Practice Questions

Justify why the profit on cancellation of a company's own debentures is treated as a capital profit.

Calculate the total amount to be debited to 'Loss on Issue of Debentures Account' if a company issues 2,000, 8% Debentures of Rs. 100 each at a discount of 5%, redeemable at a premium of 10%.

Calculate the value of Goodwill if a company purchases a business with assets of Rs. 8,00,000 and liabilities of Rs. 1,50,000 for a purchase consideration of Rs. 7,00,000.

Calculate the number of equity shares of Rs. 10 each to be issued at a premium of 25% if a company redeems 500, 12% debentures of Rs. 100 each by conversion.

Justify the classification of 'Premium on Redemption of Debentures Account' as a non-current liability in the balance sheet at the time the debentures are issued.

Identify what is meant by 'Redemption of Debentures' and list the four ways it can be done.

A company has issued 4,000, 10% Debentures of Rs. 100 each. Interest is payable half-yearly. The rate of Tax Deducted at Source (TDS) is 10%. Calculate the amount of interest due for six months and apply it to prepare the journal entry for interest becoming due.

Propose the most suitable type of debenture for an investor seeking both a fixed regular income and the potential for capital appreciation through future ownership in the company.

Define the term 'Bearer Debenture'.

Name the account that is credited when debentures are issued at a premium.

State the difference between 'Secured Debentures' and 'Unsecured Debentures'.

Justify how the accounting treatment for debentures issued at par but redeemable at a premium adheres to the principle of prudence. Formulate the journal entry at the time of issue to illustrate this.

List three key distinctions between shares and debentures regarding ownership, security, and convertibility.

Summarize the concept of 'over subscription' of debentures and state how a company handles the excess application money.

Describe the five main classifications of debentures as mentioned in the text.

Explain the meaning of 'Debentures issued as a Collateral Security'.

Explain the accounting treatment for interest on debentures, including the journal entries for when interest is due and when it is paid.

Examine how a 'Loss on Issue of Debentures' of Rs. 70,000 would be written off in a year if the company has a balance of Rs. 50,000 in its Securities Premium Reserve. Demonstrate the journal entry.

Contrast bearer debentures and registered debentures based on transferability and record keeping.

A company proposes to settle a purchase consideration of Rs. 4,40,000 by issuing 12% debentures of Rs. 100 each at a premium of 10 percent. Formulate the journal entry for the issue of these debentures to the vendor.

Evaluate the strategic advantage for a company to redeem its debentures by purchasing them from the open market, as opposed to redemption at maturity.

Create the 'Notes to Accounts' for 'Long-term borrowings' for a company that has taken a bank loan of Rs. 10,00,000 and has issued 12,000, 10% Debentures of Rs. 100 each as collateral security, using the second accounting method.

Recall the meaning of a Bond and explain how the terms 'Debenture' and 'Bond' are used today.

Compare and contrast the accounting treatment for debentures issued at a premium and redeemable at par, versus debentures issued at par and redeemable at a premium.

Zenith Ltd. purchased machinery worth Rs. 4,80,000 from Premier Machines. The payment was made by issuing 9% Debentures of Rs. 100 each at a discount of 4%. Calculate the number of debentures issued and demonstrate the journal entries in the books of Zenith Ltd.

Analyze the journal entry for the redemption of debentures by purchasing them from the open market at a price lower than their face value. Explain the nature and treatment of the resulting profit.

A company has 5,000, 9% debentures of Rs. 100 each outstanding. It purchases 1,000 of its own debentures from the open market at Rs. 95 each for immediate cancellation. Calculate the profit on redemption and demonstrate the necessary journal entries for the purchase and cancellation of these debentures.

From a financial leverage perspective, evaluate why debentures might be considered a superior source of long-term finance compared to equity shares for a profitable company.

An unlisted manufacturing company plans to redeem Rs. 20,00,000 worth of debentures. Apply the provisions of the Companies Act, 2013, to calculate the minimum amount that must be transferred to the Debenture Redemption Reserve (DRR) and the minimum amount to be invested in Debenture Redemption Investments (DRI) before redemption.

A company has a 'Loss on Issue of Debentures' of Rs. 80,000 and a balance of Rs. 50,000 in its Securities Premium Reserve. Propose the journal entry to write off this loss at the end of the financial year.

Critique the practice of issuing Zero Coupon Rate Debentures from an investor's point of view. What are the primary risks and potential rewards?

A company issues 1,000, 10% debentures of Rs. 100 each at a discount of 5 percent, redeemable at a premium of 10 percent after five years. Formulate the journal entry at the time of issue and justify the accounting treatment of the total loss.

Identify the primary difference between the return paid on shares and the return paid on debentures.

Evaluate the two accounting methods for debentures issued as collateral security. Justify which method presents a more transparent view of the company's contingent liabilities.

Summarize the two accounting methods a company can use when it issues debentures as collateral security.

Critique the legal requirement for certain unlisted companies to create a Debenture Redemption Reserve (DRR) out of profits. Evaluate its effectiveness and a potential drawback.

Recall the journal entry passed at the time of allotment for debentures issued at par but redeemable at a premium.

Design a redemption plan for an unlisted company with Rs. 20,00,000, 8% Debentures, to be redeemed in two equal annual instalments starting March 31, 2024. Propose the key journal entries for the creation of required reserves and investments for the first year of redemption.

Describe 'Zero Coupon Rate Debentures' and explain how investors are compensated.

Create a scenario where a company acquires a business with net assets of Rs. 10,00,000 for a purchase consideration of Rs. 9,50,000. Formulate the journal entries for this acquisition and the subsequent settlement by issuing 9% debentures of Rs. 100 each at a 5 percent premium.

A company secured a loan of Rs. 10,00,000 from a bank and issued 12,000, 9% Debentures of Rs. 100 each as collateral security. Demonstrate the two alternative methods of recording this transaction in the company's books and show its presentation in the Balance Sheet.

Bright Ltd. acquired the business of Star Enterprises, taking over assets of Rs. 12,00,000 and liabilities of Rs. 2,00,000. The purchase consideration was settled by issuing 12% debentures of Rs. 100 each at a premium of 25%. Analyze the transaction to determine if it results in Goodwill or Capital Reserve and demonstrate the necessary journal entries for the business purchase and settlement.

Solve the accounting for an oversubscription scenario where a company issued 10,000, 10% Debentures of Rs. 100 each, but received applications for 15,000 debentures. The company rejected 3,000 applications and made a pro-rata allotment to the remaining applicants. The application money was Rs. 40 per debenture. Demonstrate the journal entry for the adjustment of application money.

A company issued 5,000, 9% debentures of Rs. 100 each at a discount of 6%, redeemable at a premium of 4%. At the time of issue, the company had a balance of Rs. 20,000 in its Securities Premium Reserve. Solve for the total loss on issue and demonstrate the journal entry to write off this loss completely at the end of the year.

Explain the concept of issuing debentures for a consideration other than cash and list the journal entries for such an issue at par and at a premium.