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

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Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

Given following data calculate cost of capital under Net Income (NI) Approach 
(1) EBIT is Rs. 20 Lakhs.
(2) 4,00,000 shares of Rs. 10 each & market capitalisation is $16\%$ 
(3) 25,000, $14\%$ debentures of Rs. 150 each.

  1. $16\%$

  2. $14\%$

  3. $15\%$

  4. $15.42\%$
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

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 $K _e$ = $\frac{EBIT}{V}$.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

Non-convertible debentures are ________________.

  1. debt instruments which acquire equity status at the issuers option

  2. debt instruments which retain their debt character and cannot acquire equity status

  3. debt instruments which acquire equity status with the permission of Registrar of Companies

  4. debt instruments which acquire equity status on maturity
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

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

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

Which of the following is the odd one?

  1. Net worth

  2. Owners equity

  3. Fixed interest liability

  4. Non-redeemable shares
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

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.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

A debenture holder is not entitled to _________.

  1. voting right

  2. claim dividend

  3. claim bonus shares

  4. all the above
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

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.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

Which of the following is incorrect with respect of debentures?

  1. They can be issued for cash

  2. They can be issued for consideration other than cash

  3. They can be issued as collateral security

  4. They can be issued in lieu of dividends
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

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

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

In the event of liquidation of the company the debenture holders have prior right for __________.

  1. interest

  2. principal amount

  3. b<span>oth (a) &amp; (b)</span>

  4. <span>none of the above</span>
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

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.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

When a company is not earning profits, then which of the following securities proves a burden on the finances of the company?

  1. Equity Shares

  2. Preference Shares

  3. Redeemable Preference Shares

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

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.

Multiple choice book keeping and accountancy company accounts part - 2 (accounting for debentures) introduction to debentures meaning and features of debentures meaning of debentures

Which of the following is false?

  1. Equity is owners' stake and the debentures is a debt

  2. Rate of interest on debentures is fixed

  3. Debenture holders get preferential treatment over the equity holders at the time of liquidation

  4. Interest on debentures is an appropriation of profits
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

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.