Explain the methods of redeeming debentures and preference shares and show the journal entries.

1. 1 · Define redemption. Repaying debenture holders or redeemable preference shareholders.
2. 2 · Explain why care is needed. Cash leaves the company, so creditors must stay protected.
3. 3 · Sources of funds.
   • A fresh issue of shares or debentures.
   • Retained profits.
   • A sinking fund built up over the years.
4. 4 · Debentures at par or at a premium. Dr Debentures (and premium on redemption), Cr Bank, with figures.
5. 5 · Open-market purchase. Buy below face value; credit the gain on redemption.
6. 6 · Preference shares. Dr Redeemable preference shares, Cr Bank; show the fresh issue and the part funded by profits.
7. 7 · Conclude. Redemption reduces long-term funds, so it must be planned and funded.

Scoring tip: Work each entry with figures; examiners give most marks for correct entries, not definitions.