## Cancellation of Own (Investment in) Debentures
### Concept
A company may purchase its own debentures from the open market at a price lower than the face/issue value and cancel them. The gain on cancellation is a capital profit → credited to Capital Reserve (not P&L).
### Why Capital Reserve, Not P&L?
The gain arises from a capital transaction (extinguishing a liability at a discount). It is unrealised in the trading sense and must be kept as Capital Reserve per the conservatism and capital maintenance principles.
### Journal Entry on Cancellation
```
Debenture Liability A/c Dr [Issue/Face Value of debentures cancelled]
To Investment in Own Debentures A/c [Cost at which purchased]
To Capital Reserve A/c [Profit = Issue Value – Cost]
```
### Key Distinction
| Amount | Represents |
|---|---|
| Issue/Face Value | The liability being cancelled |
| Cost of purchase | What the company paid for its own debentures |
| Difference (profit) | Goes to Capital Reserve |
### Sequence of Events
1. Company purchases own debentures → Dr Investment in Own Debentures, Cr Bank
2. Company cancels them → Dr Debenture Liability, Cr Investment + Capital Reserve