Test: Redemption of Debentures - CA Foundation MCQ

• Long-term liabilities of a business: Debentures represent long-term liabilities of a business. They are essentially a form of loan taken by the company from investors, usually with a fixed rate of interest.


• Govt's share in the capital of the company: This statement is incorrect. Debentures do not represent government shares in the capital of a company.


• Short-term liabilities: Debentures are not short-term liabilities. They are typically issued for a longer duration, usually more than one year.


• Investment by shareholders in business: Debentures are not investments by shareholders. Shareholders invest in the company by buying shares, while debenture holders lend money to the company.

Therefore, the correct answer is A: Long-term liabilities of a business.

• Excess value of net assets: This refers to the situation where the total value of the net assets acquired in a business purchase exceeds the purchase consideration paid for those assets.


• Capital reserve: When there is excess value of net assets over purchase consideration, this amount is credited to capital reserve. Capital reserve is a type of reserve that is created out of capital profits and cannot be distributed as dividends to shareholders.


• General reserve: General reserve is created out of retained earnings or profits of the business and is used for various purposes like expansion, diversification, or meeting unexpected contingencies.


• Vendors' account: Vendors' account is used to record the amounts payable to the vendors from whom the assets were purchased.


• Goodwill: Goodwill represents the reputation, brand value, customer loyalty, etc. of a business that is not directly attributable to any specific asset and is recorded as an intangible asset on the balance sheet.

• Debenture premium is the amount received by a company in excess of the face value of debentures issued. This premium cannot be used in certain ways:




• Write off the discount on issue of shares or debentures: Debenture premium cannot be used to write off any discount given on the issue of shares or debentures. The premium is a separate amount received and cannot be utilized for this purpose.


• Write off the premium on redemption of shares or debentures: The premium received cannot be used to offset any premium paid on the redemption of shares or debentures. It is meant to be kept separate from such expenses.


• Pay dividends: Debenture premium cannot be used to pay dividends to shareholders. Dividends are paid from the profits of the company and the premium received is not considered as part of the profit.


• Write off capital loss: Debenture premium also cannot be used to write off any capital losses incurred by the company. It is a separate amount and cannot be utilized in this manner.

• Treated as negotiable instruments: Bearer Debentures are treated as negotiable instruments, which means they can be transferred from one person to another by mere delivery.


• Transfer requires a deed of transfer: This statement is incorrect as bearer debentures are transferable by mere delivery. There is no need for a deed of transfer for their transfer.


• Interest paid to the holder irrespective of identity: The interest on bearer debentures is paid to the holder irrespective of their identity. This characteristic makes them different from registered debentures where interest is paid to the registered holders.

Therefore, the correct answer is B: Their transfer requires a deed of transfer.

• Capital loss: The discount on issue of debentures is considered as a capital loss.


• Writing off: This capital loss should be written off over the tenure of the debentures.


• Spread over time: The discount is not treated as a revenue loss to be charged in the year of issue, but rather as a capital loss to be spread out over the life of the debentures.


• Impact on financial statements: Writing off the discount over time affects the balance sheet and income statement accordingly.

• Profits: Debentures can be redeemed using profits earned by the company. This is a common source of funds for redemption as it does not require any additional capital infusion.


• Capital: In some cases, debentures can also be redeemed using the capital of the company. However, this should be done cautiously as it may impact the financial stability of the company.


• Provisions made for redemption: Companies often set aside provisions specifically for the redemption of debentures. These provisions ensure that there are enough funds available for redemption when the debentures mature.


• All of the above: In conclusion, debentures can be redeemed out of profits, capital, and provisions made for redemption. It is essential for companies to have a well-defined strategy for debenture redemption to ensure financial stability and investor confidence.

• Debentures Redemption Fund: This fund is created to redeem debentures when they are due.


• Transfer of Balance: When all the debentures are redeemed, the balance in the debentures redemption fund account is transferred to another account.


• General Reserve: The balance in the debentures redemption fund account is usually transferred to the general reserve.


• Capital Reserve: Sometimes, the balance may be transferred to the capital reserve if there is a specific provision for it.


• Profits and Loss Appropriation Account: In some cases, the balance may also be transferred to the profits and loss appropriation account.


• All of the Above: While all the options are possible, the most common practice is to transfer the balance to the general reserve.

Therefore, the correct answer is General Reserve.

• Definition of Own Debentures: Own debentures are those debentures of the company which the company purchases from the market and keeps them as investments. This means that the company buys its own debentures as an investment option.


• Company Allotment: Own debentures are not allotted to promoters or directors. They are purchased from the market, which distinguishes them from debentures allotted to promoters or directors.


• Investment Purpose: Companies may choose to invest in their own debentures for various reasons, such as generating additional income through interest payments or holding them as part of their investment portfolio.


• Legal Considerations: Companies need to ensure that the purchase of their own debentures complies with legal regulations and does not violate any laws related to investments or corporate actions.

• Redemption of Debentures: When debentures are redeemed out of profits, an equal amount is transferred to the Debenture Redemption Reserve.


• Debenture Redemption Reserve: This reserve is created to ensure that funds are available for the redemption of debentures when they fall due.


• Legal Requirement: As per the Companies Act, companies are required to create a Debenture Redemption Reserve before redeeming debentures out of profits.


• Protection of Investors: The creation of the Debenture Redemption Reserve protects the interests of debenture holders by ensuring that there are sufficient funds set aside for redemption.


• General Reserve vs. Debenture Redemption Reserve: While a General Reserve is a reserve created out of profits for general business purposes, the Debenture Redemption Reserve is specifically earmarked for the redemption of debentures.

• Transfer of balance: The balance of sinking fund investment account after the realisation of investments is transferred to the sinking fund account.

• Purpose of sinking fund: Sinking fund is created to ensure that funds are available for the repayment of debentures or other long-term liabilities when they become due.

• Realisation of investments: When the investments made from the sinking fund are realised, the resulting amount is transferred back to the sinking fund account.

• Utilisation of sinking fund: The sinking fund is used to ensure that the company has sufficient funds to meet its long-term financial obligations.

• Conclusion: Therefore, the correct answer is option C: Sinking fund account, as the balance of sinking fund investment account is transferred back to the sinking fund account after the realisation of investments.

• Definition: Debenture holders are individuals or institutions that lend money to a company by purchasing debentures issued by the company.



• Creditors: Debenture holders are considered creditors of the company because they have provided funds to the company in exchange for the debentures.



• No ownership rights: Unlike shareholders, debenture holders do not have ownership rights in the company. They are merely lenders who are entitled to receive interest payments and the repayment of the principal amount.



• Prior claim: In case of liquidation or bankruptcy, debenture holders have a prior claim on the company's assets over shareholders. This means that they are entitled to be repaid before shareholders receive anything.



• Interest payments: The company is required to make regular interest payments to debenture holders as per the terms of the debenture agreement. Failure to make these payments can lead to default.



• Risk: Investing in debentures involves a certain level of risk as the company may default on its payments, leading to potential losses for the debenture holders.

• Excess value of Purchase consideration: This refers to the amount paid for a business over and above the net assets acquired.


• Crediting to Goodwill: The excess value is credited to Goodwill in the books of accounts.


• Goodwill: Goodwill represents the reputation, customer base, brand value, and other intangible assets of a business that are not separately identifiable.


• Classification: Goodwill is classified as a Capital Reserve as it is not available for distribution as dividends.


• Capital Reserve: Capital reserves are created out of capital profits and cannot be distributed as dividends to shareholders.

• Treatment of Loss on Issue of Debentures: Loss on issue of debentures is considered as a miscellaneous expenditure and not as an intangible asset, current asset, or current liability.


• Miscellaneous Expenditure: Any loss incurred during the issue of debentures is treated as a miscellaneous expenditure because it represents an additional cost for the company which does not result in the acquisition of any tangible or intangible asset.


• Impact on Financial Statements: Treating loss on issue of debentures as a miscellaneous expenditure will result in a decrease in the company's profits and overall financial performance.


• Disclosure: It is important for companies to disclose such losses transparently in their financial statements to provide a clear picture of their financial position to stakeholders.

• Mortgage Debentures or Simple Debentures: Mortgage debentures are secured against the assets of the company, while simple debentures are unsecured.


• Registered Debentures Or Bearer Debentures: Registered debentures are issued in the name of the holder, while bearer debentures are payable to the bearer.


• Redeemable Debentures or Irredeemable Debentures: Redeemable debentures are repayable after a certain period, while irredeemable debentures are not repayable during the lifetime of the company.


• Convertible Debentures or Non-convertible Debentures: Convertible debentures can be converted into equity shares at a later date, while non-convertible debentures cannot be converted.

• Discount on issue of debentures: When a company issues debentures at a price lower than their face value, the difference between the face value and the issue price is known as discount on issue of debentures.


• Classification in balance sheet: The discount on issue of debentures is considered as a deferred revenue expenditure and hence shown under the head of Miscellaneous Expenditure in the balance sheet.


• Reason for classification: The discount is treated as a capital loss for the company, and it is amortized over the period of debentures. Therefore, it is not considered as a current asset or non-current liability but rather as an expenditure that has been incurred for issuing debentures at a discount.


• Impact on financial statements: Showing the discount under Miscellaneous Expenditure helps in reflecting the true financial position of the company by adjusting the total liabilities with the amount of discount that needs to be amortized over time.

Premium on redemption of debentures is shown under liabilities side of the Balance Sheet, so, it is a personal account. This premium is payable by the company on redemption of the debentures to the debenture-holders.

• Debentures issued as collateral security:




• When debentures are issued as collateral security, the final entry for recording the transaction in the books is to debit the debenture suspense account and credit the debentures account.

• Profit and loss appropriation a/c: This account is used to distribute profits among shareholders. It is not the correct place to transfer profit on cancellation of own debentures.


• Debenture redemption reserve: This reserve is created to ensure that funds are available for the redemption of debentures. Profit on cancellation of own debentures is not transferred here.


• Capital reserve: Profit on cancellation of own debentures is transferred to capital reserve. Capital reserve is a reserve that is created from the profits earned by a company, but cannot be distributed as dividends.


• General reserve: General reserve is a reserve created out of profits of a company, which is not specifically earmarked for any particular purpose. It is not the correct place to transfer profit on cancellation of own debentures.

Therefore, the correct answer is option C: Capital reserve.

• Debenture Redemption Fund Account: Profit on sale of debenture redemption fund investments in the first instance is credited to the Debenture Redemption Fund Account. This is because the purpose of the Debenture Redemption Fund is to ensure that there are enough funds available to redeem the debentures at maturity. Therefore, any profits made from the investments held in this fund are credited back to the fund itself.


• Profit and Loss Appropriation Account: The Profit and Loss Appropriation Account is used to allocate profits among various accounts such as reserves, dividends, etc. It is not directly related to the Debenture Redemption Fund investments.


• General Reserve Account: The General Reserve Account is used to set aside funds for general business purposes and is not specifically linked to the Debenture Redemption Fund investments.


• None of these: This option is incorrect as the profit on the sale of debenture redemption fund investments is credited to the Debenture Redemption Fund Account in the first instance.

Therefore, the correct answer is option A: Debenture Redemption Fund Account.

• Loss on issue of debentures: This represents the amount by which the proceeds from the debenture issue are less than the face value of the debentures. It is considered a cost for the company.


• Shown as Miscellaneous expenditure in Balance sheet: Until the debentures are redeemed, the loss on issue of debentures is treated as a deferred revenue expenditure and shown under the head of miscellaneous expenditure in the balance sheet.


• Deferred Revenue Expenditure: It is an expenditure incurred in a particular accounting period, the benefits of which are to be derived over a number of future accounting periods. It is carried forward and amortized over a period of time.


• Impact on Balance Sheet: By showing the loss on issue of debentures as miscellaneous expenditure, the balance sheet reflects the true financial position of the company by recognizing the cost associated with the debenture issue.