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.
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.
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?
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 -
3. Unrecorded Liabilities when paid are debited to-
4. 2- A firm is unable to pay its debts when
5. 3-realization account is a
6. WHICH COMPANIES ARE EXEMPTED FROM CREATING DEBENTURE REDEMPTION RESERVE BY SEBI ?
7. 4-when the realsation expenses are to borne by a partner. It is credited to-
8. 5-at the time of dissolution of firm, assets taken over by partner should be
9. WHAT % OF AMOUNT AS PER RULE 18(7)C OF CO.ACT SHOULD INVEST OR OUTSIDE BEFORE 30TH APRIL OF EACH YEAR
10. In the balance sheet of a company, interest accrued and due on debentures is shown under the main head
11. Discount on issue of debentures is restricted to
12. HP ltd. issued 5000, 8% debentures of Rs. 100 each at Rs. 95. It will credit 8% debentures account by
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
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
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
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?
17. AS PER SEBI GUIDELINES AN AMOUNT EQUAL TO ___________ OF THE DEBENTURES ISSUE MUST BE TRANSFERRED TO DEBENTURE REDEMPTION RESERVE BEFORE REDEMPTION BEGINS.
18. PROFIT ON CANCELLATION OF OWN DEBENTURES IS
19. WHERE IS DEBENTURE REDEMPTION RESERVE TRANSFERRED AFTER THE REDEMPTION OF ALL DEBENTURES
20. PROFIT ON REDEMPTION OF DEBENTURE IS TRANSFERRED TO WHICH ACCOUNT
21. DEBENTURES CAN BE REDEEMED....
22. WHICH OUT OF THE FOLLOWING IS NOT A METHOD OF REDEMPTION OF DEBENTURE
23. HOW MUCH AMOUNT OF DEBENTURE REDEMPTION RESERVE WILL BE CREATED IN CASE OF REDEMPTION OF DEBENTURE BY CONVERSION
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.
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?
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?
27. What is meant by a Debenture ?
28. Debentures can be issued at
29. Which of the following is correct with respect to debentures
30. Debentures are said to be issued at Discount when
31. The discount on issue of debentures is :
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:
33. Debentures can not be redeemed:
34. Discount/loss on issue of debentures should be written off:
35. Premium on redemption of debentures account is :
36. Discount on issue of debentures is classified as :
37. 9-General reserve appearing at the time of dissolution is transferred to
38. 8-Profit or loss on realization should be divided among partners in the
39. Debentures which do not carry any specific rate of interest are know as:
40. 7-unrecorded liability when paid on dissolution of a firm is debited to
41. 6-unrecorded asserts realized at the time of realization is credited to-
42. When the number of debentures applied is less than number of debentures offered to public the issue is said to be :
43. Debentures issued as collateral security
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
45. Discount or loss on issue of debentures is written off from
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
47. A debenture holder gets
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:
49. When debentures are issued at Par and redeemable at Premium , the loss on such an issue is debited to:
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