Debentures are debt instruments. Hence when their period expires, debenture holders are paid back their principal amount. This process of discharging the company’s debt is known as the redemption of debentures.
Redemption of debentures refers to the repayment of these debentures by the company to the debenture holders. So the company will discharge its liability and remove it from the balance sheet. This is a major transaction for the company since the amount of money involved tends to be quite significant.
There are a few ways in which this redemption of shares can take place. These methods all have different accounting treatment as well. So let us take a look at the various methods of redemption of debentures.
Lump Sum Method
This method as the name suggests is a one-time payment method. Here the company will repay the whole amount in one lump sum payment to the debenture holders. The amount and the date of the payment will be according to the terms of issue.