Tag: definition, characteristics and parties of bills of exchange

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Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

On 1.3.2006 X draws a bill on Y for 3 months for Rs20,000. On 4.5.2006, Y pays the bill to X at 12% discount. The amount of discount will be __________.

  1. Rs. 200

  2. Rs. 400

  3. Rs. 600

  4. Rs. 100
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The discount is calculated on the face value of the bill for the period it is held before maturity. Here, the bill is for 20,000 at 12 percent per annum for 3 months: 20,000 * 0.12 * (3/12) = 600. However, the question asks for the discount on the amount paid on 4.5.2006, which is 1 month before maturity (due date is 4.6.2006). 20,000 * 0.12 * (1/12) = 200.

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

When a bill of exchange is drawn by one of co-venturer on the other co-venturer, discount charges are borne by drawee.

  1. True

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

In a joint venture, if a bill is discounted, the discount charges are considered a joint expense and are shared by the co-venturers in their profit-sharing ratio, not solely borne by the drawee.

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

Cancelling the original bill and drawing a fresh acceptance is known as __________.

  1. Retiring under rebate

  2. Renewal

  3. Discounting

  4. Bill sent to bank for collection
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Sometimes the acceptor of the bill foresees that it may be difficult to meet the obligation of the bill on maturity and may, therefore, approach the drawer with the request for extension of time for payment.  In such cases the old bill is cancelled and fresh bill with new terms of payment is drawn it is called as renewal of bill. 

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

While preparing P/L account, rebate on bills discounted to be provided shall be deducted from discount received is ________.

  1. Schedule 16

  2. Schedule 15

  3. Schedule 14

  4. Schedule 13
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Rebate on Bills Discounted is also known as Discount Received in Advance, or, Unexpired Discount or, Discount Received but not earned.

Its treatment is same as we do in the case of Interest Received in Advance.

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

Rebate on bills discounted is also called_____.

  1. Unexpired discount

  2. Earned discount

  3. Expired discount

  4. Received discount
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Rebate on Bills Discounted is also known as Discount Received in Advance, or, Unexpired Discount or, Discount Received but not earned. Its treatment is same as we do in the case of Interest Received in Advance.

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

Encashment of bill before due date ________________.

  1. Retirement of bill

  2. Discounting of bill

  3. Honouring of bill

  4. Endorsing of bill
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

When bill is sold to the bank at a discounted rate it is called discounting the bill of exchange.
As cash is received on discounting the bill it is also called encashment.

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

Which of the following is not a correct statement ?

  1. A bill given to a creditor is called Bill Payable

  2. Del-Credere commission is normally calculated o total sales

  3. Discount at the time of retirement of a Bill is a given for the drawee

  4. The owner of a shop feels that he has made a loss due to closing stock being zero
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Closing stock is an asset. If it is zero, it does not represent a loss in the accounting sense; rather, it reflects that all goods were sold or otherwise disposed of. The other statements are standard accounting definitions.

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

Mr. X accepted a bill of exchange of $Rs. 1500$ drawn by Y and payable in $3$ months. He got it discounted from bank at $2$% discount. The discounting charges amounted to __________.

  1. $30$

  2. $25$

  3. $7.5$

  4. $22$
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

A bill is drawn by the drawer(debtor) on the drawee (creditor) so as to give him a sense of  security for the receivables. But in case the drawer does not want to wait till the maturity period of the bill or rather he has some urgent need of funds, what he will do is get the bill discounted by a bank. When the bill is discounted by the bank, it pays the drawer an amount after deducting a certain percentage, because they are giving the drawer the funds he needs before the date of maturity of the bill and the discount is a type of fee for their service. So here in this case the amount of discount is calculated as follows:

Discount = $Rs. 1500$ x $2/100$= $Rs. 30$
Remember here the discount percentage is in not expressed as per annum so do not multiply it with the number of months. 

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

A draw a bill of exchange on $B$ for $Rs. 3,000$ for $4$ months. He got it discounted with a Bank at $12$% p.a. The discount charged by the bank will be _________.

  1. $Rs. 120$

  2. $Rs. 360$

  3. $Rs. 125$

  4. $Rs. 154$
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

Discount = Face Value * Rate * Time. Discount = 3,000 * 0.12 * (4/12) = 3,000 * 0.12 * (1/3) = 1,000 * 0.12 = 120.

Multiple choice elements of book keeping and accountancy commission,brokerage and discount advantages of bill of exchange definition, characteristics and parties of bills of exchange simple transactions related to bills of exchange

R draws a bill of exchange on S for $Rs. 8,000$ for $4$ months. He got it discounted with a Bank at $12$% p.a. The net proceeds to be received from bank will be _______.

  1. $Rs. 7900$

  2. $Rs. 7680$

  3. $Rs. 8000$

  4. $Rs. 7650$
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Discount = 8,000 * 0.12 * (4/12) = 320. Net proceeds = Face Value - Discount = 8,000 - 320 = 7,680.