Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures Short Questions | accountancy Class 12 CBSE

Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures Short Questions | accountancy Class 12 CBSE | ByteNotes.in

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Easy

Question 1

Quick Recall

What is a debenture? How is it defined under the Companies Act, 2013?

A debenture is a written instrument acknowledging a debt under the common seal of the company, containing terms for repayment of principal after a specified period and payment of interest at a fixed rate.
The word 'debenture' is derived from the Latin word 'debere' meaning to borrow, and interest is payable usually half-yearly or yearly on fixed dates.
Under Section 2(30) of the Companies Act, 2013, 'Debenture' includes Debenture Inventory, Bonds, and any other securities of a company, whether or not constituting a charge on the company's assets.

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Question 2

Quick Recall

State any three points of distinction between shares and debentures.

A share represents ownership of the company (owned capital), whereas a debenture is only an acknowledgement of debt (borrowed capital).
The return on shares is dividend which varies with profits and is an appropriation of profits, while the return on debentures is fixed interest which is a charge on profits payable even in loss.
Shareholders enjoy voting rights whereas debentureholders normally do not enjoy any voting rights.

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Easy

Question 3

Quick Recall

Distinguish between secured and unsecured debentures.

Secured debentures are those on which a charge — fixed or floating — is created on the assets of the company as security for repayment in case of default.
A fixed charge is created against specific assets held for use in operations, while a floating charge covers the general assets of the company excluding those assigned to secured creditors.
Unsecured (naked) debentures do not carry any specific charge on the company's assets; however, a floating charge may be created on them by default, and normally these kinds of debentures are not issued.

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Medium

Question 4

Quick Recall

What are zero coupon rate debentures? How is the investor compensated?

Zero coupon rate debentures are debentures that do not carry any specific rate of interest (coupon rate) on their face value.
To compensate investors for the absence of periodic interest, these debentures are issued at a substantial discount below their nominal value.
The difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures, effectively providing an implicit return to the investor.

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Medium

Question 5

Quick Recall

Distinguish between registered debentures and bearer debentures.

Registered debentures are those in respect of which all details including names, addresses, and particulars of holding of debentureholders are recorded in a register maintained by the company.
Registered debentures can only be transferred by executing a regular transfer deed, making the process more formal.
Bearer debentures are transferable by mere delivery — the company keeps no record, and interest is paid to whoever presents the interest coupon attached to such debentures.

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Medium

Question 6

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What is meant by issue of debentures at a discount? How is discount on issue of debentures written off?

A debenture is said to be issued at a discount when its issue price is less than its nominal (face) value; for example, issuing Rs. 100 debentures at Rs. 95 implies a discount of Rs. 5.
The discount on issue of debentures is a capital loss and must be written off — first from the Securities Premium Reserve to the extent of the available balance under Section 52(2).
If Securities Premium Reserve is inadequate or non-existent, the remaining amount of discount is written off against the revenue profits through the Statement of Profit and Loss.

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Easy

Question 7

Quick Recall

What is meant by issue of debentures at a premium? How is the premium treated in the books?

A debenture is said to be issued at a premium when the price charged from investors exceeds the nominal value; for example, issuing Rs. 100 debentures at Rs. 110 implies a premium of Rs. 10.
The amount of premium received is credited to the Securities Premium Reserve account — it is not part of the debenture value itself.
The Securities Premium Reserve is shown on the liabilities side of the balance sheet under the head 'Reserves and Surplus' within Shareholders' Funds.

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Medium

Question 8

Quick Recall

What is meant by debentures issued for consideration other than cash? Give the journal entry for purchase of assets from a vendor.

When a company acquires assets from vendors and instead of paying cash issues its own debentures as payment, such issue is called 'debentures issued for consideration other than cash'.
On purchase of assets: Sundry Assets A/c Dr. / To Vendors A/c (assets recorded at agreed value, vendor account credited).
Debentures may be issued to the vendor at par, at a premium, or at a discount, and the journal entry for the debenture issue follows the same principles as cash issue adjusted for the issue price.

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Medium

Question 9

Quick Recall

What is collateral security? How is it different from primary security?

Collateral security is a subsidiary, secondary, or additional security offered to a lender alongside the primary security when a company obtains a loan or overdraft from a bank or financial institution.
Primary security is the main asset pledged against the loan, whereas collateral security acts as a backup invoked only when the realisable value of the primary security falls short of the loan amount.
If the company fails to repay, the lender first recovers from the primary security; if insufficient, the lender can invoke the collateral security — debentures may be presented for redemption or sold in the open market.

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Question 10

Quick Recall

Explain the two methods of recording debentures issued as collateral security in the books of accounts.

Under the First Method, no journal entry is recorded since no actual liability arises; however, a note is appended below the loan on the liabilities side of the balance sheet stating that the loan is secured by debentures issued as collateral security.
Under the Second Method, a journal entry is passed — Debenture Suspense A/c Dr. / To Debentures A/c — for the face value of debentures issued as collateral.
In the Second Method, the Debenture Suspense account is shown as a deduction from the debenture balance in the notes to accounts of long-term borrowings, so the net liability remains only the bank loan amount.

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Question 11

Quick Recall

What journal entry is passed when debentures are issued at par and redeemable at premium?

On receipt of application money: Bank A/c Dr. / To Debenture Application and Allotment A/c.
On allotment: Debenture Application and Allotment A/c Dr. + Loss on Issue of Debentures A/c Dr. (with the premium on redemption amount) / To Debentures A/c (nominal value) + To Premium on Redemption of Debentures A/c (premium on redemption).
The premium on redemption is recognised as a liability (Loss on Issue of Debentures) at the time of issue itself because it is a future obligation that arose due to the terms of the debenture contract.

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Medium

Question 12

Quick Recall

What is the accounting treatment for premium on redemption of debentures in the balance sheet?

Premium on Redemption of Debentures is a future liability of the company payable at the time of redemption — it is not a revenue item but a provision recognised at the time of issue.
It is classified as a Non-current Liability under the sub-head 'Long-term Borrowings' in the balance sheet until the debentures are actually redeemed.
At the time of redemption, the Premium on Redemption of Debentures A/c is debited along with the Debentures A/c, and Debentureholders A/c is credited for the total amount payable.

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Medium

Question 13

Quick Recall

What is interest on debentures? Why is it treated as a charge on profits?

Interest on debentures is the fixed return payable by the company to debentureholders, calculated at the specified rate on the nominal (face) value of debentures, typically paid half-yearly.
It is treated as a charge on profits rather than an appropriation because it is a legal contractual obligation of the company — it must be paid whether the company earns a profit or not.
Since debentureholders are creditors of the company, not owners, their interest claim ranks before any distribution to shareholders; the company has no discretion to withhold it in loss years.

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Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures | Short Questions

What is a debenture? How is it defined under the Companies Act, 2013?

State any three points of distinction between shares and debentures.

Distinguish between secured and unsecured debentures.

What are zero coupon rate debentures? How is the investor compensated?

Distinguish between registered debentures and bearer debentures.

What is meant by issue of debentures at a discount? How is discount on issue of debentures written off?

What is meant by issue of debentures at a premium? How is the premium treated in the books?

What is meant by debentures issued for consideration other than cash? Give the journal entry for purchase of assets from a vendor.

What is collateral security? How is it different from primary security?

Explain the two methods of recording debentures issued as collateral security in the books of accounts.

What journal entry is passed when debentures are issued at par and redeemable at premium?

What is the accounting treatment for premium on redemption of debentures in the balance sheet?

What is interest on debentures? Why is it treated as a charge on profits?

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