Commerce Exam > Commerce Questions > Which of the following is false?a)Equity is o...
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Which of the following is false?
- a)Equity is owners’ stake and the debenture is a debt
- b)Rate of interest on debentures is fixed
- c)Debenture holders get preferential treatment over the equity holders at the time of liquidation
- d)Interest on debentures is an appropriation of profits.
Correct answer is option 'D'. Can you explain this answer?
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Which of the following is false?a)Equity is owners stake and the deben...
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.
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.
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Which of the following is false?a)Equity is owners stake and the deben...
Understanding the False Statement
The statement that is false is option ‘D’: "Interest on debentures is an appropriation of profits." Let’s delve into why this is incorrect.
1. Nature of Debentures
- Debentures represent a form of debt raised by a company.
- They are essentially loans taken by the company from debenture holders.
2. Fixed Interest Payments
- The rate of interest on debentures is predetermined and fixed.
- This means that the company is obliged to pay this interest irrespective of its profit levels.
3. Priority in Liquidation
- In the event of liquidation, debenture holders have a superior claim over equity holders.
- They are repaid before any distributions are made to shareholders.
4. Appropriation of Profits
- Interest on debentures is not an appropriation of profits; rather, it is treated as an expense.
- It is deducted from the company's earnings before arriving at net profit.
- This makes it a liability of the company, not a distribution of profits.
Conclusion
- Hence, the false statement is that “Interest on debentures is an appropriation of profits.”
- It is crucial to recognize that debenture interest is an obligation that affects the company's cash flow but does not directly represent profit distribution to shareholders.
Understanding these distinctions is essential for grasping the financial structure of a company and the treatment of different financing instruments.
The statement that is false is option ‘D’: "Interest on debentures is an appropriation of profits." Let’s delve into why this is incorrect.
1. Nature of Debentures
- Debentures represent a form of debt raised by a company.
- They are essentially loans taken by the company from debenture holders.
2. Fixed Interest Payments
- The rate of interest on debentures is predetermined and fixed.
- This means that the company is obliged to pay this interest irrespective of its profit levels.
3. Priority in Liquidation
- In the event of liquidation, debenture holders have a superior claim over equity holders.
- They are repaid before any distributions are made to shareholders.
4. Appropriation of Profits
- Interest on debentures is not an appropriation of profits; rather, it is treated as an expense.
- It is deducted from the company's earnings before arriving at net profit.
- This makes it a liability of the company, not a distribution of profits.
Conclusion
- Hence, the false statement is that “Interest on debentures is an appropriation of profits.”
- It is crucial to recognize that debenture interest is an obligation that affects the company's cash flow but does not directly represent profit distribution to shareholders.
Understanding these distinctions is essential for grasping the financial structure of a company and the treatment of different financing instruments.
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Which of the following is false?a)Equity is owners stake and the debenture is a debtb)Rate of interest on debentures is fixedc)Debenture holders get preferential treatment over the equity holders at the time of liquidationd)Interest on debentures is an appropriation of profits.Correct answer is option 'D'. Can you explain this answer?
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