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 book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

When the debentures are redeemed, the requisite amount of Debenture Redemption Reserve is transferred to ___________.

  1. statutory reserve

  2. general reserve

  3. revenue

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

Once the debentures are fully redeemed, the purpose of the Debenture Redemption Reserve (DRR) is fulfilled. The balance in the DRR account is then transferred to the General Reserve, as it is no longer required for its specific purpose.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

A price exclusive of the interest for the period for which the seller held the debentures is called _________________.

  1. Ex-interest price

  2. Cum-interest price

  3. Plus-interest price

  4. Additional-interest price
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

An 'Ex-interest' price means the price of the debenture excludes the interest accrued since the last interest payment date. Conversely, a 'Cum-interest' price includes the accrued interest.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Withdrawal from DRR is permissible only after ____% of the debenture liability has been redeemed.

  1. 30

  2. 40

  3. 10

  4. 25
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Under current regulations, companies may withdraw from the Debenture Redemption Reserve (DRR) only after at least 10% of the total debenture liability has been redeemed.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Which of the following statements is false?

  1. Debenture is a form of borrowing fro public

  2. Normal rate of interest on debentures is specified on issue

  3. Debenture interest is a charge against profits

  4. The issue price and redemption value of debentures will always be equal
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Debentures can be issued at a discount, at par, or at a premium, and they can be redeemed at par or at a premium. Therefore, the issue price and redemption value are not always equal.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

From the point of view of tenure, 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
B Correct answer
Explanation

From the point of view of tenure (time), debentures are classified as redeemable (repayable after a fixed period) or irredeemable (perpetual).

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Convertible Debentures are those debentures which are -

  1. convertible into equity only at the point of debenture holders.

  2. convertible into equity shares only at the option of company only.

  3. convertible into equity shares only at the option of debenture holders or company.

  4. convertible into any securities at the option of debenture holders or company.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

A convertible debenture is a type of long-term debt issued by a company that can be converted into stock after a specified period. Convertible debentures are usually unsecured bonds or loans meaning that there is no underlying collateral connected to the debt.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

From the point of view of mode of Redemption, 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
B Correct answer
Explanation

Debentures are classified based on the mode of redemption into redeemable debentures, which are paid back after a set period, and irredeemable debentures, which have no fixed repayment schedule during the company's lifetime.

Multiple choice book keeping and accountancy company accounts - redemption of debentures debentures redemption methods of redemption of debentures accounting effects for redemption of debentures

Which of the following is not true about Debenture Redemption Reserve(DRR)?

  1. DRR created @ 50% of the amount of debentures issued before commencement of redemption

  2. Withdrawal from DRR can be made only after 10% of debenture liability has been redeemed

  3. DRR is required in case of fully convertible debenture

  4. DRR is not required in case of debentures with a maturity period of 18 months or less
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Fully convertible debentures do not require the creation of a Debenture Redemption Reserve (DRR) because they are converted into equity rather than redeemed in cash.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

A higher accounts receivable turnover ratio means _______________.

  1. Lower debt collection period

  2. Higher debt collection period

  3. Lower sales

  4. Higher sales
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Accounts receivable turnover is the number of times per year that a business collects its average accounts receivables.

A high turnover ratio indicates a combination of a conservative credit policy and an aggressive collections department, as well as a number of high-quality customers.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

80% of sales of  10,00,000 of a firm are on credit. It has a receivable turnover of 8. What is the average collection period (360 days a year) and average debtors of the firm?

  1. 45 days and 1,00,000

  2. 360 days and 1,00,000

  3. 45 days and 8,00,000

  4. 360 days and 1,25,000
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Debtors turnover ratios is an activity ratio measuring how efficiently a firm uses it assets. This can be calculated as:

Debtors Turnover Ratio=Credit sales/Average accounts receivables

In the given information:
Total Sales      Rs.1000000
Credit Sales    Rs.800000 (80% of sales)
Debtors T/O ratio- 8
Therefore
8=800000/Average receivables
Average Receivables are Rs.100000

Average Collection period=No of days in a year/debtors turnover ratio
=360/8
Average collection period is 45 days.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

When the Debt Turnover Ratio is $4$, what is the average collection period?

  1. $5$ months
  2. $4$ months
  3. $3$ months
  4. $2$ months
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Debt Turnover ratio = Net credit sales/ Average trade receivables = $4$

Average collection period = $12$ months / Debt turnover ratio
                                             = $12$ months / $4$
                                              = $3$ months

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

ABC co. extends credit term of 45 days to its customers. Its credit collection would be considered poor if its average collection period was ____________.

  1. 30 days

  2. 36 days

  3. 47 days

  4. 42 days
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

By monitoring average collection policy, the firm can see if its term are generally being met. ABC company's credit collection would be considered poor if collection period is more than 45 days i.e. Customers on average are significantly slower in paying than company policies allow.

Multiple choice elements of accounts ratio analysis activity (or turnover) ratios accounting ratio's accounting ratios

Credit Revenue from Operations, i.e.,
Net credit sales for the year - 1,20,000
Debtors - 12,000
Bills Receivable - 8,000
Calculate Trade Receivable or Debtors' Turnover Ratio.

  1. 4 times

  2. 3 times

  3. 6 times

  4. 5 times
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation
Debtor's turnover ratio =             Credit sales
                                               -------------------------------
                                               Average receivables 
                                    
                                       =         1,20,000
                                                -----------------
                                                    20,000                              
                                       =       6 times.