Tag: meaning and features of 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

Who is not eligible to be appointed as Debenture Trustee:

  1. A Scheduled Bank

  2. A Public Financial Institution

  3. An Insurance Company

  4. A partnership firm carrying on banking Business
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Legal regulations typically prohibit a partnership firm from acting as a debenture trustee, as the trustee must be an independent corporate entity or institution capable of holding assets in trust, such as a bank or financial institution.

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

Debenture Trustess are to be appointed in case of issue of:

  1. All Debentures

  2. Debentures with maturity of more than $18$ months

  3. Debentures with maturity of lessthan $18$ months

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

No Public Issue/Rights Issue of Debentures shall be made by a company unless it has appointed one or more Debenture Trustees for such debentures whereas under SEBI guidelines, appointment of Debenture Trustees is compulsory only in case of debentures with maturity of 18 months or more.

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

Consider the following items.
1. Debentures  2. Prepaid rent
3. Accrued interest   4. Bank overdraft
Liabilities would include

  1. 2, 3 and 4

  2. 1, 2 and 3

  3. 1 and 4

  4. 1, 2, 3 and 4
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Liabilities include debentures (debt obligations) and bank overdraft (short-term borrowing). Prepaid rent is a prepaid expense (current asset), not a liability. Accrued interest can be either an asset (interest receivable) or liability (interest payable), but without context, we assume it's interest receivable. Therefore, only debentures and bank overdraft are clearly liabilities.

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

Debentures issued as collateral security for Rs 10,000 will be debited to ________________.

  1. Debentures suspense A/c

  2. Bank A/c

  3. Debentures A/c

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

When debentures are issued as collateral security, the entry is made in a 'Debenture Suspense Account' to reflect the contingent nature of the liability until the loan is defaulted or repaid.

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

First debentures and second debentures would denote a classification of debentures on the basis of ______________.

  1. Security

  2. Redemption

  3. Record

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

The classification into first and second debentures refers to the order of repayment or the priority of claims against the company's assets in the event of liquidation.

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

Advantage of debt financing is:

  1. Interest is tax-deductible

  2. It reduces WACC

  3. Does not dilute owners control

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

Advantages of Debt Financing over equity are:

1) Tax advantage: The amount you pay in interest is tax deductible.
2) Retains Ownership- With debt financing you don't have togive out a stake in your company.
3) Reduces WACC- The cost of debt is the interest rate applied on loans borrowed from bank and Non-banking financial institutions. A company can reduce its WACC by cutting debt financing costs.

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

Tax-rate is relevant and important for calculation of specific cost of capital of ____________.

  1. Equity Share Capital

  2. Preference S<span>hare Capital</span>

  3. Debentures

  4. Both A and B
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

In case of debenture, interest payable is the cost of capital. Interest on debenture is tax deducible and charged to profit & loss account as an expense. It reduces the tax liability of the business. 

Tax rate is relevant and important for calculation of cost of capital for debenture. 

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

___________ are those debentures where the debenture holder have option to convert into equity.

  1. Optional debentures

  2. Flexible debentures

  3. Convertible debentures

  4. Non-convertible debentures
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

Convertible debentures provide the holder with the right to convert their debt instrument into equity shares of the company at a predetermined price or ratio.

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

Debenture holders are like ___________ of the company.

  1. owners

  2. debtors

  3. creditors

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

Debenture holders lend money to the company, making them creditors. They are entitled to interest payments, unlike shareholders who are owners and entitled to dividends.