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Direction: Choose the correct answer to the following questions from the given alternatives:
Debenture premium cannot be used to:
- a)Write off the discount on issue of shares or debentures.
- b)Write off the premium on redemption of shares or debentures.
- c)Pay dividends.
- d)Write off capital loss.
Correct answer is option 'C'. Can you explain this answer?
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Direction:Choose the correct answer to the following questions from th...
Understanding Debenture Premium
A debenture premium arises when a company issues debentures at a price higher than their face value. This premium can be utilized for specific purposes, but there are restrictions on its use.
Why Dividends Cannot Be Paid from Debenture Premium
1. Nature of Premium:
- The debenture premium is considered a capital profit, not a revenue profit.
- It reflects the additional amount investors are willing to pay over the nominal value of the debentures, primarily due to the perceived creditworthiness of the company.
2. Legal Restrictions:
- According to company laws, debenture premiums are not classified as profits generated from business operations.
- Dividends, on the other hand, can only be paid out of profits earned by the company. Since debenture premiums do not fall under this category, they cannot be used for dividend distribution.
3. Financial Prudence:
- Using capital reserves for paying dividends is generally viewed as financially imprudent.
- It could lead to liquidity issues and may affect the company’s ability to meet its obligations, particularly if it relies on capital funds for operational liquidity.
Permissible Uses of Debenture Premium
Debenture premiums can be used for the following purposes:
- Write Off Discounts:
- They can be utilized to write off any discount on the issue of shares or debentures.
- Redemption Premiums:
- The premium can be applied to write off the premium on redemption of shares or debentures.
- Capital Losses:
- It may also be used to write off capital losses, ensuring that the company maintains its capital integrity.
In conclusion, while debenture premiums have specific applications, paying dividends is not one of them due to the nature of capital reserves and legal guidelines.
A debenture premium arises when a company issues debentures at a price higher than their face value. This premium can be utilized for specific purposes, but there are restrictions on its use.
Why Dividends Cannot Be Paid from Debenture Premium
1. Nature of Premium:
- The debenture premium is considered a capital profit, not a revenue profit.
- It reflects the additional amount investors are willing to pay over the nominal value of the debentures, primarily due to the perceived creditworthiness of the company.
2. Legal Restrictions:
- According to company laws, debenture premiums are not classified as profits generated from business operations.
- Dividends, on the other hand, can only be paid out of profits earned by the company. Since debenture premiums do not fall under this category, they cannot be used for dividend distribution.
3. Financial Prudence:
- Using capital reserves for paying dividends is generally viewed as financially imprudent.
- It could lead to liquidity issues and may affect the company’s ability to meet its obligations, particularly if it relies on capital funds for operational liquidity.
Permissible Uses of Debenture Premium
Debenture premiums can be used for the following purposes:
- Write Off Discounts:
- They can be utilized to write off any discount on the issue of shares or debentures.
- Redemption Premiums:
- The premium can be applied to write off the premium on redemption of shares or debentures.
- Capital Losses:
- It may also be used to write off capital losses, ensuring that the company maintains its capital integrity.
In conclusion, while debenture premiums have specific applications, paying dividends is not one of them due to the nature of capital reserves and legal guidelines.
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Explanation:
- 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.
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Direction:Choose the correct answer to the following questions from the given alternatives:Debenture premium cannot be used to:a)Write off the discount on issue of shares or debentures.b)Write off the premium on redemption of shares or debentures.c)Pay dividends.d)Write off capital loss.Correct answer is option 'C'. Can you explain this answer?
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Direction:Choose the correct answer to the following questions from the given alternatives:Debenture premium cannot be used to:a)Write off the discount on issue of shares or debentures.b)Write off the premium on redemption of shares or debentures.c)Pay dividends.d)Write off capital loss.Correct answer is option 'C'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Direction:Choose the correct answer to the following questions from the given alternatives:Debenture premium cannot be used to:a)Write off the discount on issue of shares or debentures.b)Write off the premium on redemption of shares or debentures.c)Pay dividends.d)Write off capital loss.Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Direction:Choose the correct answer to the following questions from the given alternatives:Debenture premium cannot be used to:a)Write off the discount on issue of shares or debentures.b)Write off the premium on redemption of shares or debentures.c)Pay dividends.d)Write off capital loss.Correct answer is option 'C'. Can you explain this answer?.
Direction:Choose the correct answer to the following questions from the given alternatives:Debenture premium cannot be used to:a)Write off the discount on issue of shares or debentures.b)Write off the premium on redemption of shares or debentures.c)Pay dividends.d)Write off capital loss.Correct answer is option 'C'. Can you explain this answer? for CA Foundation 2024 is part of CA Foundation preparation. The Question and answers have been prepared according to the CA Foundation exam syllabus. Information about Direction:Choose the correct answer to the following questions from the given alternatives:Debenture premium cannot be used to:a)Write off the discount on issue of shares or debentures.b)Write off the premium on redemption of shares or debentures.c)Pay dividends.d)Write off capital loss.Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for CA Foundation 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Direction:Choose the correct answer to the following questions from the given alternatives:Debenture premium cannot be used to:a)Write off the discount on issue of shares or debentures.b)Write off the premium on redemption of shares or debentures.c)Pay dividends.d)Write off capital loss.Correct answer is option 'C'. Can you explain this answer?.
Solutions for Direction:Choose the correct answer to the following questions from the given alternatives:Debenture premium cannot be used to:a)Write off the discount on issue of shares or debentures.b)Write off the premium on redemption of shares or debentures.c)Pay dividends.d)Write off capital loss.Correct answer is option 'C'. Can you explain this answer? in English & in Hindi are available as part of our courses for CA Foundation.
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