In the earlier blog, we had a learnt about Capital Redemption Ratio. In today's blog, we understand about another type of reserve - The Debenture Redemption Reserve
It is common for the debenture deeds to require the companies to transfer an amount equal to the annual sinking fund deposit to a reserve called - Debenture Redemption Reserve account from the Retained Earnings head. This transfer would be needed even in case we don’t have a sinking fund. This reserve is actually set up through the transfer to prevent the company from distributing the amount as dividends so that the assets of the company are not reduced to the disadvantage of the company's creditors.
While debentures are repaid, the balance in Debenture Redemption Reserve a/c is transferred to Retained Earnings. The balance in Debenture Redemption Reserve a/c is not available of issuance of bonus shares until the debentures are redeemed.
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