Chapter 25

Issue of Debentures

Debenture is a loan taken by the company from the general public in small denomination. It is a
fixed – interest bearing security. Interest is payable at a fixed rate on a fixed date. Debenture
repaid at a specified future date. Debentures can be bought and sold in the stock market.
Debenture holders are the creditors of the company. They have no voting rights. Debentures
cannot be forfeited for non payment of call money.
Interest on Debentures is an expense and debited to the Profit & Loss A/c. In the Company
Balance Sheet, Debentures are shown as “Secured Loans”. Debentures can be converted into
shares
Debentures are secured loans. There maybe a specific or floating charge which is created by the
company. Specific charge means the debentures are secured by a charge is a mortgage on
specific assets. These assets cannot be sold without the consent of the debenture holders. If
theses assets are sold the amount received on its sale will be first used to repay the debenture
holders. Floating charge means the charge is created on all the assets of the company
Debentures are payable to a registered holder are not easily transferable. Bearer Debentures are
transferable by delivery. It is like a Negotiable instruments .No record is kept by the company .of
Bearer Debentures. Interest is paid to the holder of these Debentures.
Issue of Debentures can be made at par or at a discount or at premium. If the issue is made at
Discount the discount is shown under the heading of Miscellaneous Expenses and written off over
the period of Debentures.
If the Debentures are issued at a premium the premium on issue is credited to a separate
Account.
Journal Entry for issue of debentures:
Cash / Bank A/c Dr.
Discount of issue of debentures A/c Dr.
Loss on Issue of debentures A/c Dr.
To Debentures A/c
To Premium on issue of debentures A/c
To Premium on redemption of debentures A/c
Debentures will be repaid by the company after a specific period. These Debentures can be
redeemed at par or premium or at a discount. If the debentures are to be redeemed at a premium
then the Premium on redemption of debentures should be credited to a separate A/c called as
Premium on Redemption of Debentures and debited to Loss on issue of Debentures A/c. This loss
will be written off over the period of Debentures.

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MULTIPLE CHOICE QUESTIONS

1. Which of the following statements is true?

(a) A debenture holder is an owner of the company
(b) A debenture holder can get his money back only on the liquidation of the company
(c) A debenture issued at a discount can be redeemed at a premium
(d) A debenture holder receives interest only in the event of profits

2. Which of the following statements is false?

(a) At maturity, debenture holders get back their money as per the terms and conditions of
redemption
(b) Debentures can be forfeited for non payment of call money
(c) In company’s balance sheet, debentures are shown under secured loans
(d) Interest on debentures is charged against profits

3. Debenture premium cannot be used to ____________.

(a) Write off the discount on issue of shares or debentures
(b) Write off the premium on redemption of shares or debentures
(c) Pay dividends
(d) Write off capital loss

4. Loss on issue of debentures is treated as _______________.

(a) Intangible asset (b) Current asset
(c) Current liability (d) Miscellaneous expenditure

5. Which of the following is/are true with respect to debentures?

(a) They can be issued for cash
(b) They can be issued for consideration other than cash
(c) They cannot be issued as collateral security
(d) Both (a) and (b) above

6. Which of the following is false?

(a) A company can issue redeemable debentures
(b) A company can issue debentures with voting rights
(c) A company can buy its own shares
(d) A company can buy its own debentures

7. Which of the following statements is false?

(a) Debenture is a form of public borrowing
(b) It is customary to prefix debentures with the agreed rate of interest
(c) Debenture interest is a charge against profits
(d) The issue price and redemption value of debentures cannot differ

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8. Which of the following is true with regard to 10% Debentures issued at a discount of 20%?
(a) The carrying amount of debentures gets reduced each year at a rate of 20%
(b) Issue price and the carrying amount of debentures are equal
(c) At the time of redemption, the debenture holder will be paid the issue price
(d) The face value and the carrying amount of debentures are equal

9. Discount on issue of debentures is a _____________.

(a) Revenue loss to be charged in the year of issue
(b) Capital loss to be written off from capital reserve
(c) Capital loss to be written off over the tenure of the debentures
(d) Capital loss to be shown as goodwill

10. Which of the following is false with respect to debentures?

(a) They can be issued for cash
(b) They can be issued for consideration other than cash
(c) They can be issued as collateral security
(d) They can be issued in lie of dividends

11. Which of the following is not a characteristic of Bearer Debentures?

(a) They are treated as negotiable instruments
(b) Their transfer requires a deed of transfer
(c) They are transferable by mere delivery
(d) The interest on it is paid to the holder irrespective of identity

12. When debentures are issued as collateral security, the final entry for recording the
transaction in the books is ____________
(a) Credit debentures a/c and debit cash a/c
(b) Debit debenture suspense a/c. and credit cash a/c
(c) Debit debentures suspense a/c and credit debenture a/c
(d) Debit cash a/c & credit the loan a/c. for which security is given

13. As per the Companies Act, “Interest accrued and due on debentures” should be shown
(a) Under Debentures (b) As Current Liabilities
(c) As provisions (d) As a reduction of bank balance

14. Mortgage debentures are those debentures which are secured either on the particular
asset called fixed charge or on the __________ asset of the company called floating
charge.
(a) general (b) particular (c) none (d) no opinion

15. Interest is paid to the person who produces the interest coupon attached to debenture in
case of _
(a) Bearer Debentures (b) Registered Debentures
(c) All types of Debentures (d) None of these

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16. Which of the following statements is true?

(a) A debenture holder is an owner of the company
(b) A debenture holder can get his money back only on the liquidation of the company
(c) A debenture issued at a discount can be redeemed at a premium
(d) A debenture holder receives interest only in the event of profits

17. In the Balance Sheet of a company, Debenture Redemption Premium Account appears
under the head ________
(a) Share Capital (b) Reserves & Surplus
(c) Secured Loans (d) Miscellaneous Expenditure

18. In the Balance Sheet of a company, Loss in issue of Debenture Account appears under the
head _________
(a) Share Capital (b) Reserves & Surplus
(c) Secured Loans (d) Miscellaneous Expenditure

19. Interest on Debentures is calculated on ________

(a) its face value (b) its issue price (c) its book value (d) its cost price

20. In Balance Sheet of a company, interest accrued but not due on debentures appears under
the head _________
(a) Secured Loans (b) Unsecured Loans
(c) Current Liabilities Provisions (d) Contingent Liabilities

21. When debentures are issued as collateral security, the final entry for recording the
transaction in the books is ____________.
(a) Credit Debentures A/c and debit Cash A/c
(b) Debit Debenture Suspense A/c and credit Cash A/c
(c) Debit Debenture Suspense A/c and credit Debentures A/c
(d) Debit Cash A/c and credit the Loan A/c for which security is given

22. The under writing commission in case of issue of debentures can’t exceed :
(a) 2% (b) 2.5% (c) 3% (d) 5%

23. A debenture holder gets :

(a) Dividend (b) Right prescribed in articles
(c) Ownership of the company (d) Interest at fixed rates

24. Loss on issue of debentures is generally written off in :

(a) 5 years (b) 10 years (c) 15 years (d) Over the period of redemption

25. A Ltd. issued 10,000 12% Debentures of 10 each at par which are redeemable at the
end of each year in equal lots in 5 years at a premium of 30%. The amount of loss on
redemption of debentures to be written off in fourth and fifth year will be :
(a) 10,000, Nil (b) 4,000, 4000 (c) 6,000, 6000 (d) 4,000, 2000

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26. T Ltd. has issued 14% Debentures of 20,00,000 at a discount of 10% on April 01, 2004
and the company pays interest half-yearly on June 30, and December 31 every year. On
March 31, 2006, the amount shown as “interest accrued but not due” in the Balance Sheet
will be
(a) 70,000 shown in current liabilities (b) 2,10,000 under current liabilities
(c) 1,40,000 shown along with debentures (d) 2,80,000 under current liabilities

27. On May 01, 2004 U Ltd. issued 7% 10,000 convertible debentures of 100 each at a
premium of 20%. Interest is payable on September 30 and March 31 every year. Assuming
that the interest runs from the date of issue, the amount of interest expenditure debited to
profit and loss account for the year ended March 31, 2005 = ?
(a) 70,000 (b) 58,333 (c) 84,000 (d) 64,167

28. W Ltd. issued 20,000, 8% debentures of 10 each at par, which are redeemable after
5 years at a premium of 20%. The amount of loss on redemption of debentures to be
written off every year = ?
(a) 40,000 (b) 10,000 (c) 20,000 (d) 8,000

29. T Ltd. purchased land and building from U Ltd. for a book value of 2,00,000.
The consideration was paid by issue of 12% Debentures of 100 each at a discount of
20%. The debentures account is credited with _____________.
(a) 2,60,000 (b) 2,50,000 (c) 2,40,000 (d) 1,60,000

30. P Ltd. issued 5,000, 12% debentures of 100 each at a premium of 10%, which are
redeemable after 10 years at a premium of 20%. The amount of loss on redemption of
debentures to be written off every year = ?
(a) 15,000 (b) 40,000 (c) 10,000 (d) 8,000

31. On May 1, 2003, Y Ltd. issued 7% 40,000 convertible debentures of 100 each at a
premium of 20%. Interest is payable on September 30 and March 31, every year.
Assuming that the interest runs from the date of issue, the amount of interest expenditure
debited to profit and loss account for the year ended March 31, 2004 = ?
(a) 2,80,000 (b) 2,33,333 (c) 3,36,000 (d) 2,56,667

32. A Ltd. took over the assets of 6,60,000 and liabilities of 80,000 of B Ltd. for an agreed
purchase consideration of 6,00,000 payable 10% in cash and the balance by the issue of
15% Debentures of 100 each at 10% discount.
The number of debentures to be issued is ______
(a) 6,600 (b) 6,000 (c) 5,400 (d) 4,500

33. A Ltd. took over the assets of 3,00,000 and liabilities of 10,000 of B Ltd. for an agreed
purchase consideration of 2,70,000 to be satisfied by the issue of 15% Debentures of
100 each at 20% premium.
(a) Goodwill A/c is to be debited with 20,000
(b) Capital Reserve A/c is to be debited with 20,000
(c) Goodwill A/c is to be credited with 20,000
(d) Capital Reserve A/c is to be credited with 20,000
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34. X Ltd. purchased Land and Building for Y Ltd. for a book value of 4,00,000.
The consideration was paid by issue of 12% Debentures of 100 each at a discount of
20%. The debentures account is credited with ________
(a) 5,20,000 (b) 5,00,000 (c) 4,80,000 (d) 3,20,000

35. X Ltd. issued 1,00,000 12% Debentures at a discount of 6% on 1st January, 20X1,
repayable by five equal annual drawings of 20,000 each on 31st December every year.
The amount of discount to be written of each year assuming that the company closes its
accounts on calendar year basis is _________
(a) 1,200 each year
(b) 2,000, 1,600, 1,200, 800, 400
(c) 1,000 each year

36. X Ltd. issued 10,000, 12% Debentures of 100 each at a premium of 10%, which are
redeemable after 10 years at a premium of 20%. The amount of loss on redemption of
debentures to be written off every year = ?
(a) 10,000 (b) 30,000 (c) 20,000 (d) 40,000

37. X Ltd. issued 500, 15% Debentures of 100 each at a discount of 10% redeemable at a
premium of 5% after 4 year. The amount of annual interest on debentures is ______
(a) 6,750 (b) 7,500 (c) 7,875 (d) 7,125

38. X Ltd. issued 500, 15% Debentures of 100 each on 1st May, 2006 at a discount of 10%
redeemable at a premium of 5% after 4 years. Interest was payable half yearly on
30th June and 31st December. The amount of interest paid for the year ended
31st March, 2007 is ________
(a) 1,250 (b) 3,750 (c) 5,000 (d) 6,875

39. When Debentures are issued as Collateral Security, which entry has to be passed :
(a) Debenture Suspense A/c Dr.
To Debentures A/c
(b) No entry has to be made
(c) Either (a) or (b)
(d) None

40. Deep Ltd. issued 1,00,000 7% Debentures of 100 each at a discount of 4% redeemable
after 5 years at a premium of 6%. Loss on issue of debentures is :
(a) 10,00,000 (b) 6,00,000 (c) 16,00,000 (d) 4,00,00

41. Premium on redemption of debentures account is ___________

(a) A real account (b) A nominal account-income
(c) A personal account (d) A nominal account -expenditure

42. Loss on issue of debentures is treated as ___________

(a) Intangible asset (b) Current asset (c) Current liability (d) Miscellaneous expenditure

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43. Debentures can be ___________

I. Mortgage Debentures or Simple Debentures.
II. Registered Debentures or Bearer Debentures.
III. Redeemable Debentures or Irredemable Debentures.
IV. Convertible Debentures or Non-convertible Debentures.
(a) Both (I) and (II) above (b) Both (I) and (III) above
(c) Both (II) and (III) above (d) All of (I), (II), (III) and (IV) above.

44. Discount on issue of debentures is a ______________.

(a) Revenue loss to be charged in the year of issue
(b) Capital loss to be written off from capital reserve
(c) Captial loss to be written off over the tenure of the debentures
(d) Capital loss to be shown as goodwill

45. When debentures are issued as collateral security against any loan then holder of such
debentures is entitled to
(a) Interest only on the amount of loan (b) Interest only on the face value of debentures
(c) Interest both on the amount of the loan and on the debentures (d) None of the above

46. When debentures are redeemable at different dates, the total amount of discount on issue
of debentures should be written off
(a) Every year by applying the sum of the year’s digit method
(b) Every year by applying the straight line method
(c) To profit and loss account in full in the year of final or last redemption
(d) To profit and loss account in full in the year of first redemption.

47. Which of the following is not a characteristic of Bearer Debentures?

(a) They are treated as negotiable instruments
(b) Their transfer requires a deed of transfer
(c) They are transferable by mere delivery
(d) The interest on it is paid to the holder irrespective of identity.

48. Loss on issue of debentures is treated as

(a) Intangible asset (b) Current asset
(c) Current liability (d) Miscellaneous expenditure

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