Meaning and kinds of debentures - class-XII

Auction Rated Debentures (ARDs) are a specific financial instrument that combines features of commercial paper and debentures.

Jobbers are independent dealers in the stock exchange who buy and sell shares for their own account, rather than acting as agents for others like brokers.

Debentures are never redeemed by the company. This statement is False. 
Reasons :
(i) Debenture is a document issued by a company under its company seal and signed by the Director, acknowledging the loan accepted by the company from a party under certain terms and conditions stated there in.
(ii) Debenture capital represents borrowed funds, which means, it has to be repaid after the expiry of certain period of time, with a fixed rate of return.
(iii) On the basis of redeemability there are two types of debentures : (a) Redeemable Debentures - Which are repaid by the company on the expiry of specified time. (b) Irredeemable Debentures - These debentures are repaid by the company according to its convenance. Therefore, it can't be said that debentures are never redeemed by the company. 

This statement is False.
 Reasons: According to Webster's Dictionary, a Debenture is an interest-bearing certificate issued by a government or business, promising to pay to the holder specified sum at a specified date. In fact, there is no difference between Debentures and bonds. 
(1) Debenture is a loan taken by company for medium to long period. Debenture holder therefore is the creditor of the company. 
(2) Debenture capital is returnable and therefore has no permanency. Debenture holder earns interest as return. 
(3) Debenture holder cannot participate in management of company. They cannot take any decision on matters of the company. 
(4) Debenture holder has no voting rights on matters related to company like he cannot appoint Directors / Auditors of the company. 
(5) The real owner of the company is the equity shareholder. Equity shareholders are risk bearers of the company and they are having the voting rights and taking participation in management of the company. Hence Debenture holders are not the owners of the company. 

When a company buys its own debentures from the market at a price lower than their face value, the difference represents a gain or profit on the redemption of the debt.

Once the debentures are fully redeemed, the balance remaining in the Debenture Redemption Fund (DRF) is no longer required for that purpose and is transferred to the General Reserve.

When the required rate of return (market interest rate) equals the coupon rate of a bond, the bond is priced at par, meaning its value equals its face value.

A debenture is a formal document acknowledging a debt, typically issued under a company seal, and represents a form of long-term borrowing.

Debentures can indeed be secured (by assets) or unsecured. Therefore, the statement that 'Debentures cannot be secured' is false.

The face value of a debenture represents the principal amount the company is obligated to repay. The carrying amount is the book value, which remains equal to the face value regardless of the issue price, as the discount is treated as a separate deferred charge.

Debentures are debt instruments, and there is no legal restriction preventing a company from issuing them at a discount while redeeming them at a premium. The other options are incorrect because debenture holders are creditors, not owners, and they are entitled to interest regardless of profit.

When a fixed asset is purchased using debentures, the asset account is debited to record the increase in assets, and the debenture account is credited to record the liability created.

Discount on the issue of debentures is a capital loss because it relates to the cost of raising long-term capital. It is amortized over the tenure of the debenture rather than being written off entirely in the year of issue.

Debentures are debt instruments and do not carry voting rights, which are reserved for equity shareholders. The other options describe legal actions a company can perform.

Debentures are debt instruments and do not carry voting rights, which are reserved for equity shareholders. The other options are valid types of debentures.

Under the Companies Act, the underwriting commission for debentures is capped at 2.5% of the issue price.

The face value is 2,00,000. The cash received is 1,90,000. The difference is 10,000. However, the loss on issue is 26,000, which includes the 16,000 premium on redemption. Thus, the discount is 26,000 - 16,000 = 10,000. 10,000 / 2,00,000 = 5%.

Debenture A/c is a Personal A/c as it reflects the liability of the company towards debentureholders'.

A debenture is a long-term debt instrument that is not secured by physical assets or collateral, making it an unsecured bond.

Blue chip companies' shares and debentures are traded in the capital market, which deals with long-term securities.

Total discount = 1000 * 100 * 0.06 = 6000. Since they are redeemed in 5 equal annual installments, the discount is written off proportionally. 6000 / 5 = 1200 per year.

Redeemable debentures are those that must be repaid by the company at the end of a specified period.

Debentures can be redeemed through various methods, including open market purchases, conversion into new debentures, or conversion into equity shares.

Whatever the company pays as consideration will be credited to the Realisation Account. If expenses are incurred by the firm, the amount will be debited to the Realisation Account. If the creditors are taken over by the company, no further treatment is necessary beyond transferring them to the credit of Realisation Account; but if creditors are to be paid by the firm, the actual amount paid to them will be debited to liability account concerned; the difference between the book figure and the amount actually paid will be transferred to Realisation Account. The profit or’ loss on realisation will be transferred to the capital accounts in the profit-sharing ratio.

Premium on redemption of debentures is a personal account and it is a liability of the company which is payable on redemption.

First calculate net earnings available to equity shareholders deducting interest on debt i.e. NI then calculate market value of equity i.e. $\frac{NI}{K _e}$ where $k _e$ = market capitalization rate then value of firm V = S + B lastly $K _e$ = $\frac{EBIT}{V}$.

Non-convertible debentures are debt instruments that do not have the option to be converted into equity shares; they remain debt until maturity.

Debenture holders are creditors of the company and are entitled to receive a fixed rate of interest on their investment.

Net worth, owners' equity, and non-redeemable shares are all components of equity or capital. Fixed interest liability is a debt obligation, making it the odd one out.

Debenture holders are lenders, not owners. Therefore, they do not have voting rights, nor are they entitled to dividends or bonus shares, which are reserved for equity shareholders.

Debenture holders provide capital to the company in the form of a loan, making them lenders to the company.

Dividends are distributions of profit to shareholders. Debentures are debt, and interest is paid on them; they cannot be issued in lieu of dividends.

In the event of liquidation, debenture holders have a prior claim over shareholders, but they are not the only ones with priority. Other creditors and statutory dues often rank higher or equal, so 'none of the above' is the most accurate choice given the options.

Interest on debentures is a mandatory expense that must be paid regardless of whether the company earns a profit. Equity and preference dividends are typically paid out of profits.

Interest on debentures is a charge against profits, not an appropriation of profits. An appropriation of profits is a distribution of earnings, whereas interest is an expense incurred to earn those profits.

Interest on debentures is a fixed financial obligation that the company must pay regardless of its profit status, making it a burden during periods of no profit.

Debentures are debt instruments issued by companies. They are generally unsecured or secured by assets, and they are considered liabilities that rank ahead of equity. Option C correctly identifies that debentures are a form of debt, though the specific ranking can vary by contract.

Debentures are debt instruments representing a loan to a company. They are distinct from income bonds, which only pay interest if earnings are sufficient. Option C is the standard textbook definition provided in this context.

Appropriation of profit refers to the distribution of net profit after tax. Debenture interest is a charge against profit, meaning it must be paid regardless of whether the company makes a profit or a loss, unlike dividends.

Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.

Debentures can be classified by security (mortgage vs. simple), ownership (registered vs. bearer), and convertibility (convertible vs. non-convertible). All listed categories are valid ways to classify debentures.

Debentures can be secured in nature, it may be unsecured in nature. A secured debenture is secured by the charge on some asset or set of assets which is known as secured or mortgage debenture and another when it is issued solely on the credibility of the issuer is known as the naked or unsecured debenture. 

The document created by the company, whereby trustees are appointed to protect the interest of debenture-holders before they are offered for public subscription is known as Debenture Trust Deed.

 A trust deed shall be executed by the issuer company in favour of the debenture trustees within six months of the closure of the issue.

Debenture is a written instrument acknowledging a debt to the Company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.

Interest accrued and due on debentures represents a short-term obligation that the company must pay within the next accounting period. Therefore, it is classified as a current liability on the balance sheet.

Legal regulations typically prohibit a partnership firm from acting as a debenture trustee, as the trustee must be an independent corporate entity or institution capable of holding assets in trust, such as a bank or financial institution.

No Public Issue/Rights Issue of Debentures shall be made by a company unless it has appointed one or more Debenture Trustees for such debentures whereas under SEBI guidelines, appointment of Debenture Trustees is compulsory only in case of debentures with maturity of 18 months or more.

Liabilities include debentures (debt obligations) and bank overdraft (short-term borrowing). Prepaid rent is a prepaid expense (current asset), not a liability. Accrued interest can be either an asset (interest receivable) or liability (interest payable), but without context, we assume it's interest receivable. Therefore, only debentures and bank overdraft are clearly liabilities.

When debentures are issued as collateral security, the entry is made in a 'Debenture Suspense Account' to reflect the contingent nature of the liability until the loan is defaulted or repaid.

The classification into first and second debentures refers to the order of repayment or the priority of claims against the company's assets in the event of liquidation.

Advantages of Debt Financing over equity are:

In case of debenture, interest payable is the cost of capital. Interest on debenture is tax deducible and charged to profit & loss account as an expense. It reduces the tax liability of the business. 

Convertible debentures provide the holder with the right to convert their debt instrument into equity shares of the company at a predetermined price or ratio.

Debenture holders lend money to the company, making them creditors. They are entitled to interest payments, unlike shareholders who are owners and entitled to dividends.