CBSE Class 12 Accountancy Issue Of Debentures Important Questions Set 01

Very Short Answer Questions (1 Mark)

Question 1. State whether the following statement is True or False: Shares are not borrowings of a company whereas Debentures are borrowings of the company.
Answer:
True

Teacher's Note:
1. Shares form owners' funds; debentures are long-term borrowings.

Question 2. State whether the following statement is True or False: When debentures are issued at par, they cannot be redeemed at premium.
Answer:
False

Teacher's Note:
1. Debentures issued at par may be redeemed at a premium; the premium payable is a loss on issue.

Question 3. State whether the following statement is True or False: Debentures are normally shown as short-term borrowings under Current Liabilities.
Answer:
False

Teacher's Note:
1. Debentures are shown as Long-term Borrowings under Non-current Liabilities.

Question 4. State whether the following statement is True or False: A company has issued 5,000, 10% Debentures at ₹1,000 each as collateral security for a loan of ₹75,00,000. It may or may not pass an entry for the issue of such debentures.
Answer:
True

Teacher's Note:
1. When debentures are issued as collateral security, recording an entry (Debenture Suspense A/c) is optional; a note is enough.

Question 5. State whether the following statement is True or False: Loss on issue of Debentures may be written off over the tenure of the debentures from Capital Reserve or Statement of Profit and Loss.
Answer:
False

Teacher's Note:
1. Loss on issue is written off in the year of issue, first from Securities Premium Reserve and then from Statement of Profit and Loss.

Question 6. Fill in the blank: Interest accrued on debentures is shown under the head ______ and sub-head ______.
Answer:
Current Liabilities; Other Current Liabilities

Teacher's Note:
1. Interest accrued but not due is a current liability, shown under Other Current Liabilities.

Question 7. Fill in the blank: Debentures Account is always credited with the ______ value of the debentures.
Answer:
nominal (face)

Teacher's Note:
1. Premium or discount is recorded in separate accounts.

Question 8. Fill in the blank: Interest on debentures is paid whether the company ______ or ______.
Answer:
earns profit; incurs loss

Teacher's Note:
1. That is why interest on debentures is a charge, not an appropriation.

Question 9. Fill in the blank: A company has Loss on Issue of Debentures Account of ₹40,000. It has a balance in Securities Premium Reserve of ₹25,000. It will debit ______ by ₹25,000 and ______ by ₹15,000 in the year of issue.
Answer:
Securities Premium Reserve; Statement of Profit and Loss

Teacher's Note:
1. Use the whole Securities Premium Reserve first; only the balance is charged to Statement of Profit and Loss.

Question 10. Fill in the blank: Interest is not paid on Debentures issued as ______.
Answer:
collateral security

Teacher's Note:
1. Interest is paid only on the loan, not on debentures held as collateral security.

Question 11. Give the meaning of a Debenture. [CBSE Delhi 2014]
Answer:
A debenture is a document acknowledging indebtedness for the money lent. It contains a contract for the repayment of the principal amount and for the payment of interest at a fixed rate.

Teacher's Note:
1. Key words to include: acknowledgement of debt, fixed rate of interest, repayment of principal.

Question 12. What is meant by 'Issue of Debentures as collateral security'? [CBSE Delhi; (AI) 2011, 2018]
Answer:
Issue of Debentures as collateral security means issuing debentures as an additional security that may be offered against the loan in addition to principal security.

Teacher's Note:
1. The lender can use such debentures only if the principal security fails to cover the loan.

Teacher's Note:
1. The entry is at the face value of the debentures (₹10,00,000), not the amount of the loan.

Question 14. What is meant by Bonds?
Answer:
A bond is like a debenture. It is an acknowledgment of debt where the rate of interest is not generally predetermined.

Teacher's Note:
1. In practice the terms bond and debenture are used almost interchangeably in India.

Question 15. What are Zero Coupon Bonds?
Answer:
Debentures issued without a predetermined rate of interest are called 'Zero Coupon Bonds' or 'Deep Discount Bond'.

Teacher's Note:
1. They are issued at a big discount and redeemed at face value; the difference is the investor's return.

Question 16. Difference between shareholders and debentureholders on the basis of status.
Answer:
Debentureholders are the creditors of a company and shareholders are the owners of a company.

Teacher's Note:
1. Write the point for both sides: owners vs creditors.

Question 17. What is Debenture Trust Deed?
Answer:
A company issuing debentures by way of public issue is required to appoint trustees and execute a trust deed. Debenture trust deed is a document created by the company to protect the interest of debentureholders before they are offered for public subscription.

Teacher's Note:
1. The trust deed states the rights of debentureholders, the security given and the terms of redemption.

Question 18. State the circumstances when debentures are issued for consideration other than cash.
Answer:
(i) Issue of debentures for purchase of assets to the vendor, (ii) Issue of debentures for purchase of business of a company, (iii) Issue of debentures as collateral security.

Teacher's Note:
1. In such cases no cash is received, so the vendor's account (not Bank A/c) is debited.

Question 19. What is the nature of interest on debentures?
Answer:
It is a charge to the profit of the company.

Teacher's Note:
1. It is shown as finance cost in the Statement of Profit and Loss, payable even when there is a loss.

Question 20. Define irredeemable debentures.
Answer:
These are those debentures whose repayment are not made during the life time of the company and they will be repaid only when company is going to be wound up.

Teacher's Note:
1. They are also called perpetual debentures.

Question 21. What is the provision for settlement of debt of debentureholders?
Answer:
Debentureholders are fully secured so they are paid before payment of shareholders.

Teacher's Note:
1. On winding up, creditors including debentureholders are paid before any amount is returned to shareholders.

Question 22. Nishant Ltd. wants to issue shares and debentures at 10% discount. Is it possible? [HOTS]
Answer:
Nishant Ltd. can easily issue debentures at 10% discount as the Companies Act, 2013 does not restrict issue of debentures at discount. However, it cannot issue shares at discount as Section 53 of the Companies Act, 2013 lays down some restrictions on the issue of shares at discount.

Teacher's Note:
1. Section 53 prohibits issue of shares at a discount except sweat equity shares; there is no such bar for debentures.

Question 23. 15,000, 8% debentures were issued by the Times Sports Ltd. During the year, 2018-19, the company suffered a huge loss. Will debentureholders be entitled to interest of that year? [HOTS]
Answer:
Debentureholders will be entitled to interest of the year 2018-19 as Interest on debentures is a charge against profits of the company and is payable irrespective of the fact whether the company has earned profit or not.

Teacher's Note:
1. Contrast with dividend, which is paid only out of profits.

Question 24. George adopts the policy of risk aversion while purchasing securities from the market. Which option George will select from the following:
(i) 1,500, 10% Debentures of ₹100 each,
(ii) 2,000 equity shares expected to yield dividend of ₹50,000 per year.
Answer:
George will select the option (i) as by purchasing debentures he will be entitled to receive interest irrespective of the fact whether the firm has earned profit or not.

Teacher's Note:
1. A risk-averse investor prefers a fixed, assured return over a higher but uncertain dividend.

Teacher's Note:
1. Debentures cannot be issued in fractions, so the small balance is paid in cash.

Question 26. Under which sub-head and head, the amount of 'Premium Payable on Redemption of Debentures' is shown in the Balance Sheet? [HOTS]
Answer:
Premium Payable on Redemption of Debentures is shown as 'Other Long-term Liabilities' under Non-current Liabilities in Equity and Liabilities part of Balance Sheet.

Teacher's Note:
1. If the debentures are to be redeemed within 12 months, the premium is shown under Other Current Liabilities instead.

Question 27. Dew Ltd. issued 1,000; 10% debentures of ₹100 each on 1st April, 2015. Interest is payable half yearly in June and December. The company closes its books on 31st March every year. Find out the amount of (i) Interest accrued but not due (ii) Interest accrued and due if interest has not been paid on 31st March, 2016. Also state the head under which they will be shown in the Balance Sheet. [HOTS]
Answer:
(i) Interest accrued but not due = 1,00,000 × \( \frac{10}{100} \times \frac{3}{12} \) = ₹2,500 (from Jan. 2016 to March 2016)
(ii) Interest accrued and due = 1,00,000 × \( \frac{10}{100} \times \frac{6}{12} \) = ₹5,000 (June 2015 to Dec. 2015)
Both will be shown under 'Other Current Liabilities' in the Balance Sheet.

Teacher's Note:
1. Interest accrued but not due is for the period after the last due date (1st Jan. to 31st March); interest accrued and due is the instalment that fell due on 31st December but is unpaid.

Question 28. Why would an investor prefer to invest in the Debentures of a company rather than in its shares? [CBSE Delhi 2009]
Answer:
(i) To ensure the safety of his investment (ii) To have assured return.

Teacher's Note:
1. Debentures are usually secured and carry a fixed rate of interest payable even in a loss year.

Question 29. Why would an investor prefer to invest partly in shares and partly in the debentures of a company? [CBSE Delhi 2009]
Answer:
To reduce risk and to have steady income with higher return and ownership rights.

Teacher's Note:
1. Debentures give safety and steady interest; shares give a chance of higher dividend and voting rights.

Short Answer Questions (2 Marks)

Teacher's Note:
1. Amount received = 2,000 × ₹105 = ₹2,10,000; the loss on issue equals only the premium on redemption (₹20,000).

Teacher's Note:
1. Net assets ₹16,00,000 exceed the consideration ₹15,00,000, so the difference is Capital Reserve.

Teacher's Note:
1. Goodwill = consideration ₹20,00,000 − net assets ₹16,00,000 = ₹4,00,000.

Short Answer Questions (3 Marks)

Teacher's Note:
1. The refund on rejected applications is at the full application money including premium (₹135 each).

Teacher's Note:
1. In pro-rata allotment with full money on application, the excess (100 × ₹95 = ₹9,500) is refunded.

Teacher's Note:
1. The machinery is recorded at the total of the payments: shares and debentures at their issue price, plus the bill.

Teacher's Note:
1. Divide the amount due by the issue price (₹110), not the face value.

Teacher's Note:
1. Purchase consideration more than net assets is goodwill; less than net assets is capital reserve.

Teacher's Note:
1. Loss on issue = discount on issue + premium payable on redemption (₹21,900 + ₹18,250 = ₹40,150).

Teacher's Note:
1. Premium on issue (a gain) and premium on redemption (a loss) are recorded separately; they are not set off against each other.

Teacher's Note:
1. Loss on issue here = discount ₹1,00,000 + premium on redemption ₹50,000 = ₹1,50,000; only ₹1,00,000 of it is posted to the Debentures Account.

Teacher's Note:
1. With no Securities Premium Reserve, the whole discount is written off to Statement of Profit and Loss in the year of issue and appears as a negative surplus.

Teacher's Note:
1. Securities Premium Reserve goes under Shareholders' Funds (Reserves and Surplus), not with the debentures.

Teacher's Note:
1. Under both methods the Balance Sheet total is the same: collateral debentures never add to the borrowings.

Teacher's Note:
1. Use the full ₹15,000 of Securities Premium Reserve first; only the remaining ₹10,000 is charged to Statement of Profit and Loss.

Teacher's Note:
1. Number of debentures = amount to be paid by debentures ÷ issue price (₹80), since they are issued at a discount.

Teacher's Note:
1. Debentures issued as collateral are cancelled out by Debenture Suspense A/c, so only the bank loan of ₹20,00,000 adds to Long-term Borrowings.

Question 47. Nav Lakshmi Ltd. invited applications for issuing 3,000, 12% Debentures of ₹100 each at a premium of ₹50 per Debenture. The full amount was payable on application.
Applications were received for 4,000 debentures. Applications for 1,000 debentures were rejected and application money was refunded. Debentures were allotted to the remaining applicants.
Pass necessary Journal Entries for the above transactions in the books of Nav Lakshmi Ltd. [CBSE (AI) 2012]
Answer:
Ans. Securities Premium Reserve ₹1,50,000 (3,000 × ₹50).

Teacher's Note:
1. Premium is credited only on the 3,000 debentures allotted; money on 1,000 rejected applications (1,000 × ₹150 = ₹1,50,000) is refunded.

Question 48. X Ltd. invited applications for issuing 1,000, 9% debentures of ₹100 each at a discount of 6%. Applications for 1,200 debentures were received. Pro-rata allotment was made to all the applicants.
Pass necessary journal entries for the issue of debentures assuming that the whole amount was payable with application. [CBSE Delhi 2017]
Answer:
Ans. Discount on issue of Debentures ₹6,000 (1,000 × ₹6).

Teacher's Note:
1. Discount is on the debentures allotted (1,000), not on the applications received; the excess ₹18,800 (200 × ₹94) is refunded.

Question 49. 'ZK Ltd.' issued ₹4,00,000, 9% Debentures of ₹100 each at a discount of 5% redeemable at a premium of 10%.
Pass necessary journal entries for the above transactions in the books of 'ZK Ltd.' [CBSE 2019 (67/2/1)]
Answer:
Ans. Discount on issue of Debentures ₹20,000; Premium on redemption of Debentures ₹40,000

Teacher's Note:
1. Total loss on issue = ₹20,000 + ₹40,000 = ₹60,000; the amount received is ₹3,80,000.

Question 50. 'Good Blankets Ltd.' are the manufacturers of woollen blankets. Blankets of the company are exported to many countries. The company decided to distribute blankets free of cost to five villages of Kashmir Valley destroyed by the recent floods. It also decided to employ 100 young persons from these villages in their newly established factory at Solan in Himachal Pradesh. To meet the requirements of funds for starting its new factory, the company issued 50,000 equity shares of ₹10 each and 2,000 8% debentures of ₹100 each to the vendors of machinery purchased for ₹7,00,000.
Pass necessary journal entries for the above transactions in the books of the company. [CBSE (AI) 2015]
Answer:
Ans. Dr. Vendor's A/c ₹7,00,000; Cr. Equity Share Capital ₹5,00,000 and 8% Debentures ₹2,00,000

Teacher's Note:
1. First record the purchase (Machinery A/c Dr. To Vendor's A/c ₹7,00,000), then the payment by shares and debentures at par.

Question 51. Shruti Ltd. bought the business of Shinkey Ltd. on 1st April, 2017 consisting of sundry assets of ₹5,60,000 and creditors ₹1,00,000, for a purchase consideration of ₹5,00,000. ₹1,00,000 was paid in cash on 3rd April, 2017 and for balance 6% debentures of ₹100 each were issued at a premium of 25% on 5th April, 2017.
Pass necessary journal entries in the books of Shruti Ltd. for the above mentioned transactions. [CBSE (AI) 2008]
Answer:
Ans. No. of debentures issued 3,200 (₹4,00,000 ÷ ₹125).

Teacher's Note:
1. Net assets are ₹4,60,000 against a consideration of ₹5,00,000, so Goodwill of ₹40,000 is debited.

Question 52. X Ltd. obtained a loan of ₹4,00,000 from IDBI Bank. The company issued 5,000, 9% debentures of ₹100 each as a collateral security for the same. Show how these items will be presented in the Balance Sheet of the company. [CBSE (AI) 2010]
Answer:
Ans. Balance Sheet: Long-term Borrowings ₹4,00,000

Teacher's Note:
1. The ₹5,00,000 collateral debentures are either shown only as a note or set off by Debenture Suspense A/c; they never increase the total.

Long Answer Questions (5 Marks)

Teacher's Note:
1. Face value = 500 × ₹500 = ₹2,50,000; discount 4% = ₹10,000 and premium on redemption 5% = ₹12,500. With no Securities Premium Reserve, both are written off to Statement of Profit and Loss in the year of issue.

Teacher's Note:
1. In (a), net assets ₹7,60,000 exceed the consideration ₹7,20,000, so the ₹40,000 difference is Capital Reserve; number of debentures = ₹7,20,000 ÷ ₹120 = 6,000.

Teacher's Note:
1. Calls-in-advance is a liability until the call is made; check that the advance received (₹56,000) is fully adjusted by the end.

Teacher's Note:
1. When no entry is passed for collateral debentures, the fact is disclosed only as a note against the loan.

Teacher's Note:
1. Every discount or loss arising in the year must be written off in that year: here both the ₹75,000 loss on the cash issue and the ₹20,000 discount on the vendor issue.

Teacher's Note:
1. In (a), net assets ₹8,00,000 less consideration ₹7,80,000 = Capital Reserve ₹20,000; debentures = ₹7,80,000 ÷ ₹120 = 6,500.

Question 59. On 1st April, 2015, KVK Ltd. issued 15,000, 9% debentures of ₹100 each at a discount of 7%, redeemable at a premium of 10% after 10 years. The company closes its books on 31st March every year. Interest on 9% debentures is payable on 30th September and 31st March every year.
Pass necessary journal entries for the issue of 9% debentures and debentures' interest for the year ended 31st March, 2016. [CBSE (AI) 2017]
Answer:
Ans. Discount on Issue of Debentures ₹1,05,000, Interest on Debentures for the year ₹1,35,000
Premium on Redemption of Debentures = 15,000 × ₹10 = ₹1,50,000; Loss on issue (₹1,05,000 + ₹1,50,000 = ₹2,55,000) is written off to Statement of Profit and Loss in the year of issue.

Teacher's Note:
1. Interest is ₹67,500 for each half-year on the face value ₹15,00,000 at 9%, total ₹1,35,000, transferred to Statement of Profit and Loss.