About Debentures

An unsecured bond or any other debt instrument which is not backed with collateral is referred to as a debenture. Due to the lack of collateral, debentures must rely on the issuer's trustworthiness and reputation for support. Debentures are regularly issued by enterprises and governments to raise capital or funds.

Meaning of Debentures

A debenture is a marketable instrument (a sort of investment) that a company or other institution issues to obtain funds for long-term operations and expansion. Because it's a type of debt capital, it's recorded on the issuing company's balance sheet as debt

A debenture is a legal document that specifies the amount of money invested (principal), the interest rate to be paid, and the payment schedule. It is at the time of maturity of the debentures that investors receive back their principal (i.e., at the end of its term).

Elements of Debentures

  • Interest Rate: When determining the interest rate to be paid to debenture holders or investors, the coupon rate is used. This coupon rate could be constant or variable.
  • Credit Rating: Investors' interest rates are affected by the credit rating of both the firm and the debenture.
  • Debenture Maturity Date: This is the date by which the corporation must repay the debenture holders.

Features of Debentures

  • A debenture is a debt instrument that is not backed by any collateral and has a period of more than ten years.
  • Issuer creditworthiness and reputation serve as the only security for debt obligations.
  • Debentures are regularly issued by enterprises and governments to raise capital or funds.
  • Equity shares can be converted into some types of debt instruments while others cannot.
  • Long-term bonds, defined as those with maturities of more than 10 years, are most commonly issued by governments and since such bonds are issued by the government, they are said to be low-risk investments.

Conclusion.

Companies benefit from debentures because they have lower interest rates and longer repayment terms than other forms of loans and debt instruments.

Following are some of the multiple choice questions on the Debentures with answers that will help the students in developing their knowledge.

Debentures MCQ

1. X LTD REDEEMED 6,000 , 8% DEBENTURES OF RS 100 EACH AT 105% BY CONVERTING THEM INTO EQUITY SHARES OF RS 10 EACH AT RS 12. STATE THE NO. OF EQUITY SHARES ISSUED?

  • 52,500
  • 55,000
  • 51,500
  • 56,500

2. ABC limited issues 10,000 9% debentures of 100 each at a premium of 5% , repayable at a premium of 10%, the loss on issue of debentures account will be debited to by -

  • Rs10,00,000
  • Rs1,00,000
  • Rs10,50,000
  • Rs1,05,000

3. Unrecorded Liabilities when paid are debited to-

  • Realization account
  • Partners’ capital account
  • Bank
  • None of the above

4. 2- A firm is unable to pay its debts when

  • a partner is insolvent
  • a partner has debit balance
  • a suit against the firm
  • the firm is insolvent

5. 3-realization account is a

  • nominal account
  • personal account
  • real account
  • impersonal account

6. WHICH COMPANIES ARE EXEMPTED FROM CREATING DEBENTURE REDEMPTION RESERVE BY SEBI ?

  • INFRASTRUCTURE COMPANIES 
  • FINANCIAL INSTITUTION AND BANKING COMPANIES
  • PRIVATE COMPANY
  • MULTINATIONAL COMPANY

7. 4-when the realsation expenses are to borne by a partner. It is credited to-

  • cash account
  • realization account
  • partners’ capital
  • profit and loss account

8. 5-at the time of dissolution of firm, assets taken over by partner should be

  • credited to realisation account
  • credited to partner capital account
  • debited to realization account
  • none of the above

9. WHAT % OF AMOUNT AS PER RULE 18(7)C OF CO.ACT SHOULD INVEST OR OUTSIDE BEFORE 30TH APRIL OF EACH YEAR

  • 25%
  • 15%
  • 50%
  • 10%

10. In the balance sheet of a company, interest accrued and due on debentures is shown under the main head

  • Share capital
  • Reserves and surplus
  • Current liabilities
  • Non current liabilities

11. Discount on issue of debentures is restricted to

  • 10%
  • 20%
  • 25%
  • None of these

12. HP ltd. issued 5000, 8% debentures of Rs. 100 each at Rs. 95. It will credit 8% debentures account by

  • Rs. 5,00,000
  • Rs. 4,75,000
  • Either (a) or (b) as it decides
  • Rs. 5,25,000

13. Apple computers ltd. issued 10,000, 7% debentures of Rs. 100 each at a discount of Rs. 6 on 1st October 2019. Interest for the year ended 31st March, 2020 will be

  • Rs. 65,800
  • Rs. 32,900
  • Rs. 70,000
  • Rs. 35,000

14. William pens ltd. issued 10,000, 7% debentures of Rs. 100 each at a discount of Rs. 4. It has a balance in securities premium reserve of Rs. 25,000. It will write off discount on issue of debentures

  • Rs. 40,000 from securities premium reserve
  • Rs. 40,000 from statement of profit and loss
  • Rs. 25,000 from securities premium reserve and Rs. 15,000 from statement of profit and loss (finance cost)
  • Rs. 15,000 from securities premium reserve and Rs. 25,000 from statement of profit and loss (finance cost)

15. Luxor pens ltd. issued 10,000, 7% debentures of Rs. 100 each at a discount of Rs. 4 redeemable at a premium of Rs. 6. It will write of loss on issue of debentures

  • From securities premium reserve
  • From statement of profit and loss
  • From general reserve
  • None of these

16. X LTD WANTS TO REDEEM 5000, 5% DEBENTURES OF RS.100 EACH AT PREMIUM . HOW MUCH AMOUNT IT MUST TRANSFER TO DRR IF IT HAS ALREADY A BALANCE OF RS 1,00,000 IN DRR A/C?

  • RS 4,00,000
  • RS 25,000
  • RS 2,00,000
  • RS 2,50,000

17. AS PER SEBI GUIDELINES AN AMOUNT EQUAL TO ___________ OF THE DEBENTURES ISSUE MUST BE TRANSFERRED TO DEBENTURE REDEMPTION RESERVE BEFORE REDEMPTION BEGINS.

  • 50%
  • 25%
  • 80%
  • 100%

18. PROFIT ON CANCELLATION OF OWN DEBENTURES IS

  • REVENUE PROFIT
  • CAPITAL PROFIT
  • OPERATING PROFIT
  • TRADING PROFIT

19. WHERE IS DEBENTURE REDEMPTION RESERVE TRANSFERRED AFTER THE REDEMPTION OF ALL DEBENTURES

  • CAPITAL RESERVE A/C
  • GENERAL RESERVE A/C
  • STATEMENT OF PROFIT AND LOSS
  • SINKING FUND ACCOUNT

20. PROFIT ON REDEMPTION OF DEBENTURE IS TRANSFERRED TO WHICH ACCOUNT

  • CAPITAL RESERVE ACCOUNT
  • GENERAL RESERVE ACCOUNT
  • SINKING FUND ACCOUNT
  • STATEMENT OF P&L ACCOUNT

21. DEBENTURES CAN BE REDEEMED....

  • BY ISSUE OF NEW SHARES
  • BY EXISTING RESOURCES
  • BY ACCUMULATED PROFITS
  • BY ALL THE ABOVE

22. WHICH OUT OF THE FOLLOWING IS NOT A METHOD OF REDEMPTION OF DEBENTURE

  • BY DRAW OF LOTS
  • BY PURCHASE IN THE OPEN MARKET
  • BY REVALUATION METHOD
  • BY CONVERSION 

23. HOW MUCH AMOUNT OF DEBENTURE REDEMPTION RESERVE WILL BE CREATED IN CASE OF REDEMPTION OF DEBENTURE BY CONVERSION

  • 25% 
  • 50%
  • NIL AMOUNT
  • 100%

24. AS PER WHICH RULE/ SECTION OF CO. ACT EVERY COMPANY IS REQUIRED TO CREATE DRR AND SHALL BEFORE 30TH APRIL OF THE YEAR DEPOSIT OR INVEST OUTSIDE.

  • 18(7)D
  • 18(7)C
  • 22(7)C
  • 19(7)C

25. IF A COMPANY HAS DECIDED TO REDEEM ITS DEBENTURE TOTALLY OUT OF PROFITS THEN HOW MUCH AMOUNT WILL BE TRANSFERRED TO DEBENTURE REDEMPTION RESERVE A/C?

  • 25%
  • 50%
  • 100%
  • NO AMOUNT

26. ACCORDING TO WHICH SECTION OF COMPANIES ACT 2013 AND THE SEBI GUIDELINES AN AMOUNT OF 25 % OF THE FACE VALUE OF DEBENTURE TO BE REDEEMED IS TO BE TRANSFERRED TO DRR A/C?

  • 75(4)
  • 71(4)
  • 72(4)
  • 70(4)

27. What is meant by a Debenture ?

  • Debenture is an oral acknowledgement of debt taken by company
  • Debenture is a written acknowledgement of debt taken by company
  • Debenture may be written or oral acknowledgement of debt taken by company
  • None of these

28. Debentures can be issued at

  • Par
  • Premium
  • Discount
  • Par or Premium or Discount

29. Which of the following is correct with respect to debentures

  • They can be issued on credit
  • They can be issued for consideration other than cash
  • They cannot be issued as collateral security
  • They can be issued partly on credit and partly in cash

30. Debentures are said to be issued at Discount when

  • I.P. = F.V.
  • I.P. > F.V.
  • I.P. < F.V.
  • Any of these

31. The discount on issue of debentures is :

  • Capital profit
  • Capital gain
  • capital loss
  • revenue loss

32. As a purchase consideration of a machinery of Rs 720000, debentures of Rs 100 each were issued at a premium of Rs 25 by company. The number of debentures issued by company is:

  • 7200
  • 7000
  • 6570
  • 5760

33. Debentures can not be redeemed:

  • at par
  • at premium
  • at discount
  • at maturity

34. Discount/loss on issue of debentures should be written off:

  • within 10 years
  • after redemption of debentures
  • in the yer of issue of debentures
  • during life of debentures

35. Premium on redemption of debentures account is :

  • Liability
  • Asset
  • Expenses
  • Revenue

36. Discount on issue of debentures is classified as :

  • fixed asset
  • current liability
  • fictitious asset
  • none of these

37. 9-General reserve appearing at the time of dissolution is transferred to

  • Option 1*(a) Bank A/c
  • Option (b) Realisation A/c
  • c) Capital A/c
  • none of the above

38. 8-Profit or loss on realization should be divided among partners in the

  • Option 1*(a) Profit sharing ratio
  • (b) Equally
  • (c) Capital Ratio
  • Option 4 (optional)(c) Capital Ratio

39. Debentures which do not carry any specific rate of interest are know as:

  • bearer debentures
  • zero coupon rate debentures
  • first debentures
  • registered debentures

40. 7-unrecorded liability when paid on dissolution of a firm is debited to

  • Option 1*(a) Liability A
  • Option 2*(b) Partner’s Capital A/c
  • Realisation A/cOption 3 (optional)
  • Option 4 (optional)(d) None of these 

41. 6-unrecorded asserts realized at the time of realization is credited to-

  • revaluation account
  • realization account
  • capital  account
  • none of these

42. When the number of debentures applied is less than number of debentures offered to public the issue is said to be :

  • Oversubscription
  • Under subscription
  • Full Subscription
  • None of the above

43. Debentures issued as collateral security

  • Are recorded in the books
  • Are not recorded in the books
  • May or may not be recorded in the books
  • None of these

44. X ltd. purchased building of Y ltd. for Rs. 4,00,000. The consideration was paid by issue of 10% debentures of Rs. 100 each at a discount of Rs. 20. 10% debentures account is credited with

  • Rs. 5,20,000
  • Rs. 5,00,000
  • Rs. 4,80,000
  • Rs. 3,20,000

45. Discount or loss on issue of debentures is written off from

  • Securities premium reserve
  • Securities premium reserve (if it exists) and thereafter from statement of profit and loss
  • Statement of profit and loss
  • General reserve

46. Electronics ltd. issued 10,000, 6% debentures of Rs. 100 each at a premium of Rs. 10. It will credit 6% debentures account by

  • Rs. 11,00,000
  • Rs. 10,00,000
  • Rs. 9,00,000
  • Rs. 8,00,000

47. A debenture holder gets

  • Dividend
  • Rights prescribed in articles
  • Ownership of the company
  • Interest at fixed rates

48. D Ltd. Issued 2,000, 12% debenture of Rs. 100 each at par and redeemable at 5% premium, identify the amount of loss on issue of debenture:

  • 12,000
  • 10,000
  • 18,000
  • 16,000

49. When debentures are issued at Par and redeemable at Premium , the loss on such an issue is debited to:

  • Profit and loss account
  • Debenture application and allotment account
  • Loss on issue of debentures account
  • Discount on issue of debentures account.

50. A Debenture is:

  • an oral or written instrument acknowledging a debt by a company
  • An oral acknowledgement of debt by a company
  • A written instrument acknowledging a debt taken by a company
  • None of these

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