Tag: company accounts part - 2 (accounting for debentures)

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Questions Related to company accounts part - 2 (accounting for debentures)

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

ABC Ltd. purchased Machinery from Kumar Company for a book value of Rs. 2,00,000. The consideration was paid by issue of 10% debentures of Rs. 100 each at a discount of 20%. The debenture account was credited with ____.

  1. Rs. 4,00,000

  2. Rs. 2,50,000

  3. Rs. 3,20,000

  4. Rs. 4,80,000
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

The purchase consideration is Rs. 2,00,000. Since debentures are issued at a 20% discount, the issue price per debenture is Rs. 80 (100 - 20). The number of debentures issued is 2,00,000 / 80 = 2,500. The debenture account is credited with the face value: 2,500 * 100 = Rs. 2,50,000.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

Which of the following statements is false?

  1. Debenture is a form of public borrowing

  2. It is customary to prefix debentures with the agreed rate of interest

  3. Debenture interest is a charge against profits

  4. The issue price and redemption value of debentures cannot differ.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The issue price and redemption value frequently differ; for example, a company may issue at a discount and redeem at par, or issue at par and redeem at a premium.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

Which of the following is true with regard to $10\%$ Debentures issued at a discount of $20\%$?

  1. The carrying amount of debentures get reduced each year at a rate of $20\%$

  2. Issue price and the carrying amount of debenture are equal

  3. At the time of redemption, the debenture holder will be paid the issued price.

  4. The carrying amount of debentures remain the same.
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

The carrying amount of a debenture refers to its face value (the liability amount). While the issue price is lower due to the discount, the liability recorded in the books remains the face value.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

Interest on Debentures is calculated on -

  1. Its face value

  2. Its issue price

  3. Its book value

  4. Its cost price
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The interest is calculated on the face value of the debentures. This interest amount is paid periodically, generally yearly or half-yearly. The interest is a charge against the profit of the company.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

State, with reasons, whether the following statements are True and False.
Share transfer in depository mode is fast and economical.

  1. True

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

True 
Reasons: 
(1) Dematerialization is the process by which securities like shares are converted into electronic form from physical form. 
(2) It results in paperless procedures with respect to holding of shares, handling them or transferring them. 
(3) It is an account based system where the dealings happen electronically and not physically. It saves a lot of time, efforts and hassles. 
(4) It results in very fast and quick transactions due to direct credit. 
(5) This also leads to minimizing cost. 
(6) Payments in case of transfer, dividend etc. also happen much faster. 
(7) So demat is a very simple, easy and time saving process.Thus, share transfer in depository mode is fast and economical.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

When debentures are issued at par but are redeemable at premium, the entry is:

  1. Bank Account DebenturesPremium on redemption of debentures Dr.  Cr.Cr. 
  2. Bank Account DebenturesLoss on the issue of debenture  Dr.  Cr. Cr.
  3. Bank Account Loss on the issue of debenture DebenturePremium on redemption of debentures Dr.  Cr. Cr.Cr.

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

When issued at par but redeemed at a premium, the premium on redemption is a loss. The entry debits Bank and Loss on Issue, and credits Debentures and Premium on Redemption.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

Interest on debenture is __________.

  1. An Appropriation of Profit

  2. A Charged Against Profit

  3. An Adjustment of Profit

  4. None of the Above
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Debenture are financial instrument which carries a certain percentage of interest. Debentures are like other debts. Interest paid on debenture is an expense and charged to profit & loss account.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

Statement (A): Discount on issue of debentures represents capital loss.
Statement (B): The amount of such discount cannot be written off annually

  1. Both (A) and (B) are true.

  2. Both (A) and (B) are false.

  3. (A) is correct but (B) is false

  4. (B) is correct but (A) is false
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Statement A is correct because discount on issue is a capital loss. Statement B is false because the discount is typically written off over the life of the debentures.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) discount/loss on issue of debenture written off issue of debentures procedure for issue of debentures

When debentures are issued at a discount but are redeemable at a premium the entry is:

  1. Bank Account Discount on Debentures accountDebentures Dr.  Cr. Cr.
  2. Bank Account Discount on Debentures accountDebenturesPremium on redemption of debentures Dr.  Cr. Cr.Cr.
  3. Bank Account Loss on the issue of debenturesDebenturesPremium on redemption of debentures Dr.  Cr. Cr.Cr.

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

When issued at a discount and redeemed at a premium, the total loss (discount + premium) is debited to the Loss on Issue of Debentures account. The entry credits Debentures and Premium on Redemption.