CBSE Class 12 Accountancy Issue Of Debentures MCQs Set 04

Practice MCQs for Class 12 Accountancy Chapter 02 Issue Of Debentures

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Multiple Choice Questions

Question 1: Debentureholders are:
(a) the owners of the company
(b) the vendors of the company
(c) the creditors of the company
(d) the debtors of the company
Show Answer & Explanation

Answer: (c) the creditors of the company

Explanation:
1. A debenture is an acknowledgement of a debt; the company owes the money to the debentureholders, so they are its creditors.

Teacher's Note:
1. Shareholders are owners; debentureholders are lenders (creditors).

Question 2: In the Balance Sheet of a company, debentures are generally shown under the head of:
(a) Share Capital
(b) Non-current Liabilities
(c) Current Liabilities
(d) Non-current Assets
Show Answer & Explanation

Answer: (b) Non-current Liabilities

Explanation:
1. Debentures are long-term borrowings, shown under Non-Current Liabilities → Long-term Borrowings.

Teacher's Note:
1. Only debentures due for redemption within 12 months are shown as current maturities under Other Current Liabilities.

Question 3: Discount/loss on issue of debentures should be written off:
(a) within 2 years of the issue of debentures
(b) after the redemption of debentures
(c) in the year of issue of debentures
(d) during the life of debentures
Show Answer & Explanation

Answer: (c) in the year of issue of debentures

Explanation:
1. As per AS 16 (Borrowing Costs), discount/loss on issue of debentures is written off in the year in which the debentures are issued.

Teacher's Note:
1. Write it off first from Securities Premium Reserve, and the balance from Statement of Profit and Loss (finance cost).

Question 4: Debentureholders are entitled to receive from the company:
(a) Dividend
(b) Interest
(c) Share of Profit
(d) None of the above
Show Answer & Explanation

Answer: (b) Interest

Explanation:
1. Debentureholders are creditors, so they receive interest at a fixed rate; dividend is paid to shareholders.

Teacher's Note:
1. Interest on debentures is payable whether the company earns a profit or not.

Question 5: At the time of issue, Debentures Account is:
(a) credited by the amount received
(b) credited by the face value of debentures
(c) credited by the issue price of the debentures
(d) none of the above.
Show Answer & Explanation

Answer: (b) credited by the face value of debentures

Explanation:
1. Debentures Account is always credited with the nominal (face) value; premium goes to Securities Premium Reserve and discount is debited to Discount on Issue of Debentures A/c.

Teacher's Note:
1. Whatever the issue price, the Debentures Account shows only the face value.

Question 6: For recording the issue of debentures as collateral security, the amount of debentures issued is debited to:
(a) Statement of Profit and Loss
(b) Debentures Suspense Account
(c) Debentures Account
(d) General Reserve Account
Show Answer & Explanation

Answer: (b) Debentures Suspense Account

Explanation:
1. Entry: Debenture Suspense A/c Dr. To Debentures A/c, with the face value of the debentures issued as collateral security.

Teacher's Note:
1. Debenture Suspense A/c is shown as a deduction from Debentures in the Notes to Accounts.

Question 7: Premium received on issue of debentures is credited to:
(a) Capital Reserve
(b) General Reserve
(c) Securities Premium Reserve
(d) None of these
Show Answer & Explanation

Answer: (c) Securities Premium Reserve

Explanation:
1. Premium on issue of any security is credited to Securities Premium Reserve (Section 52 of the Companies Act, 2013).

Teacher's Note:
1. Do not confuse it with Premium on Redemption of Debentures A/c, which is a liability.

Question 8: The discount on issue of debentures is:
(a) Capital profit
(b) Capital gain
(c) Capital loss
(d) All of the above
Show Answer & Explanation

Answer: (c) Capital loss

Explanation:
1. Discount on issue means the company receives less than the face value but must repay the full amount, so it is a capital loss.

Teacher's Note:
1. Being a capital loss, it is written off first against Securities Premium Reserve.

Question 9: Premium on Redemption of Debentures Account is:
(a) Asset
(b) Liability
(c) Expenses
(d) Revenue
Show Answer & Explanation

Answer: (b) Liability

Explanation:
1. It is the extra amount the company must pay at redemption, so it is a liability till redemption.

Teacher's Note:
1. It is shown under Long-term Borrowings along with debentures (or as per the redemption date).

Question 10: Those debentures in which the holders are given option to partially or fully convert debentures into equity shares after a specified period are known as:
(a) Registered Debentures
(b) Mortgage Debentures
(c) Naked Debentures
(d) Convertible Debentures
Show Answer & Explanation

Answer: (d) Convertible Debentures

Explanation:
1. Debentures that can be converted into equity shares are convertible debentures (fully or partly convertible).

Teacher's Note:
1. Naked debentures are those without any charge on assets; do not mix the two classifications.

Question 11: Debentures which do not carry any specific rate of interest are known as:
(a) Registered Debentures
(b) Zero Coupon Rate Debentures
(c) Bearer Debentures
(d) First Debentures
Show Answer & Explanation

Answer: (b) Zero Coupon Rate Debentures

Explanation:
1. Zero coupon rate debentures carry no interest; they are issued at a deep discount and redeemed at face value.

Teacher's Note:
1. The difference between issue price and redemption price is the investor's return on zero coupon debentures.

Question 12: Loss or Discount on issue of debentures is written off from:
(a) Securities Premium Reserve
(b) Statment of Profit or Loss
(c) Securities Premium Reserve (if it exits) and thereafter from Statment of Profit and Loss
(d) None of the above
Show Answer & Explanation

Answer: (c) Securities Premium Reserve (if it exits) and thereafter from Statment of Profit and Loss

Explanation:
1. Discount/loss is first written off against Securities Premium Reserve, if any; the balance is written off from Statement of Profit and Loss (finance cost).

Teacher's Note:
1. Order matters: Securities Premium Reserve first, then Statement of Profit and Loss.

Question 13: Interest on debentures is always paid on:
(a) Nominal value of debentures
(b) Amount received on issue
(c) Amount received on allotment
(d) None of the above
Show Answer & Explanation

Answer: (a) Nominal value of debentures

Explanation:
1. Interest is calculated at the coupon rate on the nominal (face) value, whatever the issue price.

Teacher's Note:
1. Debentures issued at a discount still earn interest on the full face value.

Question 14: Interest on debentures is:
(a) Appropriation of profit
(b) Capital gain
(c) Charge against profit
(d) Dividend
Show Answer & Explanation

Answer: (c) Charge against profit

Explanation:
1. Interest on debentures must be paid whether or not there is a profit, so it is a charge against profit (finance cost).

Teacher's Note:
1. Dividend is an appropriation; interest on debentures is an expense.

Question 15: Debentures cannot be redeemed:
(a) at par
(b) at premium
(c) at discount
(d) all of the above
Show Answer & Explanation

Answer: (c) at discount

Explanation:
1. Debentures may be issued at par, premium or discount, but they are redeemed only at par or at a premium.

Teacher's Note:
1. Remember the six combinations: three ways of issue × two ways of redemption (par or premium).

Question 16: As a purchase consideration of a machinery of ₹7,20,000, debentures of ₹100 each were issued at a premium of ₹25 by the company. The number of debentures issued by the company is:
(a) 7,200
(b) 7,000
(c) 5,700
(d) 5,760
Show Answer & Explanation

Answer: (d) 5,760

Explanation:
1. Number of debentures = Purchase consideration ÷ Issue price = ₹7,20,000 ÷ ₹125 = 5,760.

Teacher's Note:
1. Divide by the issue price (face value + premium), not by the face value.

Question 17: Discount on Issue of Debentures is restricted to:
(a) 10%
(b) 20%
(c) 25%
(d) None of these
Show Answer & Explanation

Answer: (d) None of these

Explanation:
1. The Companies Act, 2013 does not prescribe any limit on the discount at which debentures may be issued.

Teacher's Note:
1. The restriction on issue at a discount applies to shares (Section 53), not to debentures.

Question 18: A company has issued 5,000, 6% Debentures of ₹100 each at a premium of ₹10. The prefix '6%' is:
(a) the rate of interest payable on the debentures
(b) to distinguish from other debentures issued by the company
(c) both (a) and (b)
(d) None of the above
Show Answer & Explanation

Answer: (a) the rate of interest payable on the debentures

Explanation:
1. The percentage before 'Debentures' is the coupon rate of interest, payable on the face value.

Teacher's Note:
1. 6% of ₹100 = ₹6 per debenture per year, even though the issue price is ₹110.

Question 19: Shashi Ltd. issued 6,000 Debentures of ₹100 each at a premium of ₹10. It will credit Debentures Account by:
(a) 6,60,000
(b) 6,00,000
(c) 4,50,000
(d) None of these
Show Answer & Explanation

Answer: (b) 6,00,000

Explanation:
1. Debentures A/c is credited with the face value: 6,000 × ₹100 = ₹6,00,000; the premium of ₹60,000 goes to Securities Premium Reserve.

Teacher's Note:
1. Premium is never included in the Debentures Account.

Question 20: On 1st Oct., 2018 PK Ltd. issued 500, 9% Debentures of ₹500 each at a discount of 4%. Debentures' interest for the year ended 31st March, 2019 will be:
(a) ₹11,250
(b) ₹10,800
(c) ₹22,500
(d) None of these
Show Answer & Explanation

Answer: (a) ₹11,250

Explanation:
1. Face value = 500 × ₹500 = ₹2,50,000; Interest = ₹2,50,000 × 9/100 × 6/12 = ₹11,250.

Teacher's Note:
1. Take interest on face value, not on the discounted issue price, and only for 6 months (Oct. to March).

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Multiple Choice Questions (MCQs) for Class 12 Accountancy Chapter 02 Issue Of Debentures

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