Assertion & Reason Type Questions: Issue and Redemption of Debentures

Q1: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Sarita Pvt. Ltd. issued 15% 10,000 debentures at par @ Rs. 100 per debenture. The company suffered a loss but still the directors of the company paid interest on debentures.

Reason (R): Interest on debenture is a charge against profits and therefore, its payment is not subject to the earning of profit.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: Interest on debenture is to be paid even if the company suffers a loss.

Q2: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): The 'discount on debentures' issuance is charged to 'Securities Premium Account' and is reflected as an asset.

Reason (R): The 'discount on debentures' issuance is noted as a capital loss side as a fictitious asset. Hence, has to be written off during the years of its issue.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: The 'discount on debentures' issuance is noted as a capital loss and is charged to 'Securities Premium Account' and is reflected in the asset side as a fictitious asset. Hence, has to be written off during the year of its issue.

Q3: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Issue of debenture does not result in dilution of interest of equity shareholders.

Reason (R): Debenture holders have voting rights.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: c

Sol: Issue of debenture does not result in dilution of interest of equity shareholders as they do not have the right either to vote or to take part in the management of the company.

Q4: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Debenture holders are the creditors of the company carrying a fixed rate of interest.

Reason (R): Debentures are short-term loans taken from the public.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: c

Sol: If a company needs funds for extension and development purposes without increasing its share capital, it can borrow from the general public by issuing certificates called debentures for a fixed period of time and at a fixed rate of interest. Debenture is a long-term debt instrument.

Q5: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): The Bank account is debited when the money is received for debentures.

Reason (R): Bank being a real account needs to be debited when something comes in.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: When debentures are issued at premium, the amount of premium is credited to Debenture Premium Account. Debenture Premium Account is a capital profit and is transferred to Capital Reserve Account. When debentures are issued at discount, the amount of discount is debited to 'Discount on Issue of Debentures Account.

Q6: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Debentures saves income tax.

Reason (R): Interest on debenture is tax deductible expenditure.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: Tax saving bonds enjoy special privileges under Section 80CCF of the Income Tax Act which states that individuals enjoy tax deductions up to Rs 20,000 on the bonds owned by them. This deduction is excluding the Rs 1.5 lakh provided under Section 80C of the Act.

Q7: Directions : In the following questions, a statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:

Assertion (A): Debenture holders do not enjoy any voting right.

Reason (R): A debenture holder just lends money but does not become an owner of the company with the purchase of debentures.

(a) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).

(c) Assertion (A) is true, but Reason (R) is false .

(d) Assertion (A) is false, but Reason (R) is true.

Ans: a

Sol: Debenture holders are only the creditor of the company as debentures are the part of loan.