debentures A/c Dr To Capital Reserve A/c (Profit on Cancellation of Own Debentures transferred to Capital Reserve) If Debentures are purchased at Premium for Cancellation
Own Debentures A/c Dr
To Bank A/c
(Being own debentures purchased)
Debentures A/c Dr
Loss on Redemption of Debentures A/c
To Own Debentures A/c
(Being own Debentures cancelled)
