Question 1

Which of the following statements is true regarding the issue of debentures at a premium?

Accepted Answer

Correct Option: A. Solution: When debentures are issued at a premium, the premium amount is credited to the Securities Premium Reserve account and shown under the head 'Reserves and Surpluses' in the balance sheet.

Question 2

ABC Ltd. issued $20,000$ debentures of $100$ each at a $10\%$ discount. If the company plans to write off the discount using the securities premium reserve, which of the following entries is correct?

Accepted Answer

Correct Option: B. Solution: The correct entry to write off the discount using the securities premium reserve is to debit the Discount on Issue of Debentures and credit the Securities Premium Reserve.

Question 3

A company issues debentures that can be converted into equity shares at the option of the debenture holders. What are these debentures called?

Accepted Answer

Correct Option: B. Solution: Convertible debentures are those which can be converted into equity shares or other securities at the option of the debenture holders.

Question 4

Which type of debentures can be transferred by delivery and do not require the company to keep a record of the debenture holders?

Accepted Answer

Correct Option: B. Solution: Bearer Debentures can be transferred by delivery and the company does not maintain a record of the holders.

Question 5

How should debentures issued as collateral security be presented in the company's balance sheet?

Accepted Answer

Correct Option: C. Solution: Debentures issued as collateral security are not recorded as a liability but are noted below the loan item in the balance sheet.

Question 6

A company issued debentures at par and redeemed them at a premium. How is the premium on redemption treated in the financial statements?

Accepted Answer

Correct Option: A. Solution: The premium on redemption is a future liability and is shown under 'Non-current liabilities' in the balance sheet until the debentures are redeemed.

Question 7

What is the accounting treatment for interest on debentures?

Accepted Answer

Correct Option: C. Solution: Interest on debentures is a charge against the profit of the company and must be paid whether the company has earned any profit or not.

Question 8

A company issues debentures at a price above their nominal value. What is this issuance called?

Accepted Answer

Correct Option: C. Solution: When debentures are issued at a price higher than their nominal value, it is known as an issue at premium.

Question 9

When debentures are issued as collateral security, which of the following is a correct method of accounting?

Accepted Answer

Correct Option: A. Solution: When debentures are issued as collateral security, no entry is typically made in the books of accounts unless the second method is used.

Question 10

A company issued 2,000 debentures of $100$ each at a discount of $10\%$ and redeemable at a premium of $10\%$. What is the total loss on issue of debentures?

Accepted Answer

Correct Option: B. Solution: The total loss on issue of debentures is calculated as the sum of the discount and the premium on redemption. Here, it is $20,000$ (discount) + $20,000$ (premium) = $40,000$.

Question 11

How is the interest on debentures treated in the financial statements of a company?

Accepted Answer

Correct Option: A. Solution: Interest on debentures is a charge against the profits of the company and must be paid irrespective of whether the company has earned any profit.

Question 12

A company issues 10,000 debentures of Rs. 100 each at par, redeemable at a premium of 5%. What is the correct treatment for the premium on redemption?

Accepted Answer

Correct Option: A. Solution: The premium on redemption is a loss and is therefore debited to the Loss on Issue of Debentures A/c.

Question 13

ABC Ltd. issued debentures at a discount and redeemed them at a premium. Which account should reflect the total loss incurred due to this transaction?

Accepted Answer

Correct Option: B. Solution: The total loss incurred due to issuing debentures at a discount and redeeming them at a premium is recorded in the Loss on Issue of Debentures Account.

Question 14

What is the journal entry for recording the interest due on debentures when tax is deducted at source?

Accepted Answer

Correct Option: A. Solution: The journal entry for interest due on debentures with tax deducted at source is: Debenture Interest A/c Dr. To Income Tax Payable A/c To Debentureholders A/c.

Question 15

XYZ Ltd. issued 5,000 debentures of Rs. 100 each at a discount of 5%. If the total discount is to be written off over 5 years, what amount should be written off in the first year?

Accepted Answer

Correct Option: D. Solution: The total discount is Rs. 25,000 (5% of Rs. 100 x 5,000 debentures). Spread over 5 years, Rs. 5,000 should be written off each year.

Question 16

XYZ Ltd. issued 5,000, 10% debentures of Rs. 100 each at a discount of 5% and redeemable at a premium of 10%. What is the journal entry for the issue of these debentures?

Accepted Answer

Correct Option: A. Solution: The debentures are issued at a discount of 5% and redeemable at a premium of 10%. Therefore, the loss on issue includes both the discount and the premium on redemption.

Question 17

How should a company record the interest payment on debentures, considering TDS (Tax Deducted at Source)?

Accepted Answer

Correct Option: A. Solution: The company must debit the Debenture Interest A/c and credit both the Debentureholders A/c and Income Tax Payable A/c to account for TDS.

Question 18

Which type of debenture does not carry a specific charge on the assets of the company but may have a floating charge by default?

Accepted Answer

Correct Option: C. Solution: Unsecured debentures do not have a specific charge on the assets of the company, although a floating charge may be created by default.

Question 19

Which account is debited when writing off the discount on issue of debentures using the Securities Premium Reserve?

Accepted Answer

Correct Option: A. Solution: The Securities Premium Reserve A/c is debited to write off the discount on issue of debentures if there is a balance available.

Question 20

Which journal entry is correct for recording the issue of debentures as collateral security?

Accepted Answer

Correct Option: A. Solution: When debentures are issued as collateral security, the entry 'Debenture Suspense A/c Dr. To Debentures A/c' is recorded to reflect the potential liability.

Question 21

How is the premium on redemption of debentures treated in the journal entries?

Accepted Answer

Correct Option: B. Solution: The premium on redemption of debentures is debited to Loss on Issue of Debentures A/c.

Question 22

A company issued debentures at a discount and plans to write off the discount over the life of the debentures. Which method can be used if the company has insufficient capital profits?

Accepted Answer

Correct Option: A. Solution: If capital profits are insufficient, the discount on issue of debentures can be written off against revenue profits.

Question 23

A company issues debentures which are not secured by any charge on the assets of the company. However, these debentures may have a floating charge by default. What type of debentures are these?

Accepted Answer

Correct Option: B. Solution: Unsecured debentures do not have a specific charge on the assets of the company, but a floating charge may be created by default.

Question 24

Which account is debited when tax deducted at source on debenture interest is paid to the government?

Accepted Answer

Correct Option: B. Solution: When tax deducted at source on debenture interest is paid to the government, the Income Tax Payable A/c is debited.

Question 25

A company issues debentures that are convertible into equity shares. What type of debentures are these?

Accepted Answer

Correct Option: B. Solution: Convertible debentures are those which can be converted into equity shares or other securities.

Question 26

A company issued 2,000 debentures of Rs. 100 each at a premium of 10%. What is the total amount credited to the Securities Premium Reserve?

Accepted Answer

Correct Option: A. Solution: The premium per debenture is Rs. 10 (10% of Rs. 100). For 2,000 debentures, the total premium is Rs. 20,000, which is credited to the Securities Premium Reserve.

Question 27

A company issued 2,000, 12% debentures of Rs. 100 each at par, redeemable at a premium of 5%. How should the premium on redemption be shown in the balance sheet before redemption?

Accepted Answer

Correct Option: A. Solution: The premium payable on redemption is a future liability and is shown under 'Long-term Borrowings' in the balance sheet until the debentures are redeemed.

Question 28

A company issues 1,000 debentures of $100$ each at a discount of $5\%$ and redeems them at par. What is the total loss on issue of debentures that should be written off?

Accepted Answer

Correct Option: A. Solution: The loss on issue of debentures is the discount amount, which is $5\%$ of $100,000$ (face value of debentures), i.e., $5,000$.

Question 29

Which of the following is true about registered debentures?

Accepted Answer

Correct Option: B. Solution: Registered debentures require a regular transfer deed for transfer and the details of the holder are recorded in a register.

Question 30

What is the primary difference between shares and debentures?

Accepted Answer

Correct Option: A. Solution: Shares represent ownership of the company, whereas debentures are an acknowledgment of debt.

Question 31

If a company deducts tax at source on debenture interest at 10%, how much tax is deducted on a total interest payment of Rs. 50,000?

Accepted Answer

Correct Option: A. Solution: The tax deducted at source is 10% of Rs. 50,000, which amounts to Rs. 5,000.

Question 32

A company issued 5,000 debentures of Rs. 100 each at a premium of 5% and redeemed them at par. How should the premium on issue be accounted for in the financial statements?

Accepted Answer

Correct Option: A. Solution: The premium received on the issue of debentures is credited to the Securities Premium Reserve account, which is shown under the head 'Reserves and Surplus' in the balance sheet.

Question 33

A company issues 10% debentures at a discount of 10% and redeems them at a premium of 10%. If the nominal value of the debentures is Rs. 100 each, what is the effective cost to the company per debenture?

Accepted Answer

Correct Option: C. Solution: The company issues debentures at Rs. 90 (10% discount on Rs. 100) and redeems them at Rs. 110 (10% premium on Rs. 100). The effective cost is Rs. 120 per debenture.

Question 34

What is the term used for debentures that are issued without a specified rate of interest and are usually issued at a substantial discount?

Accepted Answer

Correct Option: A. Solution: Zero Coupon Rate Debentures do not carry a specific rate of interest and are issued at a substantial discount to compensate investors.

Question 35

A company issued 10,000 debentures of $100$ each at a discount of $10\%$ and the debentures are redeemable at a premium of $5\%$. If the company has a securities premium reserve of $500,000$, how much of the discount will be written off against the securities premium reserve?

Accepted Answer

Correct Option: A. Solution: The discount on issue is $100,000$ ($10\%$ of $1,000,000$), which can be fully written off against the securities premium reserve of $500,000$.

Question 36

A company issued 10,000 debentures of $100 each as collateral security for a bank loan of $1,000,000. If the loan is repaid, what journal entry should be recorded?

Accepted Answer

Correct Option: B. Solution: Upon repayment of the loan, the debentures issued as collateral security are cancelled by debiting the Debentures Account and crediting the Debenture Suspense Account.

Question 37

XYZ Ltd. issues debentures at a premium of $10\%$ and redeems them at a premium of $5\%$. How should the premium on redemption be accounted for?

Accepted Answer

Correct Option: B. Solution: The premium on redemption is treated as a loss and should be debited to the Loss on Issue of Debentures account.

Question 38

XYZ Ltd. issued $5,000$ debentures at a discount of $5\%$ and redeemable at par. The company has a securities premium reserve of $200,000$. How should the discount on issue be treated in the financial statements?

Accepted Answer

Correct Option: A. Solution: The discount on issue of $25,000$ ($5\%$ of $500,000$) can be written off against the securities premium reserve of $200,000$.

Question 39

What is the main characteristic of zero coupon rate debentures?

Accepted Answer

Correct Option: B. Solution: Zero coupon rate debentures do not carry a specific rate of interest and are issued at a substantial discount.

Question 40

What is the journal entry for the issue of debentures at a discount?

Accepted Answer

Correct Option: C. Solution: When debentures are issued at a discount, the entry is: Debenture Application & Allotment A/c Dr. Discount on Issue of Debentures A/c Dr. To Debentures A/c.

Question 41

When a company issues debentures as collateral security, which method does not require a journal entry?

Accepted Answer

Correct Option: A. Solution: In the first method, no journal entry is made for debentures issued as collateral security. Instead, a note is appended to the balance sheet.

Question 42

When a company issues debentures as collateral security, which of the following statements is true regarding the accounting treatment in the books of the company?

Accepted Answer

Correct Option: A. Solution: When debentures are issued as collateral security, no entry is made in the books of accounts. Instead, a note is appended in the balance sheet indicating the debentures issued as collateral security.

Question 43

What is the accounting treatment for the discount on the issue of debentures?

Accepted Answer

Correct Option: A. Solution: Discount on the issue of debentures is a capital loss and can be written off against the securities premium reserve or against revenue profits if capital profits are inadequate.

Question 44

What happens to the debenture suspense account when the loan secured by debentures as collateral is repaid?

Accepted Answer

Correct Option: B. Solution: Upon repayment of the loan, the debenture suspense account is reversed by a journal entry: '9% Debentures A/c Dr. To Debenture Suspense A/c'.

Question 45

A company issued 10,000, 8% debentures of Rs. 100 each at a discount of 10% and redeemable at a premium of 5%. How should the discount on issue and premium on redemption be treated in the financial statements?

Accepted Answer

Correct Option: A. Solution: When debentures are issued at a discount and redeemable at a premium, the discount is debited to 'Loss on Issue of Debentures' and the premium is credited to 'Premium on Redemption of Debentures'.

Question 46

If a company fails to repay the loan for which debentures were issued as collateral security, what action can the lender take?

Accepted Answer

Correct Option: B. Solution: If a company fails to repay the loan, the lender can sell the debentures issued as collateral security in the open market to recover the loan amount.

Question 47

Which of the following statements correctly distinguishes between shares and debentures?

Accepted Answer

Correct Option: A. Solution: Shares represent ownership and are part of the owned capital, whereas debentures are a form of debt and part of borrowed capital.

Question 48

How should debentures issued as collateral security be reflected in the balance sheet if no journal entry is made?

Accepted Answer

Correct Option: A. Solution: Debentures issued as collateral security are reflected as a note under the head of long-term borrowings in the balance sheet, indicating that they are secured by debentures.

Question 49

What is the accounting treatment for writing off the discount on the issue of debentures?

Accepted Answer

Correct Option: A. Solution: The discount on the issue of debentures is written off by debiting the Securities Premium Reserve A/c (if available) and the Statement of Profit and Loss.

Question 50

A company has issued debentures at a discount of 10% and has a balance of $1,00,000$ in the Securities Premium Reserve. If the total discount on issue is $1,50,000$, how much will be written off against the Statement of Profit and Loss?

Accepted Answer

Correct Option: A. Solution: The discount of $1,50,000$ is first written off against the Securities Premium Reserve of $1,00,000$, leaving $50,000$ to be written off against the Statement of Profit and Loss.

Question 51

If a company issues debentures at a discount and has no securities premium reserve, how should the discount be treated?

Accepted Answer

Correct Option: A. Solution: If there is no securities premium reserve, the discount must be written off against the profit and loss account.

Question 52

What is the journal entry when debentures are issued at a discount and redeemable at a premium?

Accepted Answer

Correct Option: C. Solution: When debentures are issued at a discount and redeemable at a premium, the journal entry involves debiting the Debenture Application & Allotment A/c and Loss on Issue of Debentures A/c, and crediting the Debentures A/c and Premium on Redemption of Debentures A/c.

Question 53

Which type of debenture does not have a specific charge on the assets of the company?

Accepted Answer

Correct Option: B. Solution: Unsecured debentures do not have a specific charge on the assets of the company.

Question 54

A company issued 5,000, 10% debentures of Rs. 100 each at a discount of 10%, redeemable at a premium of 5%. What is the correct journal entry for the issue of these debentures?

Accepted Answer

Correct Option: A. Solution: The correct entry includes the discount on issue debited to Loss on Issue of Debenture A/c and the premium on redemption credited.

Question 55

A company issued debentures as collateral security for a bank loan. What is the appropriate accounting treatment?

Accepted Answer

Correct Option: A. Solution: When debentures are issued as collateral security, no journal entry is made initially, but a note is appended in the balance sheet.

Question 56

What is the primary purpose of issuing debentures as collateral security?

Accepted Answer

Correct Option: A. Solution: Debentures are issued as collateral security to provide additional security for a loan, ensuring that the lender has a secondary claim in case the primary security is insufficient.

Question 57

When a company issues debentures as collateral security, how is this reflected in the financial statements if no journal entry is made?

Accepted Answer

Correct Option: A. Solution: When debentures are issued as collateral security without a journal entry, it is noted under long-term borrowings in the balance sheet.

Question 58

How is the redemption of debentures at a premium recorded?

Accepted Answer

Correct Option: C. Solution: Premium on redemption is a liability of a company payable in future and is shown under 'Non-current liabilities'.

Question 59

How are debentures issued at a discount recorded in the financial statements?

Accepted Answer

Correct Option: C. Solution: Debentures issued at a discount are recorded as a deduction from the debentures in the notes to accounts.

Question 60

XYZ Ltd. issued 5,000, 10% debentures of Rs. 100 each at a premium of 10%. How should the premium be recorded in the financial statements?

Accepted Answer

Correct Option: A. Solution: The premium received on issue of debentures is credited to 'Securities Premium Reserve' as it is a capital receipt.

Question 61

Which journal entry is correct for the issue of debentures at a premium?

Accepted Answer

Correct Option: B. Solution: When debentures are issued at a premium, the entry is: Debenture Application & Allotment A/c Dr. To Debentures A/c To Securities Premium Reserve A/c.

Question 62

How should a company write off the discount on the issue of debentures?

Accepted Answer

Correct Option: A. Solution: The discount on the issue of debentures is written off by debiting Securities Premium Reserve and Statement of Profit and Loss.

Question 63

What is the primary purpose of issuing debentures as collateral security?

Accepted Answer

Correct Option: B. Solution: Debentures are issued as collateral security to provide additional security to lenders, ensuring that the loan amount can be recovered if the primary security is insufficient.

Question 64

How are debentures issued as collateral security typically recorded in the company's books?

Accepted Answer

Correct Option: B. Solution: No entry is made in the books for debentures issued as collateral security, but a note is appended in the balance sheet stating that the loan is secured by these debentures.

Particulars	Amount (Rs.)
Long-term borrowings	10,00,000
Cash at bank	9,00,000

Issue and Redemption of D..

Learning Objectives

Learning Objectives

Revision Notes & Summary

Notes on Debentures

1. Meaning of Debentures

2. Types of Debentures

3. Issue of Debentures

4. Redemption of Debentures

5. Accounting Treatment

6. Important Terms

7. Example Journal Entries

8. Balance Sheet Extract Example

9. Interest on Debentures

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Common Mistakes and Exam Tips

Common Pitfalls

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Multiple Choice Questions

Q1.Which of the following statements is true regarding the issue of debentures at a premium?

Correct Answer: A

Q2.ABC Ltd. issued 20,00020,00020,000 debentures of 100100100 each at a 10%10\%10% discount. If the company plans to write off the discount using the securities premium reserve, which of the following entries is correct?

Correct Answer: B

Q3.A company issues debentures that can be converted into equity shares at the option of the debenture holders. What are these debentures called?

Correct Answer: B

Q4.Which type of debentures can be transferred by delivery and do not require the company to keep a record of the debenture holders?

Correct Answer: B

Q5.How should debentures issued as collateral security be presented in the company's balance sheet?

Correct Answer: C

Q6.A company issued debentures at par and redeemed them at a premium. How is the premium on redemption treated in the financial statements?

Correct Answer: A

Q7.What is the accounting treatment for interest on debentures?

Correct Answer: C

Q8.A company issues debentures at a price above their nominal value. What is this issuance called?

Correct Answer: C

Q9.When debentures are issued as collateral security, which of the following is a correct method of accounting?

Correct Answer: A

Q10.A company issued 2,000 debentures of 100100100 each at a discount of 10%10\%10% and redeemable at a premium of 10%10\%10%. What is the total loss on issue of debentures?

Correct Answer: B

Q11.How is the interest on debentures treated in the financial statements of a company?

Correct Answer: A

Q12.A company issues 10,000 debentures of Rs. 100 each at par, redeemable at a premium of 5%. What is the correct treatment for the premium on redemption?

Correct Answer: A

Q13.ABC Ltd. issued debentures at a discount and redeemed them at a premium. Which account should reflect the total loss incurred due to this transaction?

Correct Answer: B

Q14.What is the journal entry for recording the interest due on debentures when tax is deducted at source?

Correct Answer: A

Q15.XYZ Ltd. issued 5,000 debentures of Rs. 100 each at a discount of 5%. If the total discount is to be written off over 5 years, what amount should be written off in the first year?

Correct Answer: D

Q16.XYZ Ltd. issued 5,000, 10% debentures of Rs. 100 each at a discount of 5% and redeemable at a premium of 10%. What is the journal entry for the issue of these debentures?

Correct Answer: A

Q17.How should a company record the interest payment on debentures, considering TDS (Tax Deducted at Source)?

Correct Answer: A

Q18.Which type of debenture does not carry a specific charge on the assets of the company but may have a floating charge by default?

Correct Answer: C

Q19.Which account is debited when writing off the discount on issue of debentures using the Securities Premium Reserve?

Correct Answer: A

Q20.Which journal entry is correct for recording the issue of debentures as collateral security?

Correct Answer: A

Q21.How is the premium on redemption of debentures treated in the journal entries?

Correct Answer: B

Q22.A company issued debentures at a discount and plans to write off the discount over the life of the debentures. Which method can be used if the company has insufficient capital profits?

Correct Answer: A

Q23.A company issues debentures which are not secured by any charge on the assets of the company. However, these debentures may have a floating charge by default. What type of debentures are these?

Correct Answer: B

Q24.Which account is debited when tax deducted at source on debenture interest is paid to the government?

Correct Answer: B

Q25.A company issues debentures that are convertible into equity shares. What type of debentures are these?

Correct Answer: B

Q26.A company issued 2,000 debentures of Rs. 100 each at a premium of 10%. What is the total amount credited to the Securities Premium Reserve?

Correct Answer: A

Q27.A company issued 2,000, 12% debentures of Rs. 100 each at par, redeemable at a premium of 5%. How should the premium on redemption be shown in the balance sheet before redemption?

Correct Answer: A