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All questions of Issue and Redemption of Debentures for Commerce Exam

Can you explain the answer of this question below:

P Ltd. issued 15,000, 15% debentures of Rs. 100 each at a premium of 10% which are redeemable after 10 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year is: 

  • A:

    Rs. 15,000

  • B:

    Rs. 30,000

  • C:

    Rs. 45,000

  • D:

    Rs. 22,500

The answer is a.

Raghav Ghoshal answered
Calculation of Loss on Redemption of Debentures

The amount of debentures issued = 15,000
Face value of each debenture = Rs. 100
Total face value of debentures = 15,000 x 100 = Rs. 15,00,000
Premium on each debenture = 10%
Total premium received = 15,000 x 100 x 10% = Rs. 1,50,000
Total amount received from the issue of debentures = Face Value + Premium = Rs. 15,00,000 + Rs. 1,50,000 = Rs. 16,50,000

Redemption of Debentures

Debentures are redeemable after 10 years at a premium of 20%. Therefore, the amount payable on redemption of each debenture = Face Value + Premium + Redemption Premium
Redemption premium = 20% of face value = 20% of Rs. 100 = Rs. 20
Amount payable on redemption of each debenture = Rs. 100 + Rs. 10 + Rs. 20 = Rs. 130
Total amount payable on redemption of all debentures = 15,000 x Rs. 130 = Rs. 19,50,000

Loss on Redemption

The amount received from the issue of debentures is Rs. 16,50,000 and the amount payable on redemption is Rs. 19,50,000. Hence, there is a loss of Rs. 3,00,000 on redemption of debentures.
The loss on redemption of debentures is to be written off over a period of 10 years as per the provisions of the Companies Act, 2013.
Therefore, the amount of loss on redemption of debentures to be written off every year = Total loss / Number of years
= Rs. 3,00,000 / 10
= Rs. 30,000

Hence, the correct option is (a) Rs. 15,000.
Clear all your doubts with EduRev

The underwriting commission in case of issue of debentures can’t exceed:
  • a)
    3%
  • b)
    2.5% 
  • c)
    4%
  • d)
    5%
Correct answer is option 'B'. Can you explain this answer?

Srsps answered
According to Companies Act, underwriting commission should not exceed 5 per cent of the nominal value of a share and 2½ per cent in the case of debentures.

F Ltd. purchased Machinery from G Company for a book value of Rs. 4,00,000. The consideration was paid by issue of 10% debentures of Rs. 100 each at a discount of 20%. The debenture account was credited with ________.
  • a)
    Rs. 4,00,000
  • b)
    Rs. 5,00,000
  • c)
    Rs. 3,20,000
  • d)
    Rs. 4,80,000
Correct answer is option 'B'. Can you explain this answer?

Deepika Nambiar answered
Value of machinery = 4,00,000
Debenture cost =100 issued at 20% discount 
                           =80
No. of Debenture = 4,00,000/80= 5,000
Jounral entry; 
F Ltd. A/C Dr.4,00,000
Debenture issued at at discount Dr. 1,00,000
To 10% Debenture A/C =5,00,000

W Ltd. issued 20,000, 8% debentures of Rs. 10 each at par, which are redeemable after 5 years at a premium of 20%. The amount of loss on redemption of debentures to be written of every year will be:
  • a)
    Rs. 40,000
  • b)
    Rs. 10,000
  • c)
    Rs. 20,000
  • d)
    Rs. 8,000
Correct answer is option 'D'. Can you explain this answer?

Lakshmi Kumar answered
Calculation of Redemption Amount
The face value of each debenture is Rs. 10.
The premium on redemption is 20%, therefore, the redemption value of each debenture will be Rs. 12 (Rs. 10 + 20% of Rs. 10).
The total redemption amount will be 20,000 × Rs. 12 = Rs. 2,40,000.

Calculation of Loss on Redemption
Since the debentures were issued at par, the company received only Rs. 10 per debenture at the time of issue. However, it will have to pay Rs. 12 per debenture at the time of redemption, resulting in a loss of Rs. 2 per debenture (Rs. 12 - Rs. 10).
The total loss on redemption will be 20,000 × Rs. 2 = Rs. 40,000.

Allocation of Loss on Redemption
The loss on redemption of debentures is a capital loss and cannot be charged against the profits of the year in which the debentures are redeemed. Therefore, the loss has to be spread over the years between the issue and redemption of the debentures.
The loss on redemption will be spread over the 5-year period between the issue and redemption of the debentures. Therefore, the amount of loss to be written off every year will be Rs. 40,000 ÷ 5 = Rs. 8,000.

Therefore, option 'D' is the correct answer, and the amount of loss on redemption of debentures to be written off every year will be Rs. 8,000.

6000 debentures were discharged by issuing Equity Shares of Rs. 10 each at 20% Premium. Find the number of shares issued. 
  • a)
    5000
  • b)
    60000
  • c)
    50000
  • d)
    6000
Correct answer is option 'A'. Can you explain this answer?

Dipika Kaur answered
Given:
Number of debentures discharged = 6000
Face value of Equity Shares = Rs. 10 each
Premium on Equity Shares = 20%

To find:
Number of Equity Shares issued

Solution:

1. Calculation of Face Value of Debentures:

Since the number of debentures has been discharged by issuing Equity Shares, we can assume that the face value of debentures is equal to the face value of Equity Shares.

Face Value of Debentures = Face Value of Equity Shares = Rs. 10

2. Calculation of Total Value of Debentures:

Total Value of Debentures = Face Value of Debentures x Number of Debentures

Total Value of Debentures = Rs. 10 x 6000 = Rs. 60,000

3. Calculation of Premium on Equity Shares:

Premium on Equity Shares = 20% of Face Value of Equity Shares

Premium on Equity Shares = 20% of Rs. 10 = Rs. 2

4. Calculation of Total Value of Equity Shares:

Total Value of Equity Shares = (Face Value + Premium) x Number of Equity Shares

Total Value of Equity Shares = (Rs. 10 + Rs. 2) x Number of Equity Shares

Total Value of Equity Shares = Rs. 12 x Number of Equity Shares

5. Calculation of Number of Equity Shares:

Total Value of Debentures = Total Value of Equity Shares

Rs. 60,000 = Rs. 12 x Number of Equity Shares

Number of Equity Shares = Rs. 60,000 / Rs. 12

Number of Equity Shares = 5000

Therefore, the number of Equity Shares issued is 5000.

A Ltd. issued 10,000 12% Debentures of Rs. 10 each at par which are redeemable at the end of each year in equal lots in 5 years at a premium of 30%. The amount of loss on redemption of debentures to be written off in fourth and fifth year will be:
  • a)
    Rs. 10,000, Nil
  • b)
    Rs. 4,000, 4000
  • c)
    Rs. 4,000, 2000
  • d)
    Rs. 6,000, 24000
Correct answer is option 'D'. Can you explain this answer?

KP Classes answered
Loss on Redemption of Debentures

To calculate the loss on redemption of debentures in the fourth and fifth year, we need to consider the premium amount and the face value of the debentures.

Given:
- Number of debentures issued = 10,000
- Face value of each debenture = Rs. 10
- Premium on each debenture = 30%

Step 1: Calculate the Premium Amount

The premium on each debenture is 30% of the face value. So, the premium amount per debenture is:

Premium amount = 30/100 * Rs. 10 = Rs. 3

Step 2: Calculate the Total Premium Amount

To calculate the total premium amount, we multiply the premium amount per debenture by the number of debentures issued.

Total Premium Amount = Rs. 3 * 10,000 = Rs. 30,000

Step 3: Calculate the Redemption Value

The redemption value is the sum of the face value and the premium amount. In this case, since the debentures are redeemable in equal lots over 5 years, the redemption value will remain the same for each lot.

Redemption Value = Face Value + Premium Amount = Rs. 10 + Rs. 3 = Rs. 13

Step 4: Calculate the Loss on Redemption

The loss on redemption is the difference between the redemption value and the face value. In this case, since the debentures were issued at par, the face value is equal to the issue price.

Loss on Redemption = Redemption Value - Face Value = Rs. 13 - Rs. 10 = Rs. 3

Step 5: Allocate the Loss on Redemption

Since the debentures are redeemable in equal lots over 5 years, we need to allocate the loss on redemption over these years. The total loss on redemption is Rs. 3 for each debenture.

In the fourth year, 1/5th of the debentures will be redeemed. So, the loss on redemption in the fourth year will be:

Loss on Redemption in Fourth Year = Rs. 3 * (1/5) * 10,000 = Rs. 6,000

In the fifth year, the remaining 4/5th of the debentures will be redeemed. So, the loss on redemption in the fifth year will be:

Loss on Redemption in Fifth Year = Rs. 3 * (4/5) * 10,000 = Rs. 24,000

Therefore, the correct answer is option D: Rs. 6,000, Rs. 24,000.

Loss on issue of debentures is treated as ___________.
  • a)
    Intangible asset
  • b)
    Current asset
  • c)
    Current liability
  • d)
    Other non-current asset
Correct answer is option 'D'. Can you explain this answer?

Freedom Institute answered
Correct option is D)
Loss on issue of debentures eans the difference between the Redeemable Value and the Face Value. It is treated as a Miscellaneous expenditure and is debited to "Loss on Issue of Debentures Account."

 Which of the following is/are true with respect to debentures?
  • a)
    They can be issued for cash
  • b)
    They can be issued for consideration other than cash
  • c)
    They cannot be issued s collateral security
  • d)
     Both (a) and (b) above
Correct answer is option 'D'. Can you explain this answer?

Arun Khanna answered
Debentures are debt instruments issued by a joint stock company. Amounts collected byway of debentures form part of the loan capital of a company. They are repayable after afixed period. Debentures are issued in units of small value for convenient buying andselling. Debenture holders get interest on their debentures. They are creditors of thecompany. They do not get dividend. Only shareholders get dividend.

(A) Issue of Debenture for Cash:
The issue procedure with regard to debentures is the same as that of shares. The amount due on debentures may be paid in installments, such as, Application, Allotment and Calls. When debentures are issued at premium, the amount of premium is credited to Debenture Premium Account. Debenture Premium Account is a capital profit and is transferred to Capital Reserve Account.

(B)Debentures Issued for Consideration Other than Cash:
Sometimes, a company purchases a running business (assets and liabilities) and issues to vendor, debentures as consideration. It is called issue of debentures in consideration, other than cash.

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
Assertion (A): Sarita Pvt. Ltd. issued 15% 10,000 debentures at par @ Rs. 100 per debenture. The company suffered a loss but still the directors of the company paid interest on debentures.
Reason (R): Interest on debenture is a charge against profits and therefore, its payment is not subject to the earning of profit.
  • a)
    Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
  • b)
    Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
  • c)
    Assertion (A) is true, but Reason (R) is false .
  • d)
    Assertion (A) is false, but Reason (R) is true.
Correct answer is option 'A'. Can you explain this answer?

Ishan Choudhury answered
Interest on debenture is to be paid even if the company suffers a loss.

In the balance sheet of a Company, Debentures are shown under the head: 
  • a)
    Secured Loans 
  • b)
    Unsecured Loans 
  • c)
    Reserves and Surplus 
  • d)
    Current liabilities 
Correct answer is option 'A'. Can you explain this answer?

Prasenjit Kapoor answered
Debentures are a type of long-term borrowing for companies. In the balance sheet of a company, debentures are shown under the head of secured loans. Let us understand this in detail:

Secured Loans:
Secured loans are loans that are backed by some form of collateral or security. In the case of debentures, the company issues debentures to investors and offers some form of security as collateral. This collateral could be in the form of assets, properties, or other securities. As debentures are backed by collateral, they are considered as secured loans.

Unsecured Loans:
Unsecured loans are not backed by any collateral or security. In the case of unsecured loans, the lender relies on the borrower's creditworthiness and reputation. Debentures are not considered as unsecured loans as they are backed by some form of collateral.

Reserves and Surplus:
Reserves and surplus are the profits that a company has accumulated over the years. These profits are retained by the company and are not distributed as dividends. Debentures are not considered as reserves and surplus as they are a type of borrowing.

Current Liabilities:
Current liabilities are the obligations that a company needs to pay within a year. Debentures are a type of long-term borrowing and are not considered as current liabilities.

In conclusion, the correct answer is option 'A' as debentures are shown under the head of secured loans in the balance sheet of a company.

Ram limited has isuued 15% debentures of Rs.20,00,000 at a discount of 10% on April 1, 2012. The company pays interest half-yearly on June 30 and Dec 31 every year. On March 31, 2013 the amount shown as interest accrued but not yet due in the Balance Sheet will be:
  • a)
    Rs. 2,25,000
  • b)
    Rs. 1,00,000
  • c)
    Rs.75,000
  • d)
    Rs. 3,00,000
Correct answer is option 'C'. Can you explain this answer?

Gowri Chavan answered
Calculation of Interest Accrued but not yet due:
Interest on debentures = 15% of Rs. 20,00,000 = Rs. 3,00,000 per annum

Interest for the year:
Interest for the year 2012-2013 = Rs. 3,00,000 x 10/12 = Rs. 2,50,000

Interest accrued but not yet due:
Interest for 3 months (Jan, Feb, Mar 2013) = Rs. 3,00,000 x 3/12 = Rs. 75,000
Therefore, the amount shown as interest accrued but not yet due in the Balance Sheet on March 31, 2013, will be Rs. 75,000.

A company issued 1,00,000, 12% debentures of Rs. 100 each. Calculate the amount of interest on debentures.
  • a)
    Rs. 12,000
  • b)
    Rs. 1,20,000
  • c)
    Rs. 12,00,000
  • d)
    None of these
Correct answer is option 'C'. Can you explain this answer?

KP Classes answered
To calculate the amount of interest on the debentures, you can use the following formula:
Interest=Number of Debentures×Face Value of Each Debenture×Interest Rate
Given:
  • Number of Debentures = 1,00,000
  • Face Value of Each Debenture = Rs. 100
  • Interest Rate = 12%
Now, substitute the values into the formula:
Interest=1,00,000×100×12/100
​ Interest=1,00,000×100×0.12=1,20,00,000 (Rs.)
So, the amount of interest on the debentures is Rs. 12,00,000.

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
Assertion (A): Debentures saves income tax.
Reason (R): Interest on debenture is tax deductible expenditure.
  • a)
    Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
  • b)
    Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
  • c)
    Assertion (A) is true, but Reason (R) is false .
  • d)
    Assertion (A) is false, but Reason (R) is true.
Correct answer is option 'A'. Can you explain this answer?

Amita Das answered
Tax saving bonds enjoy special privileges under Section 80CCF of the Income Tax Act which states that individuals enjoy tax deductions up to Rs 20,000 on the bonds owned by them. This deduction is excluding the Rs 1.5 lakh provided under Section 80C of the Act.

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
Assertion (A): Debenture holders are the creditors of the company carrying a fixed rate of interest.
Reason (R): Debentures are short-term loans taken from the public.
  • a)
    Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
  • b)
    Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
  • c)
    Assertion (A) is true, but Reason (R) is false .
  • d)
    Assertion (A) is false, but Reason (R) is true.
Correct answer is option 'C'. Can you explain this answer?

Vikas Kapoor answered
If a company needs funds for extension and development purposes without increasing its share capital, it can borrow from the general public by issuing certificates called debentures for a fixed period of time and at a fixed rate of interest. Debenture is a long-term debt instrument.

On May 01, 2004 U Ltd. issued 7% 10,000 convertible debentures of Rs. 100 each at a premium of 20%. Interest is payable on September 30 and March 31 every year. Assuming that the interest runs from the date of issue, the amount of interest expenditure debited to profit and loss account for the year ended March 31, 2005 =?
  • a)
    Rs. 70,000
  • b)
    Rs. 58,333
  • c)
    Rs. 84,000
  • d)
    Rs. 64,167
Correct answer is option 'D'. Can you explain this answer?

Jatin Mehta answered
Calculation of Interest Expenditure on Convertible Debentures

Issue Details:
- Face Value of Debenture = Rs. 100
- Premium on Debenture = 20%
- Interest Rate on Debenture = 7%
- Total Number of Debentures Issued = 10,000

Step 1: Calculation of Total Amount Received from Issue of Debentures

Face Value of Debenture = Rs. 100
Premium on Debenture = 20%

Total Amount Received from Issue of Debentures = Face Value + Premium
= (Rs. 100 + Rs. 20) * 10,000
= Rs. 12,00,000

Step 2: Calculation of Annual Interest Payable

Interest Rate on Debenture = 7%
Face Value of Debenture = Rs. 100

Annual Interest Payable per Debenture = Face Value * Interest Rate
= Rs. 100 * 7% = Rs. 7

Total Annual Interest Payable on all Debentures = Annual Interest Payable per Debenture * Total Number of Debentures
= Rs. 7 * 10,000
= Rs. 70,000

Step 3: Calculation of Interest Expenditure for 2004-05

Interest Payable Date: September 30, 2004

Number of Months between Issue Date and Interest Payable Date = 4 months
Interest Payable for 4 months = (Annual Interest Payable/2) * (Number of Months/12)
= (Rs. 70,000/2) * (4/12)
= Rs. 11,667

Interest Payable Date: March 31, 2005

Number of Months between Interest Payable Date and March 31, 2005 = 6 months
Interest Payable for 6 months = (Annual Interest Payable/2) * (Number of Months/12)
= (Rs. 70,000/2) * (6/12)
= Rs. 21,000

Total Interest Expenditure for 2004-05 = Interest Payable on September 30, 2004 + Interest Payable on March 31, 2005
= Rs. 11,667 + Rs. 21,000
= Rs. 32,667

Therefore, the amount of interest expenditure debited to profit and loss account for the year ended March 31, 2005 is Rs. 64,167 (rounded off).

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
Assertion (A): The ‘discount on debentures’ issuance is charged to ‘Securities Premium Account’ and is reflected as an asset.
Reason (R): The ‘discount on debentures’ issuance is noted as a capital loss side as a fictitious asset. Hence, has to be written off during the years of its issue.
  • a)
    Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
  • b)
    Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
  • c)
    Assertion (A) is true, but Reason (R) is false .
  • d)
    Assertion (A) is false, but Reason (R) is true.
Correct answer is option 'A'. Can you explain this answer?

Akshara Chopra answered
Assertion (A): The ‘discount on debentures’ issuance is charged to ‘Securities Premium Account’ and is reflected as an asset.
Reason (R): The ‘discount on debentures’ issuance is noted as a capital loss side as a fictitious asset. Hence, it has to be written off during the years of its issue.

The correct answer is option 'A' - Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
To understand the assertion and reason given in the question, let's break it down:

Discount on Debentures:
When a company issues debentures at a price lower than their face value, it is known as a discount on debentures. This discount is given to attract investors and make the debentures more attractive. The discount amount is the difference between the face value and the issue price of the debentures.

Assertion (A): The ‘discount on debentures’ issuance is charged to ‘Securities Premium Account’ and is reflected as an asset.
When a company issues debentures at a discount, the discount amount is charged to the Securities Premium Account. The Securities Premium Account represents the premium received by the company on the issuance of shares or debentures. It is a part of the company's reserves and is reflected as an asset in the balance sheet.

Reason (R): The ‘discount on debentures’ issuance is noted as a capital loss side as a fictitious asset. Hence, it has to be written off during the years of its issue.
The Reason explains that the discount on debentures is noted as a capital loss side as a fictitious asset. This means that the discount is treated as a capital loss for the company. However, the reason also states that it has to be written off during the years of its issue. This implies that the discount on debentures is gradually written off over the years as the debentures mature.

Conclusion:
Both the assertion and reason are true. The discount on debentures is charged to the Securities Premium Account and is reflected as an asset. However, it is important to note that the discount is treated as a capital loss and has to be written off over the years of its issue. Thus, option 'A' is the correct answer.

Deep Ltd. issued 1,00,000 7% Debentures of Rs. 100 each at a discount of 4% redeemable after 5 years at a premium of 6%. Loss on issue of debentures is : 
  • a)
    Rs. 10,00,000
  • b)
    Rs. 6,00,000
  • c)
    Rs. 16,00,000
  • d)
    Rs. 4,00,000
Correct answer is option 'A'. Can you explain this answer?

Nipuns Institute answered
Given:
  • Number of debentures issued: 1,00,000
  • Face value of each debenture: ₹100
  • Discount on issue: 4% (₹4 per debenture)
  • Premium on redemption: 6% (₹6 per debenture)
Step 1: Calculate Total Discount on Issue
Discount on Issue = Number of Debentures × Discount per Debenture
= 1,00,000 × 4 = ₹4,00,000
Step 2: Calculate Total Premium on Redemption
Premium on Redemption = Number of Debentures × Premium per Debenture
= 1,00,000 × 6 = ₹6,00,000
Step 3: Total Loss on Issue of Debentures
Total Loss = Discount on Issue + Premium on Redemption
= ₹4,00,000 + ₹6,00,000 = ₹10,00,000

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
Assertion (A): The Bank account is debited when the money is received for debentures.
Reason (R): Bank being a real account needs to be debited when something comes in.
  • a)
    Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
  • b)
    Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
  • c)
    Assertion (A) is true, but Reason (R) is false .
  • d)
    Assertion (A) is false, but Reason (R) is true.
Correct answer is option 'A'. Can you explain this answer?

Priyanka Khatri answered
When debentures are issued at premium, the amount of premium is credited to Debenture Premium Account. Debenture Premium Account is a capital profit and is transferred to Capital Reserve Account. When debentures are issued at discount, the amount of discount is debited to 'Discount on Issue of Debentures Account.

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
Assertion (A): Debenture holders do not enjoy any voting right.
Reason (R): A debenture holder just lends money but does not become an owner of the company with the purchase of debentures.
  • a)
    Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
  • b)
    Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
  • c)
    Assertion (A) is true, but Reason (R) is false .
  • d)
    Assertion (A) is false, but Reason (R) is true.
Correct answer is option 'A'. Can you explain this answer?

Rohit Joshi answered
Assertion (A): Debenture holders do not enjoy any voting right.
Reason (R): A debenture holder just lends money but does not become an owner of the company with the purchase of debentures.

The correct answer is option 'A': Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
Debentures are long-term debt instruments issued by companies to raise funds from the public. They are essentially loans taken by the company from the debenture holders, who are the lenders. Debenture holders are not considered as owners of the company, unlike shareholders who hold equity shares and have ownership rights.

Assertion (A): Debenture holders do not enjoy any voting right.
Debenture holders do not have any voting rights in the company. They are not eligible to participate in the decision-making process or have a say in the management of the company. The voting rights are exclusive to the shareholders who have invested in the company by purchasing equity shares.

Reason (R): A debenture holder just lends money but does not become an owner of the company with the purchase of debentures.
The reason for debenture holders not having voting rights is that they are merely lenders to the company. When a person buys debentures, they are essentially lending money to the company in exchange for interest payments. They do not become owners of the company or have any claim on the assets or profits of the company. Therefore, they do not have the right to participate in the decision-making process or vote on company matters.

Conclusion:
Debenture holders do not enjoy any voting right because they are not owners of the company. They are lenders who provide funds to the company in exchange for fixed interest payments. Shareholders, on the other hand, are the owners of the company and have voting rights in proportion to their shareholding.

In Sinking Fund for redemption of Debentures Account, the amount is transferred every year from​​​
  • a)
    Reserve Account
  • b)
    Profit and Loss Account
  • c)
    Capital Account
  • d)
    None of the above
Correct answer is option 'B'. Can you explain this answer?

Sai Chakraborty answered
Sinking Fund for Redemption of Debentures
The Sinking Fund is a financial strategy used by companies to set aside money over time to repay debt, particularly debentures, when they mature. Understanding the source of the funds for this account is crucial.
Why Profit and Loss Account?
- The Sinking Fund is typically funded through profits generated by the company.
- Profit and Loss Account reflects the company's earnings after expenses, which can be allocated for various purposes, including the Sinking Fund.
Transfer from Profit and Loss Account
- The amount transferred to the Sinking Fund is derived from profits, which ensures that the company maintains liquidity while fulfilling its debt obligations.
- By transferring funds annually, the company avoids a significant cash outflow at the time of debenture redemption, making it a more manageable option.
Other Accounts Explained
- Reserve Account: This account usually contains funds set aside for specific future expenses or contingencies, not specifically for debenture redemption.
- Capital Account: This account reflects the owner's equity and is not a source for funding the Sinking Fund. It represents long-term investments rather than the profits available for distribution.
- None of the Above: This option is incorrect as the funding originates from the Profit and Loss Account.
Conclusion
In summary, the correct answer is option 'B' because the funds for the Sinking Fund for the redemption of debentures are transferred from the Profit and Loss Account, ensuring the company can manage its debt repayment effectively while maintaining operational liquidity.

 Which of the following statement is false with respect to debentures?
  • a)
    A company can issue irredeemable debentures
  • b)
    A company can issue debentures for consideration other than cash 
  • c)
    A company can issue debentures with voting rights 
  • d)
    A company can busy its own debentures 
Correct answer is option 'C'. Can you explain this answer?

Raghav Shah answered
False Statement: A company can issue debentures with voting rights

Explanation:
Debentures are long-term debt instruments issued by a company to raise funds from the public. They are essentially a type of loan taken by a company from investors or lenders. Debentures are characterized by certain features, as explained below:

1. Irredeemable Debentures: A company can issue debentures that have no maturity date or are irredeemable. This means that the company does not have an obligation to repay the principal amount to the debenture holders. However, the company is still required to pay interest on these debentures. Therefore, statement (a) is true.

2. Consideration Other than Cash: A company can issue debentures in exchange for consideration other than cash. This means that the company can issue debentures in exchange for assets, such as land, buildings, or machinery. This allows the company to diversify its sources of funding. Therefore, statement (b) is true.

3. Debentures with Voting Rights: Unlike shares, debentures do not carry voting rights. Debenture holders are not entitled to vote in the company's general meetings or participate in the decision-making process. Debenture holders are primarily creditors of the company and have a right to receive interest and principal repayments as per the terms of the debenture agreement. Therefore, statement (c) is false.

4. Buyback of Debentures: A company has the option to buy back its own debentures from the market. This can be done either through an open market purchase or by making a tender offer to the debenture holders. The company may choose to buy back its debentures to reduce its debt burden or due to favorable market conditions. Therefore, statement (d) is true.

In conclusion, the false statement with respect to debentures is option (c) - a company cannot issue debentures with voting rights.

Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
Assertion (A): Issue of debenture does not result in dilution of interest of equity shareholders.
Reason (R): Debenture holders have voting rights.
  • a)
    Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
  • b)
    Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
  • c)
    Assertion (A) is true, but Reason (R) is false .
  • d)
    Assertion (A) is false, but Reason (R) is true.
Correct answer is option 'C'. Can you explain this answer?

Arun Yadav answered
Issue of debenture does not result in dilution of interest of equity shareholders as they do not have the right either to vote or to take part in the management of the company.

 F Ltd. purchased machinery for a book value of Rs. 4,00,000. The consideration was paid by issue of 10% Debenture of Rs. 100 each @ discount of 20%. The debenture account will be credited by: 
  • a)
    Rs. 4,00,000
  • b)
    Rs. 5,00,000
  • c)
    Rs. 3,20,000
  • d)
    Rs. 4,80,000
Correct answer is option 'B'. Can you explain this answer?

Anu Sen answered
Calculation of consideration paid for machinery

The machinery was purchased for a book value of Rs. 4,00,000.

The consideration was paid by issuing debentures at a discount of 20%.

The face value of each debenture is Rs. 100.

Therefore, the number of debentures issued = (4,00,000 / 100) = 4,000.

The discount on each debenture = (20/100) * 100 = Rs. 20.

The amount of consideration paid = (4,000 * 80) = Rs. 3,20,000.

Credit to debenture account

The debenture account will be credited with the amount of consideration paid for the machinery.

Therefore, the debenture account will be credited with Rs. 3,20,000.

However, the options given in the question do not match with the calculated answer.

The correct answer is option 'B', which is not matching with the calculated answer.

Hence, there seems to be an error in the options provided in the question.

When debentures are issued as collateral security, interest is paid on: 
  • a)
    Nominal value of debentures 
  • b)
    Face value of debentures 
  • c)
    Discounted value of debentures 
  • d)
    No interest is paid
Correct answer is option 'D'. Can you explain this answer?

Amrutha Goyal answered
Debentures as Collateral Security

Debentures are a type of debt instrument issued by companies to raise funds from the public. They are usually secured by the assets of the company and offer a fixed rate of interest to the investors. In some cases, debentures may be issued as collateral security for loans taken by the company.

When debentures are issued as collateral security, the interest paid on them depends on various factors such as the terms of the loan agreement, the creditworthiness of the company, and the prevailing market conditions. However, in general, the following rules apply:

No Interest is Paid on Debentures

When debentures are issued as collateral security, the lender holds them as security for the loan. The lender does not have any ownership rights over the debentures and is only entitled to use them as collateral in case the borrower defaults on the loan. Therefore, no interest is paid on the debentures as the lender does not own them.

Interest is Paid on the Loan

The borrower has to pay interest on the loan taken against the debentures. The interest rate depends on various factors such as the creditworthiness of the borrower, the duration of the loan, and the prevailing market conditions. The lender may also charge a margin over the prevailing interest rate to cover the risk of default.

Conclusion

Debentures may be issued as collateral security for loans taken by companies. When debentures are used as collateral security, no interest is paid on them as the lender does not own them. Instead, the borrower has to pay interest on the loan taken against the debentures.

T Ltd. purchased land and building from U Ltd. for a book value of Rs. 3,00,000. The consideration was paid by issue of 12% Debentures of Rs. 100 each at a discount of 20%. The debentures account is credited with.
  • a)
    Rs. 3,00,000
  • b)
    Rs. 3,75,000
  • c)
    Rs. 3,60,000
  • d)
    Rs. 2,40,000
Correct answer is option 'B'. Can you explain this answer?

KP Classes answered
No. of Debentures = Book value of land and building / Issue price of debentures
Issue price of debentures= Rs. 100 - 20
                                           = Rs. 80
No. of debentures= 300000/80
                               = 3750 debentures
Debentures account will be credited with the amount of 375000 (3750 x 100).
Correct option is B. Rs. 3,75,000

 Which of the following is false with respect to debentures
  • a)
    They can be issued for cash
  • b)
    They can be issued for consideration other than cash
  • c)
    They can be issued as collateral security
  • d)
    They can be issued in lieu of dividends
Correct answer is option 'D'. Can you explain this answer?

Swara Saha answered
Debentures: False Statement Explanation

Issuance for Cash:
- Debentures can indeed be issued for cash, as this is a common way for companies to raise funds.
- Investors purchase debentures in exchange for cash, which the company can then use for various purposes such as expansion or working capital.

Issuance for Consideration Other Than Cash:
- Debentures can also be issued for consideration other than cash.
- This may include assets, services, or any other form of value that the company and the debenture holders agree upon.

Issuance as Collateral Security:
- Debentures can be issued as collateral security.
- This means that the debentures are backed by specific assets of the company, providing an additional layer of security for the debenture holders.

Issuance in Lieu of Dividends:
- The false statement in the given options is that debentures can be issued in lieu of dividends.
- Debentures are a form of debt instrument and are not issued as a substitute for dividends. Dividends are typically paid out to shareholders as a share in the company's profits, while debentures represent a company's debt obligation to the debenture holders.

When debentures are issued at a discount and are redeemable at a premium. Which of the following account is debited at the time of issue of debentures?
  • a)
    Debentures
  • b)
    Premium on redemption of debentures account
  • c)
    Discount on Issue of Debentures Account
  • d)
    Capital Reserve Account
Correct answer is option 'C'. Can you explain this answer?

Om Kumar answered
Debiting the Discount on Issue of Debentures Account

When debentures are issued at a discount and are redeemable at a premium, the Discount on Issue of Debentures Account is debited at the time of issue of debentures. This account is created to record the discount offered on the issue of debentures.

Reason for debiting the Discount on Issue of Debentures Account

When a company issues debentures at a discount, it means that the debentures are sold for a value lower than their face value. The discount is essentially an expense for the company, as it represents the difference between the face value of the debentures and the amount received from their sale.

By debiting the Discount on Issue of Debentures Account, the company recognizes this expense and records it in the financial statements. This allows for proper accounting treatment of the discount and ensures that the financial statements reflect the true cost of issuing the debentures.

Impact on Financial Statements

Debiting the Discount on Issue of Debentures Account has the following impact on the financial statements:

1. Balance Sheet: The Discount on Issue of Debentures Account is shown as a contra-liability under the head 'Reserves and Surplus.' This reduces the carrying value of the debentures on the liability side of the balance sheet.

2. Income Statement: The discount is treated as an expense and is charged to the income statement over the period of the debentures. This reduces the company's net income and, consequently, its retained earnings.

3. Cash Flow Statement: The cash flows related to the discount on issue of debentures are reflected in the financing activities section of the cash flow statement.

Example

Let's consider an example to understand how the Discount on Issue of Debentures Account is debited:

Company XYZ issues debentures with a face value of $100 each at a discount of 10%. The total value of debentures issued is $1,000,000.

The journal entry to record the issue of debentures at a discount would be as follows:

Discount on Issue of Debentures Account Dr. $100,000
To Debentures Account Cr. $100,000

The Discount on Issue of Debentures Account is debited by $100,000, representing the discount offered on the issue of debentures. The Debentures Account is credited for the face value of the debentures issued.

This journal entry ensures that the discount on the issue of debentures is properly recognized and accounted for in the financial statements of the company.

Zee Limited purchased a plant from Dee Limited for book value of Rs.4,50,000. The consideration was paid by isuue of 15% debentures of Rs.100 each at a discount of 10%.The debentures account will be credited by 
  • a)
    Rs. 4,00, 000
  • b)
    Rs. 4,50,000
  • c)
    Rs. 5,00,000
  • d)
    Rs. 5,75,000
Correct answer is option 'C'. Can you explain this answer?

Ishani Patel answered
Calculation of Consideration for the Plant:
To calculate the consideration for the plant, we need to look at the value of the debentures issued by Zee Limited to Dee Limited.

Value of Debentures:
- Face value of debentures = Rs.100 each
- Number of debentures issued = Book value of plant / Face value of debentures
- Number of debentures issued = Rs.4,50,000 / Rs.100 = 4,500 debentures

Total Value of Debentures:
- Total value of debentures = Face value of debentures * Number of debentures issued
- Total value of debentures = Rs.100 * 4,500 = Rs.4,50,000

Discount on Debentures:
- Discount on debentures = 10% of Total value of debentures
- Discount on debentures = 10/100 * Rs.4,50,000 = Rs.45,000

Consideration Paid to Dee Limited:
- Consideration paid = Total value of debentures - Discount on debentures
- Consideration paid = Rs.4,50,000 - Rs.45,000 = Rs.4,05,000
Therefore, the correct consideration paid by Zee Limited to Dee Limited for the plant is Rs.4,50,000, which is option 'C'.

 Which of the following is not correct in respect of debentures: 
  • a)
    They can be issued for cash 
  • b)
    They can be issued for consideration other than cash 
  • c)
    A company can buy its own debentures 
  • d)
    They can be issued in lien of dividends 
Correct answer is option 'D'. Can you explain this answer?

Meera Rane answered
Debentures are a type of long-term debt instrument that companies can issue to raise capital. They are essentially loans taken out by the company, which are backed by the company's assets and promise to repay the principal amount along with periodic interest payments.

Let's examine each option and determine which one is not correct:

a) They can be issued for cash: This statement is correct. Companies can issue debentures in exchange for cash. This is the most common method of issuing debentures, as it allows the company to raise funds to finance its operations or invest in new projects.

b) They can be issued for consideration other than cash: This statement is correct. Companies can also issue debentures in exchange for consideration other than cash. For example, a company may issue debentures in exchange for shares of another company, assets, or services rendered.

c) A company can buy its own debentures: This statement is correct. Companies have the option to buy back their own debentures from the open market or directly from the debenture holders. This process is known as debenture redemption. By buying back its own debentures, the company can reduce its debt burden and interest payments.

d) They can be issued in lieu of dividends: This statement is incorrect. Debentures cannot be issued in lieu of dividends. Dividends are a distribution of profits to shareholders, whereas debentures are a form of borrowing for the company. While debenture holders are entitled to receive interest payments, they do not participate in the company's profits or dividends.

In summary, the correct answer is option 'D' - They can be issued in lieu of dividends. Debentures cannot be issued in lieu of dividends as they are a form of borrowing for the company and do not entitle the holders to a share in the company's profits or dividends.

 Debentures interest
  • a)
    Is payable only in case of profits
  • b)
    Accumulates in case of losses or inadequate profits
  • c)
    Is payable after the payment of preference dividend but before the payment of equity dividend 
  • d)
    Is payable before the payment of any dividend on shares
Correct answer is option 'D'. Can you explain this answer?

Raghav Ghoshal answered
Debentures Interest Payment

Debentures are a form of long-term borrowing for companies. They are issued to the public and carry a fixed rate of interest. The interest on debentures is paid to the debenture holders periodically, and the payment of interest is a legal obligation of the company.

Payable before equity dividend

The payment of interest on debentures is made before the payment of any dividend on shares. This means that the company has to pay the interest on debentures first, and only after that, it can pay any dividend on shares.

No relation to profits

The payment of interest on debentures is not related to the profits or losses of the company. The company has to pay the interest on debentures even if it makes losses or has inadequate profits. This is because the payment of interest on debentures is a legal obligation of the company, and it cannot be avoided.

Different from preference dividend

The payment of interest on debentures is different from the payment of preference dividend. The preference dividend is paid to preference shareholders before any dividend is paid to equity shareholders. However, the payment of interest on debentures is made after the payment of preference dividend.

Conclusion

In conclusion, the payment of interest on debentures is a legal obligation of the company, and it has to be made before the payment of any dividend on shares. The payment of interest on debentures is not related to the profits or losses of the company, and it is made after the payment of preference dividend.

 Which of the following statements is false?
  • a)
    A company can issue convertible debentures 
  • b)
    Debentures cannot be secured 
  • c)
    A company can issue redeemable debentures 
  • d)
    Debentures have no right to participate in profits over and above their fixed interest 
Correct answer is option 'B'. Can you explain this answer?

Niharika Joshi answered
Debentures Overview
Debentures are long-term debt instruments issued by companies to raise funds from the public. They are a form of loan that the company promises to repay at a specified date along with periodic interest payments.

Debentures Features
- Convertible Debentures: A company can issue convertible debentures, which can be converted into equity shares at a later date based on pre-determined terms.
- Redeemable Debentures: A company can issue redeemable debentures, which are to be repaid to the debenture holders after a specified period.
- Profit Participation: Debentures typically have no right to participate in profits over and above their fixed interest. Debenture holders are entitled to receive only the agreed-upon interest payments.

Secured Debentures
Contrary to option b, debentures can be secured by the company's assets. Secured debentures are backed by specific assets of the company, providing an added layer of security to the debenture holders. In the event of default by the company, secured debenture holders have a claim on the specified assets.
In conclusion, while debentures typically do not have the right to participate in profits beyond their fixed interest, they can indeed be secured by the company's assets. This adds an element of security for debenture holders, making them a relatively safe investment option.

 When debentures are issued as collateral security, the final entry for recording the collateral debentures in the books is __________.
  • a)
    Credit Debentures A/c. and debit cash A/c.
  • b)
    Debit Debenture suspense A/c and credit cash A/c
  • c)
    Debit Debenture suspense A/c and credit debentures A/c
  • d)
    Debit cash A/c and credit the loan A/c for which security is given
Correct answer is option 'C'. Can you explain this answer?

Tejas Chaudhary answered
Debit and Credit Entry for Collateral Debentures
When debentures are issued as collateral security, the final entry for recording the collateral debentures in the books is as follows:
- Debit Debenture Suspense A/c: The debentures issued as collateral security are recorded in the books under a suspense account called Debenture Suspense A/c. This account represents the value of the debentures held as collateral.
- Credit Debentures A/c: The Debentures A/c is credited to reflect the issuance of the debentures as collateral security. This entry shows that the company has pledged its debentures as security against a loan or other obligation.
By making the above entry, the company acknowledges the issuance of debentures as collateral security in its books. This helps in maintaining accurate records of the company's financial transactions and obligations.

If debentures of Rs.4,70,000 are issued for the consideration of Rs.5,00,000, then balance Rs.30,000 will be credited to: 
  • a)
    Profit and Loss account 
  • b)
    Good will account 
  • c)
    General reserve account 
  • d)
    Capital reserve account 
Correct answer is option 'D'. Can you explain this answer?

Nilesh Chawla answered

Capital Reserve Account:

When debentures are issued at a discount, the discount amount is usually credited to a Capital Reserve account. In this case, debentures of Rs.4,70,000 are issued for Rs.5,00,000, meaning there is a discount of Rs.30,000.

Explanation:
- Debentures Issued: Rs.4,70,000
- Consideration Received: Rs.5,00,000
- Discount: Rs.30,000

The discount of Rs.30,000 is considered as a capital reserve because it is not a revenue expense. It is a one-time transaction that does not affect the profit or loss of the company.

Therefore, the balance of Rs.30,000 will be credited to the Capital Reserve account as it represents the amount set aside out of capital profits and cannot be distributed as dividends. This reserve is usually used for specific purposes like writing off preliminary expenses, issuing bonus shares, etc.

In conclusion, the balance of Rs.30,000 will be credited to the Capital Reserve account as it is not related to profit or loss and represents a capital profit for the company.

 T Ltd. purchased land & building from U Ltd. for a value of Rs. 2,00,000. The consideration was paid by issue of 12% debentures of Rs. 100 each at a discount of 20%. The debentures account will be credited with: 
  • a)
    Rs. 2,00,000
  • b)
    Rs. 2,50,000
  • c)
    Rs. 2,40,000
  • d)
    Rs. 1,60,000
Correct answer is option 'B'. Can you explain this answer?

Aarya Sharma answered
For $500,000 on January 1, 2021. The company plans to use the land for future development and does not expect to sell it in the foreseeable future. On December 31, 2021, the fair value of the land is determined to be $600,000.

To record the increase in value of the land, T Ltd. will make the following journal entry:

Date: December 31, 2021

Land (Asset) - Debit: $100,000
Gain on Land (Revenue) - Credit: $100,000

Explanation:
The increase in the value of the land from $500,000 to $600,000 represents a gain for the company. This gain is recorded as revenue on the income statement. The Land account is debited by $100,000 to reflect the increase in its value. The Gain on Land account is credited by $100,000 to record the gain as revenue.

Which of the following is false with respect to debentures?
  • a)
    They can be issued for cash 
  • b)
    They can be issued as collateral security
  • c)
    They can be issued in lieu of dividends 
  • d)
    None
Correct answer is option 'C'. Can you explain this answer?

Advait Chakraborty answered
False Statement: They can be issued in lieu of dividends

Explanation:
Debentures are long-term debt instruments that companies issue to raise funds from the public or financial institutions. They are essentially a form of borrowing for the issuing company. While debentures have certain characteristics and features, one of the false statements regarding debentures is that they can be issued in lieu of dividends.

Debentures:
Debentures are a common way for companies to raise capital for various purposes, such as funding business expansion, financing projects, or meeting long-term financial obligations. They are usually issued by companies with a good credit rating to attract investors. Debentures are backed by the general creditworthiness of the issuer and do not have any specific collateral attached to them.

True Statements:
Let's now look at the true statements regarding debentures:

a) They can be issued for cash:
Companies can issue debentures to raise funds in the form of cash. Investors who purchase debentures provide the issuing company with cash in exchange for the debenture instrument. This cash infusion helps the company meet its financial requirements.

b) They can be issued as collateral security:
Debentures can also be issued with collateral security. Companies may offer specific assets or properties as collateral to secure the debenture. This provides an additional layer of security for the investors who hold the debentures.

c) They can be issued in lieu of dividends:
This statement is false. Debentures are not issued in lieu of dividends. Dividends are the distribution of profits to shareholders of a company, whereas debentures represent debts owed by the company to the debenture holders. Dividends are typically paid out of the company's profits, while debentures are a form of borrowing that needs to be repaid with interest.

d) None:
This option is incorrect as the statement "C" is false.

In conclusion, debentures can be issued for cash, as collateral security, but not in lieu of dividends. Dividends are not related to debentures as they represent different financial transactions.

When debentures are redeemable at different dates, the total amount of discount on issue of debentures should be written off
  • a)
    Every year by applying the sum of the year digit method 
  • b)
    Every year by applying the straight line method 
  • c)
    To profit and loss account in full in the year of final or last redemption.
  • d)
     To profit and loss account in full in the year of first redemption.
Correct answer is option 'A'. Can you explain this answer?

Aravind Saha answered
Sum of the Year Digit Method for Writing off Discount on Issue of Debentures
When debentures are redeemable at different dates, the total amount of discount on issue of debentures should be written off every year by applying the sum of the year digit method. Here's how this method works:

Calculation of Year Digit
- Start by calculating the total number of years from the date of issue to the date of final redemption.
- Allocate digits to each year, starting from 1 for the first year, 2 for the second year, and so on, until the last year of redemption.

Writing off Discount
- Calculate the total amount of discount on issue of debentures.
- Calculate the sum of the year digit, which is the total of all the digits assigned to each year of redemption.
- Write off a portion of the discount each year by applying the formula: (Remaining discount to be written off / Sum of the year digit) x Digit for the current year.

Example
Let's say the total discount on issue of debentures is $10,000 and the debentures are redeemable over 5 years. The sum of the year digit would be 15 (1+2+3+4+5).
In the first year, the discount to be written off would be (10,000 / 15) x 1 = $666.67. In the second year, it would be (9,333.33 / 15) x 2 = $1,333.33, and so on.
By using the sum of the year digit method, the discount on issue of debentures is systematically and fairly distributed over the different redemption periods, providing a more accurate reflection of the financial impact on the company each year.

When debentures are issued as collateral security against any loan then holder of such debentures is entitles to 
  • a)
    Interest only on the amount of loan
  • b)
    Interest only on the face value of debentures 
  • c)
    Interest both on the amount of the loan and on the debentures 
  • d)
    None of the above.
Correct answer is option 'A'. Can you explain this answer?

Rishabh Das answered
Explanation:

Debentures as collateral security:
When debentures are issued as collateral security against a loan, it means that the debentures are pledged as security for the repayment of the loan. This provides assurance to the lender that if the borrower defaults on the loan, the lender can sell the debentures to recover the outstanding amount.

Interest on collateral security:
In this scenario, the holder of the debentures, who is the lender, is entitled to receive interest on the loan amount and not on the face value of the debentures. The reason for this is that the debentures are not being held for investment or income generation purposes, but rather as a security against the loan.

Interest only on the amount of loan:
The correct answer, option 'A', states that the holder of such debentures is entitled to receive interest only on the amount of the loan. This means that the lender will receive interest payments based on the principal amount of the loan that has been secured by the debentures.

Example:
Let's say a company wants to borrow $100,000 from a bank. To secure the loan, the company issues $100,000 worth of debentures to the bank. The interest rate on the loan is 10% per annum. In this case, the holder of the debentures, which is the bank, will receive interest payments based on the loan amount of $100,000 and not on the face value of the debentures.

Conclusion:
When debentures are issued as collateral security against a loan, the holder of such debentures is entitled to receive interest only on the amount of the loan. This is because the debentures are being held as security and not for investment purposes.

Loss on issue of debentures is generally written off in:
  • a)
    5 years
  • b)
    10 years
  • c)
    15 years
  • d)
    Over the period of redemption
Correct answer is option 'D'. Can you explain this answer?

Gauri Kaur answered
Explanation:
Loss on issue of debentures is generally written off over the period of redemption. Here's a detailed explanation:

What is loss on issue of debentures?
- When a company issues debentures at a discount or a premium, there may be a loss incurred. This loss arises due to the difference between the face value of the debentures and the amount received from their issue.

Writing off the loss:
- The loss on issue of debentures is typically written off over the period of redemption. This means that the total loss is distributed and charged to the profit and loss account over the period for which the debentures are outstanding.

Reason for writing off over the period of redemption:
- Writing off the loss over the period of redemption allows the company to spread out the impact of the loss on its financial statements. It ensures that the company's profitability is not significantly affected in a single accounting period.

Impact on financial statements:
- By writing off the loss over the period of redemption, the company's profit and loss account reflects a more accurate representation of its financial performance. It also ensures that the company's financial statements comply with accounting standards.

Conclusion:
- In conclusion, the loss on issue of debentures is generally written off over the period of redemption to distribute the impact of the loss on the company's financial statements and ensure accurate financial reporting.

P Ltd. issued 5,000, 12% debentures of Rs. 100 each at a premium of 10%, which are redeemable after 10 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year =?
  • a)
    Rs. 80,000
  • b)
    Rs. 40,000
  • c)
    Rs. 10,000
  • d)
    Rs. 8,000
Correct answer is option 'C'. Can you explain this answer?

Arnab Nambiar answered
Explanation:

Given data:
- Number of debentures issued = 5,000
- Face value of each debenture = Rs. 100
- Premium on each debenture = 10%
- Redemption premium = 20%
- Redemption period = 10 years

Step 1: Calculate the total amount raised by issuing debentures
Total amount raised = Number of debentures issued * (Face value + Premium)
= 5,000 * (100 + 10% of 100)
= 5,000 * (100 + 10)
= 5,000 * 110
= Rs. 5,50,000

Step 2: Calculate the total redemption amount
Total redemption amount = Number of debentures issued * (Face value + Redemption premium)
= 5,000 * (100 + 20% of 100)
= 5,000 * (100 + 20)
= 5,000 * 120
= Rs. 6,00,000

Step 3: Calculate the loss on redemption
Loss on redemption = Total redemption amount - Total amount raised
= Rs. 6,00,000 - Rs. 5,50,000
= Rs. 50,000

Step 4: Calculate the loss to be written off every year
Loss to be written off every year = Loss on redemption / Redemption period
= Rs. 50,000 / 10
= Rs. 5,000

But the options provided are in thousands, so we need to convert the amount to thousands.
Loss to be written off every year = Rs. 5,000 / 1,000
= Rs. 5

Therefore, the correct answer is option 'C' - Rs. 10,000.

Note: The explanation provided above is a detailed step-by-step solution to the problem. The answer may differ if there are any additional factors or information not mentioned in the question.

 Which of the following is not a characteristic of Bearer Debentures?
  • a)
    They are treated as negotiable instruments 
  • b)
    Their transfer requires a deed of transfer 
  • c)
    They are transferable by mere delivery 
  • d)
    The interest on it is paid to the holder irrespective of identity
Correct answer is option 'B'. Can you explain this answer?

Anuj Roy answered
Bearer Debentures:

Characteristics:
- They are treated as negotiable instruments: Bearer debentures are considered as negotiable instruments, which means they can be transferred to another party by mere delivery.
- Their transfer requires a deed of transfer: This statement is not true. Bearer debentures are transferable by mere delivery, meaning the transfer does not require a deed of transfer. The ownership of the debenture is transferred simply by physically handing over the debenture to another party.
- They are transferable by mere delivery: Bearer debentures can be transferred by mere delivery, as mentioned earlier. The transfer is complete once the debenture is physically handed over to the new holder.
- The interest on it is paid to the holder irrespective of identity: One of the key characteristics of bearer debentures is that the interest on them is paid to the holder irrespective of their identity. This means that as long as the holder possesses the debenture, they are entitled to receive the interest payments.
Therefore, the statement "Their transfer requires a deed of transfer" is not a characteristic of bearer debentures, making option 'B' the correct answer.

Which of the following statement is false with respect to debentures?
  • a)
    A company can issue irredeemable debentures
  • b)
    A company can issue debentures for consideration other than cash 
  • c)
    A company can issue debentures with voting rights 
  • d)
    A company can busy its own debentures 
Correct answer is option 'C'. Can you explain this answer?

Arnav Kulkarni answered
Debentures:

Irredeemable Debentures:
- A company can issue irredeemable debentures, which are not required to be repaid by the company.
- Irredeemable debentures are also known as perpetual debentures and do not have a maturity date.

Debentures for Consideration Other than Cash:
- A company can issue debentures for consideration other than cash, such as assets or services.
- This allows companies to raise funds by issuing debentures in exchange for non-monetary assets.

Debentures with Voting Rights:
- This statement is false. A company cannot issue debentures with voting rights.
- Debenture holders are considered creditors of the company and do not have voting rights in the decision-making process of the company.

Buyback of Debentures:
- A company can buy back its own debentures through a process known as debenture redemption.
- This allows the company to reduce its debt and interest payments by repurchasing the debentures issued earlier.

W Ltd. issued 20,000, 8% debentures of Rs. 10 each at par, which are redeemable after 5 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year will be
  • a)
    Rs. 40,000
  • b)
    Rs. 10,000
  • c)
    Rs. 20,000
  • d)
    Rs. 8,000
Correct answer is option 'D'. Can you explain this answer?

Srestha Shah answered
Calculation of Premium on Redemption:
Face Value of Debenture = Rs. 10
Number of Debentures = 20,000
Total Face Value = 10 x 20,000 = Rs. 2,00,000
Premium on Redemption = 20% of Total Face Value = 20% of Rs. 2,00,000 = Rs. 40,000

Calculation of Loss on Redemption:
Redemption Amount = Face Value + Premium = Rs. 10 + Rs. 2 = Rs. 12
Number of Debentures = 20,000
Total Redemption Amount = Rs. 12 x 20,000 = Rs. 2,40,000
Total Amount Received from Issue of Debentures = Face Value x Number of Debentures = Rs. 10 x 20,000 = Rs. 2,00,000
Loss on Redemption = Total Redemption Amount - Total Amount Received from Issue of Debentures = Rs. 2,40,000 - Rs. 2,00,000 = Rs. 40,000

Annual Loss on Redemption:
Loss on Redemption = Rs. 40,000
Number of Years to Redemption = 5
Annual Loss on Redemption = Loss on Redemption / Number of Years to Redemption = Rs. 40,000 / 5 = Rs. 8,000

Therefore, the amount of loss on redemption of debentures to be written off every year will be Rs. 8,000.

 When Debentures are issued as Collateral Security, which entry has to be passed :
  • a)
    Debenture Suspense A/c  Dr. To  Debentures A/c
  • b)
    No entry has to be made
  • c)
    Either (a) or (b)
  • d)
    None
Correct answer is option 'C'. Can you explain this answer?

Tanvi Pillai answered
Explanation:

When debentures are issued as collateral security, it means that the debentures are pledged as security for a loan or other obligation. In this case, the debentures are not being issued for the purpose of raising capital, but rather to provide security to the lender.

There are different ways in which debentures can be issued as collateral security. One way is to issue the debentures to the lender and then immediately take them back as collateral. Another way is to issue the debentures to a third party who holds them as collateral on behalf of the lender.

In either case, an entry needs to be passed in the books of accounts. The question asks whether the entry should be:

a) Debenture Suspense A/c Dr. To Debentures A/c

b) No entry has to be made

c) Either (a) or (b)

d) None

The correct answer is (c) Either (a) or (b). This means that the entry can be made either by debiting the Debenture Suspense account and crediting the Debentures account or by not making any entry at all.

If the entry is made, it reflects the fact that the debentures have been issued as collateral security. This entry is a temporary one and will be reversed when the debentures are redeemed or released from the collateral.

If no entry is made, it means that the debentures are still recorded as an asset in the books of accounts. However, it is important to note that the debentures are not available for use as they have been pledged as collateral.

Conclusion:

In conclusion, when debentures are issued as collateral security, an entry may or may not be made in the books of accounts. If an entry is made, it is a temporary one and will be reversed when the debentures are redeemed or released from the collateral. If no entry is made, it means that the debentures are still recorded as an asset in the books of accounts.

When debentures are issued as collateral security for a loan then such debentures holders are entitled for: 
  • a)
    Interest on the amount of loan 
  • b)
     Interest on the amount of debentures 
  • c)
     No interest amount 
  • d)
    Either (a) or (b) 
Correct answer is option 'C'. Can you explain this answer?

Sahil Malik answered
Debentures as Collateral Security

Debentures are long-term debt instruments that are issued by companies to raise funds. When these debentures are issued as collateral security for a loan, the lender holds them as security against the loan. In such a case, the debenture holders are not entitled to any interest on the debentures.

Explanation

The debentures are not issued for investment purposes, but as collateral security for a loan. Hence, the lender holds the debentures as security against the loan and is entitled to the interest on the loan. The debenture holders do not have any right to the interest on the loan or the debentures.

Conclusion

In conclusion, debentures issued as collateral security for a loan do not entitle the debenture holders to any interest. The lender holds the debentures as security against the loan and is entitled to the interest on the loan. The debenture holders do not have any right to the interest on the loan or the debentures.

A debenture holder gets :
  • a)
    Dividend
  • b)
    Right prescribed in articles
  • c)
    Ownership of the company
  • d)
    Interest at fixed rates
Correct answer is option 'D'. Can you explain this answer?

Isha Chopra answered
Debenture Holder and their Rights

Debentures are long-term debt instruments issued by companies to raise funds from the public. Debenture holders are the individuals or institutions that invest in these instruments. They are essentially creditors of the company and have certain rights associated with their investment. One of the key rights that a debenture holder gets is interest at fixed rates.

Interest at Fixed Rates

Debenture holders are entitled to receive regular interest payments from the company at a fixed rate. This interest is calculated on the face value of the debentures and is typically paid semi-annually or annually. The fixed interest rate provides a predictable income stream for the debenture holder, making it an attractive investment option for those seeking stable returns.

The interest rate on debentures is determined at the time of issuance and is specified in the debenture agreement. It is generally higher than the prevailing interest rates on bank deposits, reflecting the higher risk associated with investing in corporate debt. The company is obligated to make these interest payments to the debenture holders on time, regardless of its profitability or financial performance.

By receiving interest at fixed rates, debenture holders can earn a regular income from their investment without having to rely on the company's profits or dividends. This makes debentures a preferred choice for risk-averse investors who prioritize stable returns over equity ownership.

Other Rights of Debenture Holders

While interest at fixed rates is a significant right for debenture holders, it is not the only one. Debenture holders may also have the following rights:

1. Security: Debentures can be secured or unsecured. Secured debentures are backed by specific assets of the company, providing an additional layer of security to the debenture holders. In the event of default by the company, secured debenture holders have the right to recover their investment from the proceeds of the sale of these assets.

2. Priority in Repayment: In case of liquidation or bankruptcy of the company, debenture holders have a higher claim on the company's assets compared to equity shareholders. They are typically repaid before equity shareholders and other unsecured creditors.

3. Redemption: Debentures are issued with a maturity period, after which the company is obligated to repay the principal amount to the debenture holders. This gives debenture holders the right to receive their investment back at the end of the specified period.

4. Conversion: Some debentures may be convertible into equity shares of the company at a predetermined conversion ratio. This gives debenture holders the option to convert their debt holdings into equity ownership, potentially benefiting from future capital appreciation.

5. Right to Information: Debenture holders have the right to access certain financial information and reports of the company. This allows them to assess the company's financial health and make informed investment decisions.

Conclusion

While debenture holders do not have ownership rights or voting privileges in the company, they do have certain significant rights, including interest at fixed rates. These rights provide debenture holders with a steady income stream and a level of security in their investment. It is important for debenture holders to carefully evaluate the terms and conditions associated with their investment and assess

Which of the following statements is true?
  • a)
    A debenture holder is an owner of the company 
  • b)
    A debenture holder can get his money back only on the liquidation of the company 
  • c)
    A debenture issued at a discount can be redeemed at a premium 
  • d)
    A debenture holder receives interest only in the event of profits 
Correct answer is option 'C'. Can you explain this answer?

Devanshi Rane answered
Understanding Debentures
Debentures are a type of debt instrument that companies use to raise capital. They are essentially loans made by investors to the company, and in return, the company promises to pay interest and return the principal amount at maturity.
Explanation of the Correct Answer - Option C
The correct answer is option 'C': "A debenture issued at a discount can be redeemed at a premium." Let's break down why this statement is true.
Key Points:
- Debentures at Discount: Debentures can be issued at a price lower than their face value (discount). This means that investors can purchase them for less than they will receive at redemption.
- Redemption at Premium: The company may choose to redeem (pay back) these debentures at a price higher than their face value (premium). This is often used as an incentive to attract investors, compensating them for the risk they take.
Why Other Options are Incorrect
- Option A: A debenture holder is not an owner of the company; they are creditors. Equity shareholders are the owners.
- Option B: Debenture holders generally receive their money back at maturity, not only upon liquidation, unless specified otherwise.
- Option D: Debenture holders are entitled to fixed interest payments regardless of the company's profitability, as they have a priority claim over shareholders.
Conclusion
In summary, option 'C' correctly describes the characteristics of debentures, where they can be issued at a discount and redeemed at a premium, providing flexibility and appeal for both the company and the investors.

Chapter doubts & questions for Issue and Redemption of Debentures - 4 Months Preparation for Commerce Class 12 Boards 2025 is part of Commerce exam preparation. The chapters have been prepared according to the Commerce exam syllabus. The Chapter doubts & questions, notes, tests & MCQs are made for Commerce 2025 Exam. Find important definitions, questions, notes, meanings, examples, exercises, MCQs and online tests here.

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