Banking Financial Awareness · Commerce Accountancy

Credit, Debt, and Finance

1,382 Questions

This topic covers essential concepts of credit, debt, and finance including bankruptcy, debt recovery, and financial acts. These questions are frequently asked in banking and IBPS exams. Test your knowledge of financial terminology and loan classifications.

Debt recovery actsBankruptcy filing proceduresFinancial classificationsMedium term financeCredit loss management

Credit, Debt, and Finance Questions

Multiple choice commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

The _______ debentures are those which are paid after the first debentures have been paid back.

  1. Secured

  2. Unsecured

  3. First

  4. Second
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The second debentures are those which are paid after the first debentures have been paid back. Second debenture holders have the secondary charge over the company's assets.

Multiple choice commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

Debentures may be issued by a company for ________.

  1. Cash

  2. Consideration other than cash

  3. As a collateral security

  4. Any of above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation
Issue of Debentures for Cash :-
Debentures in the general course of business are issued for cash. This issue of debentures that happens can be of three kinds, just like an issue of shares, at par, at a discount, and at a premium. So let us take a look at all three and their respective accounting entries as well.

Issue at Par :-
Here the debentures will be issued exactly at their nominal price, i.e. not above or below the face value of the debentures. Now the company can decide to collect the cash all at once, in a lump sum. Or the money will be collected in installments, like with allotment, first call, second call, last call etc.

Issue at Discount :-
When the debentures are issued at below face value, such issue of debentures is known as a discount issue. Like, say for example the debenture has a nominal value of 100/- but is issued for 90/-. Then such debentures are said to be issued at discount.
Discount on issue of debentures is treated as a capital loss and put under “Miscellaneous Expenses” on the asset side of the balance sheet until it can be written off. Then during the life of the debentures, such discount amount is written off by debiting it to the Profit and Loss A/c. It can also be charged against the Capital Profits of the company.

Issue at Premium:-
Now we come to the issue of debentures at a premium, that is when more money than the nominal value is charged. So if a debenture with a face value of 100/- is sold at 110/- then it is issued at a premium. The amount of the premium is charged to a special account known as Securities Premium Reserve Account. This account will be shown on the liabilities side of the Balance Sheet under the heading of Reserves and Surplus.


Issue of Debentures for Consideration other than Cash :-
Debentures can be issued for non-cash considerations. The company may have purchased assets from some vendors or acquired some other business. Then instead of paying cash, the company may issue debentures to such vendors. Such an issue for debentures can be at par, or for a discount or at a premium.

Issue of Debentures as Collateral Security :-
Debentures can also be issued by a company as collateral security against a bank loan or any such borrowings. A collateral security is like a parallel security which is provided along with the actual security against the loan taken. Debentures issued as such a collateral liability are a contingent liability for the company, i.e. the liability may or may not arise. Only when the company defaults on such a loan will this liability arise.
Multiple choice commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

In the company's balance sheet, debentures are shown under the head _____________.

  1. Secured Loans

  2. Non-Current Liabilities

  3. Current Liabilities

  4. Capital Employed
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Noncurrent liabilities are those obligations not due for settlement within within one year. These liabilities are separately classified in an entity's balance sheet, away from current liabilities. Examples of noncurrent liabilities are:

  • Long-term portion of debt payable

  • Long-term portion of bonds payable

The aggregate amount of noncurrent liabilities is routinely compared to the cash flows of a business, to see if it has the financial resources to fulfill its obligations over the long term. If not, creditors will be less likely to do business with the organization, and investors will not be inclined to invest in it. A factor to be considered in this evaluation is the stability of an organization's cash flows, since stable flows can support a higher debt load with a reduced risk of default.

Multiple choice commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

Debentures ______________ forfeited for non-payment of call moneys.

  1. Can be

  2. Cannot be

  3. Both (A) & (B)

  4. None of above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation
Generally total face value of debenture is demanded by company in installments I.e. Debenture application, Debenture allotment and Debentures calls accounts. It is usual that some of the debenture-holders fail to pay the amount of different installments when these are demanded by company. Such unpaid calls (installments) are called ‘Calls in arrears’. Under the provisions of Companies Act, 1956 debentures cannot be forfeited by company.

Because under section 122 of the Companies Act 1956 a contract with a company to take up and pay for any debenture may be enforced by a decree for specific performance. For the realisation of calls in arrears on debentures the company can only file a suit in the court. Company can charge interest on calls-in-arrears as provided in prospectus.

Sometimes, certain debenture-holders pay money against those calls also which have not yet en demanded by company. In such cases the amount received is credited to calls in advance account. If provided in prospectus, the company pays interest on this amount to debenture-holders at a specified rate. Interest is always calculated for the period, the advance has been received.
Multiple choice commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

Debentures redeemable after 10 years of issue are shown as___________.

  1. Long-term borrowings

  2. Other long-term liabilities

  3. Short-term borrowings

  4. Other short-term liabilities
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Debentures redeemable after 10 years of issue are shown as long-term borrowings since debenture holders invest for a long period of time. Debentures refer to the liabilities of the company that will not become due within one year.

Multiple choice elements of accounts company accounts - redemption of debentures redemption by payment in lump sum accounting effects for redemption of debentures redemption of debentures

Which of the following statements is false?

  1. At maturity, debenture holders get back their money as per the terms and conditions of redemption.

  2. Debentures cab be forfeited for non payment of call money.

  3. In company's balance sheet, debentures are shown under secured loans.

  4. Interest on debentures is charged against profits.
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Debentures are debt instruments and cannot be forfeited for non-payment of call money in the same way shares can be, as they represent a loan rather than equity ownership.

Multiple choice elements of accounts company accounts - redemption of debentures redemption by payment in lump sum accounting effects for redemption of debentures redemption of debentures

Where all the debentures are redeemed, the balance left in the debentures sinking fund account is transferable to:

  1. Debenture account

  2. Sinking fund investment account

  3. Capital redemption reserve account

  4. General reserve account
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Similar to the previous question, the balance in the debenture sinking fund after redemption is transferred to the General Reserve account.

Multiple choice elements of accounts company accounts - redemption of debentures redemption by payment in lump sum accounting effects for redemption of debentures redemption of debentures

When all the debentures are redeemed the balance left in the debentures sinking fund account is transferred to:

  1. General Reserve account

  2. Sinking Fund Investment account

  3. Debenture account

  4. Capital Redemption Reserve account
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Once the debentures are redeemed, the purpose of the sinking fund is fulfilled. The remaining balance in the Sinking Fund account is a free reserve and is transferred to the General Reserve.

Multiple choice elements of accounts company accounts - redemption of debentures redemption by payment in lump sum accounting effects for redemption of debentures redemption of debentures

Under redemption by _________, debentures can also be redeemed by converting them into shares or new debentures.

  1. purchase

  2. conversion

  3. payment

  4. payment in lump sum
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Redemption by conversion allows debenture holders to exchange their debentures for shares or new debentures of the company.

Multiple choice elements of accounts company accounts - redemption of debentures redemption by payment in lump sum accounting effects for redemption of debentures redemption of debentures

From the point of view of Registration, the debentures are classified as -

  1. Secured and unsecured Debentures

  2. Redeemable Debentures and Irredeemable Debentures

  3. Convertible Debentures and Non-convertible Debentures

  4. Registered Debentures and Bearer Debentures
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Debentures are classified as Registered (where the company maintains a register of holders) or Bearer (where the holder is the owner by possession).

Multiple choice elements of accounts company accounts - redemption of debentures redemption by payment in lump sum accounting effects for redemption of debentures redemption of debentures

After the redemption of debentures, any credit balance in the Sinking Fund A/c is transferred to ______ A/c.

  1. General reserve

  2. Capital reserve

  3. P & L

  4. None of these
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

After the redemption of all debentures, balance left in sinking fund is transferred to general reserve but the portion of the profit on sale of sinking fund investment is preferably transferred to capital reserve.

Multiple choice meaning and characteristics of negotiable instruments the negotiable instruments act, 1881 commerce

A bearer negotiable instrument is payable to ______________.

  1. banker

  2. receiver

  3. holder

  4. none of the above.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

A bearer instrument means that any check or draft can be transferred to the holder by delivery without having to be endorsed. Section 8 of N.I.Act 1881 defines 'Holder' as under. “The holder of a promissory note, bill of exchange or cheque means, any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto."

Multiple choice meaning and characteristics of negotiable instruments the negotiable instruments act, 1881 commerce

Introduction of Negotiable Instruments
If the day of maturity falls on a public holiday, the instrument is payable on the -.

  1. Preceding business day

  2. Next business day

  3. Next Monday

  4. Following day
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

If the day of maturity falls on a public holiday, the instrument is payable on the next preceding business day. he expression “Public Holiday” includes Sundays and any other day declared by the Central Government, by notification in the Official Gazette, to be a public holiday. 

Multiple choice meaning and characteristics of negotiable instruments the negotiable instruments act, 1881 commerce

Classification of Negotiable Instruments
An instrument, which in form is such that it may either be treated by the holder as a bill or as a note, is an -.

  1. Inchoate instrument

  2. Order instrument

  3. Incomplete instrument

  4. Ambiguous instrument
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Ambiguous Instruments is defined in Section 17 of Negotiable instruments Act, 1881. Ambiguous Instrument is an instrument, which in form is such that it may either be treated by holder as a note or as a bill.

Multiple choice long-term and short-term finance sources of business finance business studies

This limit of overdraft is granted purely on the basis of credit-worthiness of the borrower.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

True.

When a bank allows its account holders to withdraw money in excess of the balance in their accounts up to a specified limit, it is known as overdraft facility. This limit is granted purely on the basis of credit worthiness of the borrower.