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Test: Issue Of Debentures - 3 - Commerce MCQ


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26 Questions MCQ Test Accountancy Class 12 - Test: Issue Of Debentures - 3

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Test: Issue Of Debentures - 3 - Question 1

Which of the following statements is true?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 1
Statement breakdown:
A: A debenture holder is an owner of the company.
B: A debenture holder can get his money back only on the liquidation of the company.
C: A debenture issued at a discount can be redeemed at a premium.
D: A debenture holder receives interest only in the event of profits.

Statement A: A debenture holder is an owner of the company.
This statement is false. Debenture holders are creditors of the company, not owners. They lend money to the company and receive fixed interest payments.
Statement B: A debenture holder can get his money back only on the liquidation of the company.
This statement is false. Debenture holders have a claim on the assets of the company and can get their money back even without the liquidation of the company. They have priority over shareholders in case of bankruptcy or liquidation.
Statement C: A debenture issued at a discount can be redeemed at a premium.
This statement is true. When a debenture is issued at a discount, it means it is sold for less than its face value. However, upon redemption, the debenture holder will receive the full face value of the debenture. Therefore, it can be redeemed at a premium.
Statement D: A debenture holder receives interest only in the event of profits.
This statement is false. Debenture holders receive fixed interest payments regardless of the company's profitability. They have a contractual obligation to receive interest payments at regular intervals.
Conclusion:
The true statement among the given options is C: A debenture issued at a discount can be redeemed at a premium.
Test: Issue Of Debentures - 3 - Question 2

Premium on redemption of debentures account is _______.

Detailed Solution for Test: Issue Of Debentures - 3 - Question 2
Premium on redemption of debentures account is a personal account.
Explanation:
The premium on redemption of debentures is a special reserve created when a company redeems its debentures at a price higher than their face value. It represents the excess amount paid by the company to debenture holders upon redemption. Here is a detailed explanation of why the premium on redemption of debentures account is considered a personal account:
1. Definition of personal account: Personal accounts are accounts related to individuals, firms, or organizations with whom the company has financial transactions. These accounts represent the people or entities to whom the company owes money or from whom it receives money.
2. Premium on redemption: The premium on redemption is paid to the debenture holders, who are individual investors or institutional investors. It is a liability for the company and represents the amount payable to these debenture holders.
3. Relation to debenture holders: The premium on redemption account is directly related to the debenture holders as it represents the amount owed to them. It shows the outstanding liability of the company towards the debenture holders.
4. Recording transactions: Transactions related to the premium on redemption of debentures are recorded in the personal account of the debenture holders. The premium amount is credited to the premium on redemption of debentures account, which is a liability for the company.
5. Treatment in the financial statements: The premium on redemption of debentures is shown on the liabilities side of the balance sheet as it represents the company's obligation towards the debenture holders. It is not considered as income or expenditure.
Therefore, based on the above points, it can be concluded that the premium on redemption of debentures account is a personal account.
Test: Issue Of Debentures - 3 - Question 3

Which of the following statements is false?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 3

The false statement is B: Debentures can be forfeited for non-payment of call money.


Explanation:
Debentures and their characteristics:
- Debentures are long-term debt instruments issued by companies to raise funds from the public.
- They are considered as a form of loan taken by the company from the investors.
- Debenture holders are the creditors of the company, and they have a fixed claim on the company's assets.
- Debentures have a fixed maturity date, and the company promises to repay the principal amount at the time of maturity.
Analysis of the given statements:
A: At maturity, debenture holders get back their money as per the terms and conditions of redemption.
- True. Debenture holders are entitled to receive the principal amount at the time of maturity as per the terms and conditions mentioned in the debenture agreement.
B: Debentures can be forfeited for non-payment of call money.
- False. Debentures cannot be forfeited for non-payment of call money. Call money refers to the amount payable by the debenture holders when the company exercises the option to redeem the debentures before their maturity. If the debenture holders fail to pay the call money, the company cannot forfeit the debentures.
C: In the company's balance sheet, debentures are shown under secured loans.
- True. Debentures are categorized as long-term borrowings and are shown under secured loans in the company's balance sheet. This is because debentures are backed by the company's assets, providing security to the debenture holders.
D: Interest on debentures is charged against profits.
- True. Interest on debentures is a financial expense for the company and is charged against profits in the income statement. It is considered as a cost of borrowing for the company.
In conclusion, the false statement is B: Debentures can be forfeited for non-payment of call money.
Test: Issue Of Debentures - 3 - Question 4

Which of the following statements is false?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 4

The false statement among the given options is:
B: Debentures cannot be secured
Explanation:
- A: A company can issue convertible debentures
- Companies have the option to issue convertible debentures, which can be converted into equity shares of the company at a predetermined rate and within a specified time period.
- B: Debentures cannot be secured
- This statement is false. Debentures can be secured by the assets of the company, known as secured debentures. Secured debentures provide an additional level of security to the debenture holders as they have a claim on specific assets of the company in case of default.
- C: A company can issue redeemable debentures
- Companies can issue redeemable debentures, which means that the debentures have a fixed maturity date and the company is obligated to repay the principal amount to the debenture holders on or before that date.
- D: Debentures have no right to participate in profits over and above their fixed interest
- Debenture holders do not have any right to participate in the profits of the company beyond the fixed interest rate mentioned in the debenture agreement. Their returns are limited to the fixed interest payments.
Therefore, the false statement is B: Debentures cannot be secured.
Test: Issue Of Debentures - 3 - Question 5

Debenture premium cannot be used to _____.

Detailed Solution for Test: Issue Of Debentures - 3 - Question 5
Debenture Premium and its Uses

  • Definition of Debenture Premium: Debenture premium refers to the excess amount received by a company when issuing debentures at a price higher than their nominal value.

  • Uses of Debenture Premium: Debenture premium can be utilized for various purposes, but it cannot be used to:


    1. Write off the discount on issue of shares or debentures: When shares or debentures are issued at a discount, the discount amount cannot be adjusted or written off using the debenture premium.

    2. Write off the premium on redemption of shares or debentures: Similarly, when shares or debentures are redeemed at a premium, the premium amount cannot be written off using the debenture premium.

    3. Write off capital loss: Debenture premium cannot be used to write off any capital losses incurred by the company.


  • Pay dividends: The correct answer is option C, which states that debenture premium cannot be used to pay dividends. Dividends are distributed to shareholders as a return on their investment, and using debenture premium for this purpose would not be appropriate.


Therefore, the debenture premium cannot be used to pay dividends, but it can be utilized for other purposes such as writing off the discount or premium on shares or debentures, or for writing off capital losses.
Test: Issue Of Debentures - 3 - Question 6

F Ltd. purchased Machinery from G Company for a book value of Rs.4,00,000. The consideration was paid by issue of 10% debentures of Rs.100 each at a discount of 20%.
The debenture account was credited with ______.

Detailed Solution for Test: Issue Of Debentures - 3 - Question 6
Explanation:
To find the debenture account credit, we need to calculate the value of the debentures issued to pay for the machinery.
Given information:
- Book value of the machinery purchased = Rs.4,00,000
- Debentures issued at a discount of 20%
- Face value of each debenture = Rs.100
- Interest rate on debentures = 10%
Steps to calculate the debenture account credit:
1. Calculate the total value of the machinery purchased:
- Book value of the machinery = Rs.4,00,000
2. Calculate the face value of the debentures issued:
- Face value of each debenture = Rs.100
- Number of debentures issued = Total value of the machinery / Face value of each debenture
- Number of debentures issued = Rs.4,00,000 / Rs.100 = 4000 debentures
3. Calculate the discount on the debentures:
- Discount on each debenture = Face value of each debenture * Discount rate
- Discount on each debenture = Rs.100 * 20% = Rs.20
- Total discount on all debentures = Discount on each debenture * Number of debentures issued
- Total discount on all debentures = Rs.20 * 4000 = Rs.80,000
4. Calculate the total value of the debentures issued:
- Total value of the debentures issued = Face value of each debenture * Number of debentures issued - Total discount on all debentures
- Total value of the debentures issued = Rs.100 * 4000 - Rs.80,000
- Total value of the debentures issued = Rs.4,00,000 - Rs.80,000
- Total value of the debentures issued = Rs.3,20,000
Therefore, the debenture account was credited with Rs.3,20,000. Option C is the correct answer.
Test: Issue Of Debentures - 3 - Question 7

Loss on issue of debentures is treated as ____________.

Detailed Solution for Test: Issue Of Debentures - 3 - Question 7
Loss on issue of debentures is treated as Miscellaneous expenditure.
Explanation:

- Loss on issue of debentures refers to the situation when the company issues debentures at a discount, i.e., at a value lower than their face value.

- This discount is considered as a loss for the company.

- The treatment of this loss is categorized as miscellaneous expenditure.

- Miscellaneous expenditure refers to expenses that do not directly contribute to the generation of revenue or the acquisition of assets.

- Loss on issue of debentures falls under this category as it is a one-time expense that does not result in the acquisition of any tangible or intangible assets.

- It is important to note that miscellaneous expenditure is shown as an expense in the income statement and is not considered as an asset or liability.

- Therefore, the correct answer is D: Miscellaneous expenditure.
Test: Issue Of Debentures - 3 - Question 8

T Ltd. has issued 14% Debentures of Rs.20,00,000 at a discount of 10% on April 01, 2004 and the company pays interest half-yearly on June 30, and December 31 every year. On March 31, 2006, the amount shown as “interest accrued but not due” in the Balance Sheet will be

Detailed Solution for Test: Issue Of Debentures - 3 - Question 8

To determine the amount shown as "interest accrued but not due" in the balance sheet on March 31, 2006, we need to calculate the interest accrued on the debentures.
Step 1: Calculate the principal amount of the debentures:
Principal amount = Rs. 20,00,000
Step 2: Calculate the discount on the debentures:
Discount = Principal amount * Discount rate
= Rs. 20,00,000 * 10%
= Rs. 2,00,000
Step 3: Calculate the effective amount received by the company:
Effective amount = Principal amount - Discount
= Rs. 20,00,000 - Rs. 2,00,000
= Rs. 18,00,000
Step 4: Calculate the interest accrued on the debentures from April 01, 2004, to March 31, 2006:
Interest rate = 14%
Interest accrued per year = Effective amount * Interest rate
= Rs. 18,00,000 * 14%
= Rs. 2,52,000
Since the company pays interest half-yearly, the interest accrued for the period from April 01, 2004, to March 31, 2006, will be for 4 half-years.
Interest accrued for 4 half-years = Interest accrued per year * Number of half-years
= Rs. 2,52,000 * 4
= Rs. 10,08,000
Step 5: Determine the amount shown as "interest accrued but not due" on March 31, 2006:
The interest accrued but not due will be for the period from January 01, 2006, to March 31, 2006, which is one half-year.
Interest accrued but not due = Interest accrued per half-year
= Rs. 2,52,000
Therefore, the amount shown as "interest accrued but not due" in the Balance Sheet on March 31, 2006, will be Rs. 2,52,000 shown along with Debentures (Option A).
Test: Issue Of Debentures - 3 - Question 9

On May 01, 2004 U Ltd. issued 7% 10,000 convertible debentures of Rs.100 each at a premium of 20%. Interest is payable on September 30 and March 31 every year. Assuming that the interest runs from the date of issue, the amount of interest expenditure debited to profit and loss account for the year ended March 31, 2005 = ?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 9
Calculation of interest expenditure for the year ended March 31, 2005:


Given data:
- Date of issue: May 01, 2004
- Face value of debentures: Rs.100
- Number of debentures issued: 10,000
- Premium on debentures: 20%
- Interest rate: 7%
- Interest payment dates: September 30 and March 31
Step 1: Calculate the interest expense for the period from May 01, 2004, to March 31, 2005:
- The interest expense is calculated based on the face value of the debentures.
- The interest runs from the date of issue, i.e., May 01, 2004, to March 31, 2005, which is a period of 11 months.
Step 2: Calculate the interest expense for the period from May 01, 2004, to September 30, 2004:
- The interest expense for this period is calculated for 5 months (May, June, July, August, and September).
- The interest rate is 7% per annum, so the monthly interest rate is 7%/12 = 0.5833%.
- The face value of each debenture is Rs.100, so the interest expense per debenture for 5 months is Rs.100 * 0.5833% * 5 = Rs.2.9165.
- Since 10,000 debentures were issued, the total interest expense for 5 months is Rs.2.9165 * 10,000 = Rs.29,165.
Step 3: Calculate the interest expense for the period from October 01, 2004, to March 31, 2005:
- The interest expense for this period is calculated for 6 months (October, November, December, January, February, and March).
- The face value of each debenture is Rs.100, so the interest expense per debenture for 6 months is Rs.100 * 0.5833% * 6 = Rs.3.4998.
- Since 10,000 debentures were issued, the total interest expense for 6 months is Rs.3.4998 * 10,000 = Rs.34,998.
Step 4: Calculate the total interest expense for the year ended March 31, 2005:
- The total interest expense is the sum of the interest expenses calculated in Step 2 and Step 3.
- Total interest expense = Rs.29,165 + Rs.34,998 = Rs.64,163.
Therefore, the amount of interest expenditure debited to the profit and loss account for the year ended March 31, 2005, is Rs.64,163.
Test: Issue Of Debentures - 3 - Question 10

Which of the following is/are true with respect to debentures?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 10
Debentures

Debentures are long-term debt instruments issued by companies or governments to raise capital. They are essentially a type of loan that investors provide to the issuer in exchange for regular interest payments and the return of the principal amount at maturity. Here are the details on the statements mentioned:


A: They can be issued for cash
- Debentures can definitely be issued in exchange for cash. This is a common method used by companies to raise funds for various purposes.
B: They can be issued for consideration other than cash
- Debentures can also be issued in exchange for consideration other than cash. This means that a company can issue debentures in exchange for assets, services, or any other form of consideration agreed upon by the parties involved.
C: They cannot be issued as collateral security
- This statement is false. Debentures can be issued as collateral security. In fact, many companies issue secured debentures where they provide some form of collateral, such as assets or property, to secure the debt and provide additional security to the debenture holders.
D: Both (a) and (b) above
- This statement is true. Both statement A and statement B are correct. Debentures can be issued for cash as well as for consideration other than cash.
Test: Issue Of Debentures - 3 - Question 11

W Ltd. issued 20,000, 8% debentures of Rs.10 each at par, which are redeemable after 5 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year = ?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 11

Given:
- Number of debentures issued = 20,000
- Face value of each debenture = Rs.10
- Rate of interest on debentures = 8%
- Debentures are redeemable after 5 years at a premium of 20%
To find the amount of loss on redemption of debentures to be written off every year, we need to calculate the premium amount and divide it by the number of years.
Step 1: Calculate the premium amount:
- Face value of each debenture = Rs.10
- Premium rate = 20%
- Premium amount = Face value * Premium rate = 10 * 20% = Rs.2
Step 2: Calculate the total premium amount:
- Total premium amount = Premium amount * Number of debentures = 2 * 20,000 = Rs.40,000
Step 3: Calculate the loss on redemption to be written off every year:
- Loss on redemption = Total premium amount / Number of years = 40,000 / 5 = Rs.8,000
Therefore, the amount of loss on redemption of debentures to be written off every year is Rs.8,000. Hence, the correct answer is option D.
Test: Issue Of Debentures - 3 - Question 12

When debentures are issued as collateral security, the final entry for recording the transaction in the books is __________.

Detailed Solution for Test: Issue Of Debentures - 3 - Question 12
Explanation:
The correct entry for recording the transaction when debentures are issued as collateral security is as follows:
- Debit the Debenture Suspense Account: When debentures are issued as collateral security, the debentures are not immediately transferred to the creditor. Instead, they are held in suspense until the loan for which security is given is repaid. Thus, the Debenture Suspense Account is debited to reflect this.
- Credit the Debentures Account: The Debentures Account is credited to show that the debentures have been issued as collateral security.
Therefore, the final entry for recording the transaction in the books is to debit the Debenture Suspense Account and credit the Debentures Account.
Final Entry:
Debit Debenture Suspense Account and credit Debentures Account. (Option C)
Test: Issue Of Debentures - 3 - Question 13

Which of the following is false?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 13

Statement A:
- A company can issue redeemable debentures.
- This statement is true. A debenture is a type of debt instrument that a company can issue to raise capital. Redeemable debentures are those that can be repaid by the company at a predetermined date or at the request of the debenture holder.
Statement B:
- A company can issue debentures with voting rights.
- This statement is false. Debentures are typically issued as a form of borrowing and do not carry voting rights. Voting rights are usually associated with shares of a company's stock.
Statement C:
- A company can buy its own shares.
- This statement is true. A company can repurchase its own shares from the market, which is known as share buyback. This can be done for various reasons, such as returning capital to shareholders or reducing the number of outstanding shares.
Statement D:
- A company can buy its own debentures.
- This statement is true. A company can buy back its own debentures from the market if it wishes to reduce its debt or retire the debentures early. This is similar to a share buyback but applies to debt instruments instead.
Therefore, the false statement is B: A company can issue debentures with voting rights.
Test: Issue Of Debentures - 3 - Question 14

Which of the following is false with respect to debentures?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 14
False Statement Regarding Debentures:

Debentures are long-term debt instruments issued by companies to raise funds from the public. They have certain characteristics and features that differentiate them from other types of financial instruments. However, one of the statements provided is false with respect to debentures:



  • A: They can be issued for cash - True. Debentures can be issued in exchange for cash, which is the most common method of raising funds.

  • B: They can be issued for consideration other than cash - True. Debentures can also be issued in exchange for assets, such as land or machinery, or for services rendered.

  • C: They can be issued as collateral security - True. Debentures can be secured by specific assets of the company, which serve as collateral in case of default.

  • D: They can be issued in lieu of dividends - False. Debentures are not issued in lieu of dividends. Dividends are a share of profits distributed to shareholders, while debentures represent borrowed money that needs to be repaid with interest.


Therefore, the false statement is option D: They can be issued in lieu of dividends. Debentures are not issued in place of dividends, but rather as a means of raising long-term capital for the company.
Test: Issue Of Debentures - 3 - Question 15

Debentures can be _________.I. Mortgage Debentures or Simple Debentures.

II. Registered Debentures Or Bearer Debentures.

III. Redeemable Debentures or Irredeemable Debentures.

IV. Convertible Debentures or Non-convertible Debentures.

Detailed Solution for Test: Issue Of Debentures - 3 - Question 15

Types of Debentures:


I. Mortgage Debentures or Simple Debentures:



  • Mortgage Debentures: These debentures are secured by a charge on the assets of the company, typically its immovable properties.

  • Simple Debentures: These debentures are not secured by any specific charge on the assets of the company.


II. Registered Debentures or Bearer Debentures:



  • Registered Debentures: These debentures are recorded in the books of the company, and ownership is transferred through proper registration.

  • Bearer Debentures: These debentures are negotiable instruments that are transferable by mere delivery and do not require any registration.


III. Redeemable Debentures or Irredeemable Debentures:



  • Redeemable Debentures: These debentures are issued with a fixed maturity date and are repayable on or before that date.

  • Irredeemable Debentures: These debentures do not have a fixed maturity date and are not repayable by the company during its lifetime.


IV. Convertible Debentures or Non-convertible Debentures:



  • Convertible Debentures: These debentures can be converted into equity shares of the company at a predetermined ratio and within a specified period.

  • Non-convertible Debentures: These debentures cannot be converted into equity shares and remain as debt obligations of the company until maturity.


Answer: All of (I), (II), (III), and (IV) above (Option D)


Debentures can be categorized into various types based on their security, transferability, redeemability, and convertibility. The different types of debentures include mortgage debentures or simple debentures, registered debentures or bearer debentures, redeemable debentures or irredeemable debentures, and convertible debentures or non-convertible debentures.

Test: Issue Of Debentures - 3 - Question 16

Which of the following statements is false?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 16
False Statement: The issue price and redemption value of debentures cannot differ.
Explanation:
Debentures are a form of long-term debt instrument issued by a company to raise funds from the public. They are typically used by companies to finance their operations or undertake new projects. Let's examine each statement to determine which one is false:
1. Debenture is a form of public borrowing: This statement is true. Debentures are a type of public borrowing where companies raise funds by offering debentures to the general public or institutional investors.
2. It is customary to prefix debentures with the agreed rate of interest: This statement is also true. Debentures are usually issued with a fixed rate of interest, and it is customary to mention this rate of interest when describing the debentures.
3. Debenture interest is a charge against profits: This statement is true. Debenture interest is considered an expense and is charged against the company's profits in the income statement. It represents the cost of borrowing for the company.
4. The issue price and redemption value of debentures cannot differ: This statement is false. The issue price and redemption value of debentures can differ. The issue price is the price at which the debentures are initially issued to investors, while the redemption value is the amount that will be repaid to the debenture holders at the time of maturity. The redemption value can be equal to, higher than, or lower than the issue price depending on various factors such as market conditions, interest rates, and creditworthiness of the issuer.
Therefore, the false statement is D: The issue price and redemption value of debentures cannot differ.
Test: Issue Of Debentures - 3 - Question 17

As per the Companies Act, “Interest accrued and due on debentures” should be shown

Detailed Solution for Test: Issue Of Debentures - 3 - Question 17
Companies Act and Treatment of Interest on Debentures:
The Companies Act specifies how the interest accrued and due on debentures should be shown in the financial statements. It is important for companies to accurately present this information to provide transparency and comply with accounting standards. The correct treatment for showing interest on debentures is as follows:
1. Under Debentures:
- The interest accrued and due on debentures should be shown as a separate line item under the category of "Debentures" in the financial statements.
- This treatment accurately reflects the nature of the interest as a liability of the company towards the debenture holders.
2. As Current Liabilities:
- The interest accrued and due on debentures can also be shown as a part of current liabilities if it is payable within one year.
- This treatment is applicable when the maturity date of the debentures and the payment of interest is within the current accounting period.
3. As Provisions:
- In some cases, the interest accrued and due on debentures may be shown as a provision if it is not payable within one year.
- This treatment is applicable when the maturity date of the debentures and the payment of interest extends beyond the current accounting period.
4. As a Reduction of Bank Balance:
- The interest accrued and due on debentures should not be shown as a reduction of bank balance.
- This treatment is not in line with accounting principles and can be misleading in the financial statements.
Conclusion:
In conclusion, as per the Companies Act, the interest accrued and due on debentures should be shown under the category of "Debentures" in the financial statements. However, depending on the maturity date and payment period, it can also be shown as current liabilities or provisions. It is important for companies to accurately present this information to provide transparency and comply with accounting standards.
Test: Issue Of Debentures - 3 - Question 18

T Ltd. purchased land and building from U Ltd. for a book value of Rs.2,00,000. The consideration was paid by issue of 12% Debentures of Rs.100 each at a discount of 20%.The debentures account is credited with _____________.

Detailed Solution for Test: Issue Of Debentures - 3 - Question 18

To find the amount credited to the debentures account, we need to calculate the total value of the debentures issued to U Ltd.
Given:
- The book value of the land and building purchased is Rs.2,00,000.
- The debentures are issued at a discount of 20%.
- The face value of each debenture is Rs.100.
Step 1: Calculate the total value of the debentures issued.
- Face value of each debenture: Rs.100
- Total number of debentures issued: Book value of land and building / Face value of each debenture = Rs.2,00,000 / Rs.100 = 2000 debentures
Step 2: Calculate the discount on the debentures.
- Discount rate: 20%
- Discount on each debenture: Face value of each debenture * Discount rate = Rs.100 * 20% = Rs.20
- Total discount on all debentures: Discount on each debenture * Total number of debentures = Rs.20 * 2000 = Rs.40,000
Step 3: Calculate the amount credited to the debentures account.
- Total value of the debentures issued: (Face value of each debenture - Discount on each debenture) * Total number of debentures = (Rs.100 - Rs.20) * 2000 = Rs.80 * 2000 = Rs.1,60,000
Therefore, the debentures account is credited with Rs.1,60,000.
Test: Issue Of Debentures - 3 - Question 19

P Ltd. issued 5,000, 12% debentures of Rs.100 each at a premium of 10%, which are redeemable after 10 years at a premium of 20%. The amount of loss on redemption of debentures to be written off every year = ?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 19

To calculate the loss on redemption of debentures to be written off every year, we need to follow these steps:
1. Calculate the total face value of debentures issued:
Total face value = Number of debentures * Face value per debenture
Total face value = 5,000 * Rs.100 = Rs.500,000
2. Calculate the total premium received on the issue of debentures:
Total premium received = Number of debentures * Premium per debenture
Total premium received = 5,000 * Rs.10 = Rs.50,000
3. Calculate the total amount to be paid on redemption of debentures:
Total amount to be paid = Total face value + Total premium received
Total amount to be paid = Rs.500,000 + Rs.50,000 = Rs.550,000
4. Calculate the premium on redemption of debentures:
Premium on redemption = Total amount to be paid * Premium on redemption %
Premium on redemption = Rs.550,000 * 20/100 = Rs.110,000
5. Calculate the loss on redemption of debentures:
Loss on redemption = Premium on redemption - Total premium received
Loss on redemption = Rs.110,000 - Rs.50,000 = Rs.60,000
6. Calculate the loss on redemption of debentures to be written off every year:
Loss on redemption to be written off = Loss on redemption / Number of years to redeem
Loss on redemption to be written off = Rs.60,000 / 10 = Rs.6,000
Therefore, the amount of loss on redemption of debentures to be written off every year is Rs.6,000.
Answer: C) Rs.10,000
Test: Issue Of Debentures - 3 - Question 20

Which of the following is true with regard to 10% Debentures issued at a discount of 20%?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 20



The correct option is D: The face value and the carrying amount of debentures are equal.


Here is the explanation for each option:


A: The carrying amount of debentures gets reduced each year at a rate of 20%.
- This statement is not true. The carrying amount of debentures does not change each year. It remains the same until redemption.


B: Issue price and the carrying amount of debentures are equal.
- This statement is not true. If the debentures are issued at a discount of 20%, the carrying amount will be less than the issue price.


C: At the time of redemption, the debenture holder will be paid the issue price.
- This statement is not true. At the time of redemption, the debenture holder will be paid the face value of the debentures, not the issue price.


D: The face value and the carrying amount of debentures are equal.
- This statement is true. The face value of the debentures is the amount that the debenture holder will be paid at the time of redemption. The carrying amount of debentures is the amount at which the debentures are recorded in the books of the company. In this case, since the debentures are issued at a discount of 20%, the carrying amount will be equal to the face value minus the discount, which is equal to the face value itself.


Therefore, option D is the correct answer.
Test: Issue Of Debentures - 3 - Question 21

Which of the following is false?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 21
False Statement: Interest on debentures is an appropriation of profits.
Explanation:
There are four statements given, and we need to determine which one is false. Let's analyze each statement:
A: Equity is owners' stake and the debenture is a debt:
- This statement is true. Equity represents ownership in a company, while debentures are a form of debt.
B: Rate of interest on debentures is fixed:
- This statement is true. Debentures typically have a fixed rate of interest that is agreed upon at the time of issuance.
C: Debenture holders get preferential treatment over the equity holders at the time of liquidation:
- This statement is true. In the event of liquidation, debenture holders have a higher claim on the company's assets compared to equity holders.
D: Interest on debentures is an appropriation of profits:
- This statement is false. Interest on debentures is a liability for the company and is typically treated as an expense in the income statement. It is not considered an appropriation of profits.
Therefore, the false statement is D: Interest on debentures is an appropriation of profits.
Test: Issue Of Debentures - 3 - Question 22

Discount on issue of debentures is a ____________.

Detailed Solution for Test: Issue Of Debentures - 3 - Question 22
Discount on issue of debentures is a capital loss to be written off over the tenure of the debentures.

  • Explanation: When a company issues debentures at a discount, it means that the debentures are issued at a price lower than their face value. This discount is treated as a capital loss for the company.

  • Treatment: The discount on the issue of debentures is written off over the tenure of the debentures. It is spread out and charged to the profit and loss account over the period of the debentures.

  • Example: Let's say a company issues debentures with a face value of $100 each at a discount of 10%. The debentures are issued at $90 each. The discount of $10 per debenture will be written off over the tenure of the debentures, usually by charging $1 per year to the profit and loss account for 10 years.

  • Objective: The objective of spreading the capital loss over the tenure of the debentures is to match the loss with the benefits derived from the debentures over the same period.

  • Accounting treatment: The discount on the issue of debentures is debited to the profit and loss account and credited to the discount on issue of debentures account. The discount on issue of debentures account is then gradually transferred to the profit and loss account over the tenure of the debentures.

Test: Issue Of Debentures - 3 - Question 23

On May 01, 2003, Y Ltd. issued 7% 40,000 convertible debentures of Rs.100 each at a premium of 20%. Interest is payable on September 30 and March 31, every year. Assuming that the interest runs from the date of issue, the amount of interest expenditure debited to profit and loss account for the year ended March 31, 2004 = ?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 23
Given:
- Y Ltd. issued 7% 40,000 convertible debentures of Rs.100 each at a premium of 20%.
- Interest is payable on September 30 and March 31, every year.
- Interest runs from the date of issue.
To Find:
The amount of interest expenditure debited to the profit and loss account for the year ended March 31, 2004.

To calculate the interest expenditure, we need to consider the following factors:
1. Total value of debentures issued:
- Number of debentures issued = 40,000
- Face value of each debenture = Rs.100
- Total value of debentures issued = 40,000 x Rs.100 = Rs.4,000,000
2. Premium on debentures:
- Premium rate = 20%
- Premium on each debenture = Rs.100 x 20% = Rs.20
- Total premium on debentures = Rs.20 x 40,000 = Rs.800,000
3. Interest rate:
- Interest rate on debentures = 7%
4. Calculation of interest expenditure:
- Interest expenditure for the year ended March 31, 2004 includes interest for the period from May 1, 2003, to March 31, 2004.
- The interest payment dates are September 30 and March 31.
- The interest for the period from May 1, 2003, to September 30, 2003, is not payable in the current year.
- The interest for the period from October 1, 2003, to March 31, 2004, is payable in the current year.
- The interest expenditure can be calculated as follows:
- Interest payable for the period from October 1, 2003, to March 31, 2004 = (Total value of debentures issued + Premium on debentures) x Interest rate
- Interest payable = (Rs.4,000,000 + Rs.800,000) x 7%
= Rs.4,800,000 x 7%
= Rs.336,000
Answer:
The amount of interest expenditure debited to the profit and loss account for the year ended March 31, 2004, is Rs.2,56,667 (Option D).
Test: Issue Of Debentures - 3 - Question 24

Which of the following is false with respect to debentures?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 24
False Statement Regarding Debentures:

  • A: They can be issued for cash

  • B: They can be issued for consideration other than cash

  • C: They can be issued as collateral security

  • D: They can be issued in lieu of dividends


Answer: D


Detailed Explanation:

Debentures are a type of long-term debt instrument that companies issue to raise funds from the public. They are essentially loan agreements where the company promises to repay the principal amount along with interest to the debenture holders.


The false statement with respect to debentures is:


D: They can be issued in lieu of dividends


The other statements are true:



  • A: They can be issued for cash: Companies can issue debentures in exchange for cash to raise capital.

  • B: They can be issued for consideration other than cash: Debentures can also be issued in exchange for assets, securities, or other forms of consideration apart from cash.

  • C: They can be issued as collateral security: Companies can secure debentures by providing collateral, such as property or assets, to the debenture holders.


However, debentures cannot be issued in lieu of dividends. Dividends are a distribution of profits to the shareholders of a company, and they are usually paid in the form of cash or additional shares. Debentures are a separate form of financing and do not replace dividends.


Therefore, option D is the false statement with respect to debentures.

Test: Issue Of Debentures - 3 - Question 25

Which of the following is false?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 25

The false statement among the given options is option B: A company can issue debentures with voting rights.
Explanation:
To analyze the statements and determine the false one, let's break down each option:
A: A company can issue irredeemable debentures
- This statement is true. A company has the ability to issue debentures that do not have a maturity date or are not redeemable.
B: A company can issue debentures with voting rights
- This statement is false. Debentures are debt instruments that do not typically carry voting rights. Shareholders, on the other hand, are entitled to voting rights in a company.
C: A company can buy its own shares
- This statement is true. A company can repurchase its own shares through a process known as share buybacks. This can be done to reduce the number of outstanding shares or to return capital to shareholders.
D: A company can buy its own debentures
- This statement is true. A company has the ability to buy back its own debentures or bonds from the market.
Therefore, the false statement among the given options is option B: A company can issue debentures with voting rights. Debentures are typically not associated with voting rights; instead, they represent a form of debt for the company.
Test: Issue Of Debentures - 3 - Question 26

Which of the following is not a characteristic of Bearer Debentures?

Detailed Solution for Test: Issue Of Debentures - 3 - Question 26
Characteristics of Bearer Debentures:
1. They are treated as negotiable instruments.
2. They are transferable by mere delivery.
3. The interest on it is paid to the holder irrespective of identity.
Explanation:
Bearer debentures are a type of debenture where the ownership is not recorded in the company's register. Instead, the debenture is transferred by physical possession or delivery. Let's examine each characteristic to determine which one is not applicable to bearer debentures:
1. They are treated as negotiable instruments: Bearer debentures are considered negotiable instruments, meaning they can be transferred from one party to another by delivery or endorsement. This characteristic allows for ease of transfer and liquidity.
2. They are transferable by mere delivery: Bearer debentures are transferable by the mere delivery of the physical debenture certificate. No formal deed of transfer or registration is required. This makes the transfer process simpler and less bureaucratic.
3. The interest on it is paid to the holder irrespective of identity: Bearer debentures entitle the holder to receive interest payments from the issuing company. The identity of the holder is not relevant for the payment of interest. This characteristic ensures that the holder of the debenture receives the interest payment regardless of who currently possesses the debenture.
Conclusion:
From the given characteristics, option B is not a characteristic of bearer debentures. The transfer of bearer debentures does not require a deed of transfer. Instead, they are transferred by mere delivery.
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