CBSE Class 12 Accountancy Issue And Redemption Of Debenture Assignment

OBJECTIVE QUESTIONS 1 Mark Each Stand Alone MCQs

Question. Debenture holders are :
(A) Owners of the company
(B) Lenders of the company
(C) Vendors of the company
(D) Customers of the company
Answer. Option (B) is correct.

Question. Debentures are shown in the Balance Sheet of a company under the head of :
(A) Non-current Liabilities
(B) Current Liabilities
(C) Share Capital
(D) None of the above 
Answer. Option (A) is correct.

Question. Debentures are considered as ............... equity.
(A) External
(B) Internal
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer. Option (A) is correct.


Question. Interest on Debentures is a charge against _______.
(A) Profit
(B) Share Capital
(C) Dividend
(D) General Reserve 
Answer. Option (A) is correct.

Question. Pick the odd one out:
(A) Preference Debentures
(B) Ordinary Debentures
(C) Convertible Debentures
(D) Redeemable Debentures
Answer. Option (A) is correct.

Question. Debenture interest is paid as :
(A) Based on the net profit of company
(B) At a predetermined rate
(C) At variable rate
(D) None of the above 
Answer. Option (B) is correct.

Question. At the time of issue of Debentures, Debentures Account is :
(A) Credited by the amount received
(B) Credited by issues price of debentures
(C) Credited by the nominal (face) value of the debentures
(D) None of the above 
Answer. Option (C) is correct.

Question. Premium on Redemption of Debentures Account is a ________ Account.
(A) Real
(B) Nominal
(C) Personal
(D) None of these 
Answer. Option (C) is correct.

Question. The loss on issue of Debentures is written–off from :
(A) Capital Reserve
(B) Secret Reserve
(C) Reserve Capital
(D) Share Premium Reserve Account 
Answer. Option (A) is correct.

Question. Pick the odd one out :
(A) Issue of debentures to vendor
(B) Issue of debentures to public
(C) Issue of debentures as collateral security
(D) Issue of debentures to promoters 
Answer. Option (B) is correct.

Question. When the debenture of face value `100 is issued at `100, issue of debenture is called at:
(A) Par
(B) Premium
(C) Discount
(D) None of the above
Answer. Option (A) is correct.

Assertion and Reason Based MCQs

Directions: In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R).
Mark the correct choice as:
(A) Both (A) and (R) are true, and (R) is the correct explanation of (A).
(B) Both (A) and (R) are true, but (R) is not the correct explanation of (A).
(C) (A) is true, but (R) is false.
(D) (A) is false, but (R) is true.

Question. Assertion (A): Debenture holders are the creditors of the company carrying a fixed rate of interest.
Reason (R): Debentures are short-term loan taken from the public. 
Answer. Option (C) is correct.

Question. 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. 
Answer. Option (A) is correct.

Question. Assertion (A): Issue of debenture does not result in dilution of interest of equity shareholders.
Reason (R): Debenture holders have voting rights. 
Answer. Option (C) is correct.

Question. Assertion (A): Debentures save income tax.
Reason (R): Interest on debenture is a tax deductible expenditure. 
Answer. Option (A) is correct.

Question. 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 in the asset side as a fictitious assets. Hence, has to be written off during the year of its issue. 
Answer. Option (A) is correct.

Question. RAssertion (A): The Bank account is debited when the money is received for debentures.
eason (R): Bank being a real account needs to be debited when something comes in. 
Answer. Option (A) is correct.

Question. Assertion (A): Sarita Pvt. Ltd. issued 15% 10,000 debentures at par @ `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. 
Answer. Option (A) is correct.

Case-based MCQs

I. Analyse the case given below and answer the questions that follow :

Nikhil Technologies Ltd. issued 5,000; 9% Debentures of Rs100 each at a premium of Rs20 payable as follows:
(i) Rs 40 including premium of Rs 10 on application
(ii) Rs 40 including premium of Rs 10 on allotment
(iii) Balance as first and final call.
Applications were received for 5,000 debentures and allotment was made to all the applicants. All the calls were made, and amounts received.

Question. The amount of money received during application is:
(A) Rs1,00,000
(B) Rs4,00,000
(C) Rs2,00,000
(D) Rs50,000
Answer. Option (C) is correct.

Question. What amount of the money received on application was transferred to the securities premium reserve account:
(A) Rs 5,00,000
(B) Rs 50,000
(C) Rs 1,00,00
(D) Rs 2,00,000
Answer. Option (B) is correct.

Question. ________ is the balance amount per debenture to be received at the first and final call.
(A) Rs 20
(B) Rs 40
(C) Rs 30
(D) Rs 10
Answer. Option (B) is correct.

Question. What is the total interest payable on the debentures issued for one year?
(A) Rs 1,20,000
(B) Rs 45,000
(C) Rs 18,000
(D) Rs 54,000
Answer. Option (B) is correct.

II. Read the following information and answer the given questions:

Charan Ltd. took over Assets of Rs6,00,000 and Liabilities of Rs40,000 of Paras Ltd. at an agreed value of Rs6,30,000. Charan Ltd. issued 10% Debentures of Rs100 each at a discount of 10% to Paras Ltd. in full satisfaction of the purchase price. Charan Ltd. writes off any capital losses incurred during a year, at the end of that financial year.

Question. In which account will the difference between the assets and liabilities taken over and the payment made be transferred to?
(A) General Reserve
(B) Debenture Redemption Reserve
(C) Capital Reserve
(D) Goodwill
Answer. Option (D) is correct.

Question. What is the amount of discount given to Paras Ltd. on the issue of debentures?
(A) Rs 60,000
(B) Rs 70,000
(C) Rs 75,000
(D) Rs 65,000
Answer. Option (B) is correct.


Question. As Charan Ltd. writes off the capital losses,where will the discount on issue of debentures be transferred to?
(A) Statement of Profit and Loss
(B) General Reserve
(C) Capital Reserve
(D) Securities Premium
Answer. Option (A) is correct.

Question. Which amount of interest will be paid by Charan Ltd. to Paras Ltd. for one year?
(A) Rs60,000
(B) Rs63,000
(C) Rs64,000
(D) Rs70,000
Answer. Option (D) is correct.

Very Short Answer Type Questions

Question. Name the account, in which the balance of Rs 20,000 will be credited, if vendors are issued debentures of Rs 80,000 in consideration of net assets of Rs 1,00,000. 
Answer. Capital Reserve Account

Question. Name the account that is debited when debentures are issued as collateral security. 
Answer. Debenture Suspense Account

Question. Name the account in which the premium payable will be debited, in case debentures of Rs 2,00,000 are issued at par but redeemable at a premium of 5%. 
Answer. Loss on Issue of Debentures Account

Very Short Answer Type Questions

Question. Name the account, in which the balance of ` 20,000 will be credited, if vendors are issued debentures of ` 80,000 in consideration of net assets of ` 1,00,000. 
Answer. Capital Reserve Account

Question. Name the account that is debited when debentures are issued as collateral security. 
Answer. Debenture Suspense Account

Question. Name the account in which the premium payable will be debited, in case debentures of ` 2,00,000 are issued at par but redeemable at a premium of 5%. 
Answer. Loss on Issue of Debentures Account 

More Questions

1. Reliance Co. purchased assets of Rs.5,00,000 and took over liabilities of Rs.90,000 at an agreed value of Rs.3,80,000. Reliance Co. issued debentures of Rs.100 each at 5% discount in full satisfaction of the purchase price. Give journal entries in the books of Reliance Co.

2. Y Ltd. purchased plant and machinery for Rs.2,00,000 from Z Ltd. 20% of the amount was paid by Y Ltd. by accepting a bill of exchange in favour of Z Ltd. and the balance was paid by issuing 6%debentures of Rs.1,000 each at a premium of 25%. Journalise the above transactions.

3. X ltd. purchased assets of Y Ltd. as under:

Plant and Machinery of Rs.20,00,000 at Rs.18,00,000; Land and Buildings of Rs.30,00,000 at Rs.42,00,000 for purchase consideration of Rs.55,00,000 and paid Rs.10,00,000 in cash and remaining by issue of 8% Debentures of Rs.100 each at a premium of 20%. Record necessary entries in the books of X Ltd.

4. Meghnath Limited took a loan of Rs.1,20,000 from a bank and deposited 1,400, 8%debentures of Rs.100 each as collateral security along with primary security worth Rs.2 lakhs. Company again took a loan of Rs.80,000 after two months from a bank and deposited 1,000, 8% debentures of Rs.100 each as collateral security. Record necessary journal entries and prepare the balance sheet of the company.

5. A Ltd. Company issued debentures of Rs.1,00,000 which were issued as follows:

(1) For cash at 90% Rs.50,000(Nominal)

(2) For creditor for Rs.20,000

Capital Expenditure in satisfaction of his claim Rs.25,000(Nominal)

(3) To Bankers for a loan of Rs.15,000 as collateral security Rs.25,000(Nominal)

The issue (1) and (2) are redeemable at the end of 10 years at par. How should the debentures be dealt with in preparing the Balance Sheet of the Company?

6. Kussum Steel Industries Ltd. issued 21,00,000, 7.5% Debentures of Rs.100 each on March 31,2002 redeeemable at a premium of 8% on 30th June,2009. The Board of Directors decided to transfer the required amount to Debenture Redemption Reserve in three equal annual instalments starting with March 31,2007. Record necessary journal entries regarding issue and redemption of debentures. Ignore entries relating to interest paid on debentures.

7. Akanksha enterprises Ltd. issued 10,00,00,000, 6% Debentures of Rs.10 each on September 1, 2001 redeemable at a premium of 7% as under:

On March 31,2005 5,00,00,000 Debentures

On March 31,2007 2,50,00,000 Debentures

On March 31,2009 2,50,00,000 Debentures

The Board of Directors has also decided to transfer the required amount to Debenture Redemption Reserve in four equal annual instalments starting with March 31,2002. record necessary journal entries. Ignore entries for interest.

8. D Ltd. redeemed Rs.30,00,000, 8% debentures issued at a premium of 5% as follows:

Rs.12,00,000, 8% debentures were converted into equity shares of Rs.100 each at a premium of Rs.25 per share and the balance by converting them into 8% preference shares of Rs.100 each issued at a discount of Rs.10 per share. Pass the necessary journal entries in the books of the company. Show your workings clearly.

9. Journalise the following transactions:

(1) X Ltd. redeemed 1,000, 15% debentures of rs.100 each which were issued at a discount of6% by converting them into equity shares of Rs.10 each issued at par.
(2) Y Ltd. redeemed 400, 12% debentures of Rs.100 each which were issued at a discount of 5% by converting them into11% preference shares of Rs.100 each at a premium of Rs.25 per share.
(3) Z Ltd. converts 500, 12% debentures of Rs.200 each issued at a discount of 10% into2,000 equity shares of Rs.50 each, Rs.45 paid-up. All of the above debentures were converted at the option of the debentureholders before the date of redemption.

10. On 1st April,2011, a company issued 1,000, 12% debentures of Rs.500 each at Rs. 450 each. Debentureholders were given an option to get their debentures converted into Equity Shares of Rs.100 each at a premium of Rs.50 per share. On 31st March 2012, one year's interest had accrued on these debentures which was not paid. A holder of 100 debentures informed that he wanted to exercise the option for conversion of debentures into Equity Shares. The company, threefore, accepted his request and redeemed these 100 debentures by issuing him Equity shares. The interest, however, on these 100 debentures was paid to the debentureholder. Pass the necessary journal entries to record the above transactions in the
books of the company.

11. Company gave notice of its intention to redeem its outstanding Rs.4,00,000, 12% Debenture Stock at Rs.102 per cent, and offered the holders the following options:
To apply the redemption money for subscribing:

(a) 8% Cumulative Preference Shares of Rs.20 each at Rs.22.50 per share.

(b) 10% Debenture Stock at 96%.

(c) To have their holding redeemed for cash.

Holders of Rs.1,71,000 stock accepted the proposal(a).

Holders of Rs.1,44,000 stock accepted the proposal(b).

And the remaining stock holders accepted the proposal(c).

Pass the journal entries to record the above transactions.

12. Pass necessary journal entries for the redemption of debentures in the following cases in the books of Jain Ltd.:

(i) redeemed 5,400, 12% debentures of rs.100 ech by draw of lots.

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