MCQs: Issue and Redemption of Debentures
1. What does the term "debenture" primarily signify?
a) Ownership of a company
b) Borrowed capital of a company
c) A type of share
d) Short-term loan
Answer: b) Borrowed capital of a company
2. How is the return on debentures classified?
a) Dividend
b) Interest
c) Profit
d) Capital gain
Answer: b) Interest
3. What type of debentures are repaid on the expiry of a specified period?
a) Irredeemable debentures
b) Secured debentures
c) Redeemable debentures
d) Convertible debentures
Answer: c) Redeemable debentures
4. Which type of debentures can be converted into shares?
a) Bearer debentures
b) Secured debentures
c) Non-convertible debentures
d) Convertible debentures
Answer: d) Convertible debentures
5. In terms of registration, debentures that can be transferred by delivery are called:
a) Registered debentures
b) Convertible debentures
c) Bearer debentures
d) Secured debentures
Answer: c) Bearer debentures
6. What does "zero coupon rate debentures" mean?
a) They carry no interest but are issued at a discount.
b) They have a fixed interest rate.
c) They are redeemable at premium only.
d) They have a floating interest rate.
Answer: a) They carry no interest but are issued at a discount.
7. What is the journal entry for debentures issued at par?
a) Dr. Bank, Cr. Discount on issue of debentures
b) Dr. Bank, Cr. Debentures
c) Dr. Bank, Cr. Securities Premium Reserve
d) Dr. Bank, Cr. Profit and Loss
Answer: b) Dr. Bank, Cr. Debentures
8. What are "collateral security debentures"?
a) Debentures secured by primary assets only
b) Debentures issued in addition to primary security
c) Redeemable debentures
d) Convertible debentures
Answer: b) Debentures issued in addition to primary security
9. How are debentures recorded in a company's balance sheet when issued as collateral security?
a) As an expense under current liabilities
b) As a note under long-term borrowings
c) Under short-term liabilities
d) As a deduction from reserves
Answer: b) As a note under long-term borrowings
10. Which of the following statements is FALSE regarding debentures?
a) Debentureholders do not have voting rights.
b) Debentures represent a charge on profits.
c) Debentures can be converted into equity shares.
d) Debenture interest is paid only when the company earns a profit.
Answer: d) Debenture interest is paid only when the company earns a profit.
11. What is the main distinction between shares and debentures?
a) Debentures represent ownership, shares do not.
b) Shares represent ownership, debentures are a loan.
c) Shares have a fixed return, debentures do not.
d) Both represent ownership in the company.
Answer: b) Shares represent ownership, debentures are a loan.
12. Which type of debenture has a charge on the company’s assets?
a) Convertible debentures
b) Unsecured debentures
c) Secured debentures
d) Bearer debentures
Answer: c) Secured debentures
13. Debentures repayable only at the time of company winding up are called:
a) Convertible debentures
b) Zero coupon rate debentures
c) Redeemable debentures
d) Irredeemable debentures
Answer: d) Irredeemable debentures
14. What type of debentures does not require the maintenance of a register of holders?
a) Registered debentures
b) Bearer debentures
c) Secured debentures
d) Convertible debentures
Answer: b) Bearer debentures
15. What does a "floating charge" on assets signify?
a) A specific charge on a single asset
b) A charge on assets excluding those already secured
c) No charge on any asset
d) A charge on cash flow only
Answer: b) A charge on assets excluding those already secured
16. How is interest on debentures treated in company accounts?
a) As an appropriation of profit
b) As a charge on profits
c) As an expense for tax purposes
d) Both b and c
Answer: d) Both b and c
17. What happens to the excess application money in the case of oversubscription?
a) It is refunded.
b) It is retained for future calls.
c) It is adjusted towards allotment money.
d) All of the above.
Answer: d) All of the above.
18. When debentures are issued at a price higher than the face value, it is termed as:
a) Discount on issue of debentures
b) Premium on issue of debentures
c) Redeemable debentures
d) Collateral security
Answer: b) Premium on issue of debentures
19. Which account is credited when debentures are issued at a premium?
a) Premium on Redemption Account
b) Securities Premium Reserve Account
c) Discount on Debentures Account
d) Share Capital Account
Answer: b) Securities Premium Reserve Account
20. What entry is passed when debentures are issued as collateral security?
a) No entry is passed.
b) Dr. Debenture Suspense, Cr. Debentures Account
c) Dr. Bank, Cr. Debenture Suspense
d) Dr. Debentures Account, Cr. Securities Premium Reserve
Answer: b) Dr. Debenture Suspense, Cr. Debentures Account
21. A company must deduct TDS on debenture interest if the amount exceeds:
a) ₹5,000
b) ₹10,000
c) ₹1,000
d) ₹50,000
Answer: b) ₹10,000
22. Redemption of debentures by converting them into equity shares is called:
a) Redemption by purchase
b) Conversion method
c) Lump sum repayment
d) Amortization
Answer: b) Conversion method
23. What journal entry is passed to record the issue of debentures for cash at a discount?
a) Dr. Bank, Dr. Discount on Issue, Cr. Debenture Account
b) Dr. Bank, Cr. Debenture Account, Cr. Discount on Issue
c) Dr. Debenture Account, Cr. Bank, Cr. Discount on Issue
d) Dr. Securities Premium, Cr. Discount on Issue
Answer: a) Dr. Bank, Dr. Discount on Issue, Cr. Debenture Account
24. What is the purpose of a sinking fund?
a) To pay interest on debentures
b) To manage working capital
c) To ensure redemption of debentures
d) To pay dividends
Answer: c) To ensure redemption of debentures
25. Which section of the Companies Act defines "debenture"?
a) Section 2(12)
b) Section 2(30)
c) Section 52
d) Section 61
Answer: b) Section 2(30)
26. Debentures issued at ₹95 for a face value of ₹100 indicate:
a) Issued at par
b) Issued at premium
c) Issued at discount
d) Convertible debentures
Answer: c) Issued at discount
27. The accounting entry to record debenture interest due is:
a) Dr. Debentureholders Account, Cr. Debenture Interest Account
b) Dr. Debenture Interest Account, Cr. Debentureholders Account, Cr. Income Tax Payable
c) Dr. Bank, Cr. Debenture Interest Account
d) Dr. Debenture Suspense Account, Cr. Bank
Answer: b) Dr. Debenture Interest Account, Cr. Debentureholders Account, Cr. Income Tax Payable
28. Loss on the issue of debentures is written off against:
a) Securities Premium Reserve
b) Profit and Loss Account
c) Both a and b
d) Capital Reserve
Answer: c) Both a and b
29. Which of the following is NOT a method of redemption of debentures?
a) Payment in lump sum
b) Conversion into equity
c) Payment through dividend
d) Purchase in the open market
Answer: c) Payment through dividend
30. The repayment of debentures is shown under which liability in the balance sheet?
a) Current liabilities
b) Non-current liabilities
c) Contingent liabilities
d) Reserves and surplus
Answer: b) Non-current liabilities
31. What type of debentures are secured by a charge on specific assets of the company?
a) Naked debentures
b) Secured debentures
c) Bearer debentures
d) Convertible debentures
Answer: b) Secured debentures
32. Which debentures are considered unsecured?
a) Redeemable debentures
b) Naked debentures
c) Convertible debentures
d) Bearer debentures
Answer: b) Naked debentures
33. Convertible debentures are those that:
a) Can be converted into secured loans.
b) Can be converted into shares or other securities.
c) Cannot be transferred.
d) Must be redeemed at premium.
Answer: b) Can be converted into shares or other securities.
34. Zero coupon rate debentures compensate investors by:
a) Providing interest periodically.
b) Offering them shares instead of debentures.
c) Being issued at a substantial discount.
d) Redeeming at a premium.
Answer: c) Being issued at a substantial discount.
35. Which document records the details of debentureholders?
a) Share Certificate
b) Register of Debentureholders
c) Memorandum of Association
d) Debenture Bond
Answer: b) Register of Debentureholders
36. Bearer debentures are transferred by:
a) Delivery
b) Deed
c) Registering in the company's records
d) Filing a transfer request
Answer: a) Delivery
37. What is the impact of issuing debentures at a premium?
a) It decreases liabilities.
b) It increases the company's reserves.
c) It is treated as a loss.
d) It has no financial impact.
Answer: b) It increases the company's reserves.
38. Debentures issued for consideration other than cash are accounted for by:
a) Dr. Sundry Assets, Cr. Vendor Account
b) Dr. Sundry Assets, Cr. Bank Account
c) Dr. Vendor Account, Cr. Debenture Account
d) Both a and c
Answer: d) Both a and c
39. A company purchasing assets worth ₹1,00,000 and issuing debentures at par for payment would record:
a) Dr. Bank, Cr. Debentures
b) Dr. Vendor, Cr. Debentures
c) Dr. Sundry Assets, Cr. Vendor
d) Dr. Vendor, Cr. Bank
Answer: c) Dr. Sundry Assets, Cr. Vendor
40. Which journal entry is passed when debentures are issued at a discount and redeemable at premium?
a) Dr. Bank, Dr. Discount on Issue, Cr. Premium on Redemption, Cr. Debentures
b) Dr. Bank, Cr. Premium on Redemption, Cr. Debentures
c) Dr. Securities Premium Reserve, Cr. Bank
d) Dr. Discount on Issue, Cr. Bank
Answer: a) Dr. Bank, Dr. Discount on Issue, Cr. Premium on Redemption, Cr. Debentures
41. Which account reflects the premium amount on redemption of debentures?
a) Discount on Issue of Debentures
b) Premium on Redemption of Debentures
c) Securities Premium Reserve
d) Debenture Suspense Account
Answer: b) Premium on Redemption of Debentures
42. When a company redeems debentures by conversion into shares, it is termed:
a) Lump sum redemption
b) Conversion method
c) Amortization
d) Installment payment
Answer: b) Conversion method
43. A company issuing debentures at a discount of ₹10 per ₹100 face value records the discount as:
a) Loss in the profit and loss account.
b) A liability in the balance sheet.
c) A capital loss written off over time.
d) A gain in the securities premium reserve.
Answer: c) A capital loss written off over time.
44. How is the interest on debentures recorded when it becomes due?
a) Dr. Debenture Interest, Cr. Profit and Loss
b) Dr. Debentureholders, Cr. Debenture Interest
c) Dr. Debenture Interest, Cr. Debentureholders, Cr. Income Tax Payable
d) Dr. Profit and Loss, Cr. Bank
Answer: c) Dr. Debenture Interest, Cr. Debentureholders, Cr. Income Tax Payable
45. What type of debenture can be sold in the open market by a lender?
a) Convertible debentures
b) Secured debentures
c) Collateral security debentures
d) Zero coupon debentures
Answer: c) Collateral security debentures
46. What is shown in the company's financial statements as "Non-Current Liabilities"?
a) Debenture Interest
b) Debenture Redemption Reserve
c) Outstanding Debentures
d) Premium on Redemption
Answer: c) Outstanding Debentures
47. Which section of a balance sheet shows debentures issued as a collateral security under the first method?
a) Non-Current Liabilities
b) Current Liabilities
c) Notes to Accounts
d) Equity
Answer: c) Notes to Accounts
48. Which term describes debentures repayable over a series of payments?
a) Installment debentures
b) Zero coupon debentures
c) Irredeemable debentures
d) Convertible debentures
Answer: a) Installment debentures
49. Loss on issue of debentures is:
a) An operational loss
b) A capital loss
c) A financing expense
d) A contingent liability
Answer: b) A capital loss
50. What are the two ways debentures as collateral security are treated in accounts?
a) Capitalization or depreciation
b) Premium or discount entry
c) Journal entry or note in the balance sheet
d) Immediate expense or deferred expense
Answer: c) Journal entry or note in the balance sheet
51. The interest on debentures is calculated based on:
a) Market value of debentures
b) Face value of debentures
c) Discounted value of debentures
d) Premium on redemption
Answer: b) Face value of debentures
52. What type of liability is "premium on redemption of debentures"?
a) Contingent liability
b) Current liability
c) Non-current liability
d) No liability
Answer: c) Non-current liability
53. When debentures are issued at a discount, the discount is recorded as:
a) An immediate expense
b) A loss to be written off over the debenture's life
c) A liability in the balance sheet
d) Part of securities premium reserve
Answer: b) A loss to be written off over the debenture's life
54. Which term refers to debentures that do not have a specific repayment schedule?
a) Perpetual debentures
b) Zero coupon debentures
c) Redeemable debentures
d) Floating rate debentures
Answer: a) Perpetual debentures
55. When debentures are redeemed at a premium, the premium is recorded as:
a) An expense in profit and loss
b) An increase in securities premium reserve
c) A liability in the balance sheet
d) A loss written off immediately
Answer: c) A liability in the balance sheet
56. A debenture issued for ₹100 at a premium of ₹10 is recorded as:
a) ₹100 in debentures account and ₹10 in securities premium reserve
b) ₹90 in debentures account and ₹10 in securities premium reserve
c) ₹110 in debentures account
d) ₹10 in profit and loss account
Answer: a) ₹100 in debentures account and ₹10 in securities premium reserve
57. What happens if a company fails to repay debentures issued as collateral security?
a) Debentureholders lose their investment.
b) The collateral security is redeemed by the lender.
c) The company is dissolved.
d) The debentures are converted into shares.
Answer: b) The collateral security is redeemed by the lender.
58. Redemption of debentures through a sinking fund ensures:
a) Regular interest payment
b) A provision for repayment of principal
c) Conversion into equity shares
d) Reduction in premium on redemption
Answer: b) A provision for repayment of principal
59. Tax Deducted at Source (TDS) on debenture interest is recorded as:
a) Dr. Bank, Cr. TDS
b) Dr. Debenture Interest, Cr. TDS Payable
c) Dr. TDS Payable, Cr. Debentureholders
d) Dr. Debentureholders, Cr. Bank
Answer: b) Dr. Debenture Interest, Cr. TDS Payable
60. The issue of debentures at par with a premium on redemption results in:
a) Dr. Debentures, Cr. Premium on Redemption
b) Dr. Loss on Issue, Cr. Premium on Redemption and Debentures
c) Dr. Bank, Cr. Debentures and Premium on Redemption
d) Dr. Securities Premium, Cr. Debentures
Answer: b) Dr. Loss on Issue, Cr. Premium on Redemption and Debentures
61. In case of an oversubscription of debentures, the excess application money is:
a) Fully refunded
b) Transferred to debentureholders' accounts
c) Retained for future calls or refunded
d) Recorded as premium
Answer: c) Retained for future calls or refunded
62. If debentures are issued for a consideration other than cash, the entry includes:
a) Dr. Cash, Cr. Debentures
b) Dr. Assets, Cr. Vendor Account
c) Dr. Vendor, Cr. Securities Premium Reserve
d) Dr. Discount on Issue, Cr. Bank
Answer: b) Dr. Assets, Cr. Vendor Account
63. The repayment of debentures in installments is commonly referred to as:
a) Lump sum repayment
b) Redemption by purchase
c) Amortized repayment
d) Conversion method
Answer: c) Amortized repayment
64. The issuance of zero-coupon debentures compensates the investor through:
a) Interest payments
b) A discounted issue price
c) Higher face value
d) Convertible options
Answer: b) A discounted issue price
65. Which type of debenture offers no voting rights?
a) Convertible debentures
b) Secured debentures
c) Non-convertible debentures
d) All debentures
Answer: d) All debentures
66. Which statement is TRUE about the interest on debentures?
a) It is paid only when the company makes a profit.
b) It is a mandatory expense, irrespective of profit.
c) It is classified as an appropriation of profit.
d) It is deducted from securities premium reserve.
Answer: b) It is a mandatory expense, irrespective of profit.
67. What is the accounting treatment for debenture interest paid?
a) Dr. Profit and Loss, Cr. Debenture Interest
b) Dr. Debenture Interest, Cr. Bank
c) Dr. Bank, Cr. Debentureholders
d) Dr. Debentureholders, Cr. Bank
Answer: d) Dr. Debentureholders, Cr. Bank
68. Loss on issue of debentures is recorded as:
a) Dr. Securities Premium, Cr. Discount on Issue
b) Dr. Profit and Loss, Cr. Debentures
c) Dr. Securities Premium and Profit and Loss, Cr. Loss on Issue
d) Dr. Discount on Issue, Cr. Securities Premium Reserve
Answer: c) Dr. Securities Premium and Profit and Loss, Cr. Loss on Issue
69. In the event of redemption at premium, the "Premium on Redemption" account is classified as:
a) Current liability
b) Non-current liability
c) Revenue reserve
d) Deferred liability
Answer: b) Non-current liability
70. The process of gradually writing off loss on issue of debentures is termed:
a) Depreciation
b) Amortization
c) Appreciation
d) Consolidation
Answer: b) Amortization
71. When debentures are issued at a discount and redeemed at par, the difference is treated as:
a) Profit on issue
b) Revenue expenditure
c) Capital loss
d) Non-current liability
Answer: c) Capital loss
72. Which of the following debentures cannot be converted into shares?
a) Convertible debentures
b) Secured debentures
c) Non-convertible debentures
d) Zero coupon debentures
Answer: c) Non-convertible debentures
73. When a company issues debentures at premium and redeems them at premium, the accounting entry includes:
a) Dr. Bank, Cr. Securities Premium Reserve and Premium on Redemption
b) Dr. Loss on Issue, Cr. Debentures and Premium on Redemption
c) Dr. Bank, Cr. Debentures, Securities Premium Reserve, and Premium on Redemption
d) Dr. Debentures, Cr. Premium on Redemption
Answer: c) Dr. Bank, Cr. Debentures, Securities Premium Reserve, and Premium on Redemption
74. What is the purpose of creating a Debenture Redemption Reserve (DRR)?
a) To ensure funds for interest payments
b) To provide security for the redemption of debentures
c) To write off loss on issue of debentures
d) To repay loans
Answer: b) To provide security for the redemption of debentures
75. What is the key feature of redeemable debentures?
a) They carry no repayment obligation.
b) They must be repaid after a specific time.
c) They are always convertible into shares.
d) They provide no interest payments.
Answer: b) They must be repaid after a specific time.
76. Which type of debenture offers a fixed or floating charge over the company’s assets?
a) Unsecured debentures
b) Secured debentures
c) Perpetual debentures
d) Zero coupon rate debentures
Answer: b) Secured debentures
77. Bearer debentures are also known as:
a) Registered debentures
b) Coupon debentures
c) Convertible debentures
d) Collateral security debentures
Answer: b) Coupon debentures
78. What is the accounting treatment for a company purchasing assets and issuing debentures at a discount?
a) Dr. Assets, Cr. Debenture Account and Discount on Issue
b) Dr. Vendor, Cr. Debenture Account and Discount on Issue
c) Dr. Bank, Cr. Debenture Account
d) Dr. Securities Premium, Cr. Assets
Answer: a) Dr. Assets, Cr. Debenture Account and Discount on Issue
79. If debentures are redeemed at premium, the premium is:
a) Transferred to securities premium reserve
b) Charged to profit and loss account
c) Recorded as a provision until repayment
d) Deducted from liabilities
Answer: c) Recorded as a provision until repayment
80. Which method of redemption involves repurchasing debentures from the open market?
a) Lump sum payment
b) Sinking fund method
c) Purchase in the open market
d) Amortization
Answer: c) Purchase in the open market
81. Debentures issued as collateral security are reflected in the balance sheet as:
a) A note below the principal liability
b) A part of current liabilities
c) An addition to fixed assets
d) A deduction from cash reserves
Answer: a) A note below the principal liability
82. The term "non-convertible debentures" means:
a) They cannot be redeemed before maturity.
b) They do not carry interest.
c) They cannot be converted into shares.
d) They cannot be issued at a discount.
Answer: c) They cannot be converted into shares.
83. Interest on debentures is classified as:
a) Operating expense
b) Financing expense
c) Non-operating income
d) Provision expense
Answer: b) Financing expense
84. In the case of oversubscription, how is excess money received handled for applicants not allotted debentures?
a) Adjusted to future allotments
b) Refunded to applicants
c) Transferred to securities premium reserve
d) Retained indefinitely
Answer: b) Refunded to applicants
85. Loss on issue of debentures is shown in the balance sheet under:
a) Current liabilities
b) Non-current assets
c) Other current assets
d) Reserves and surplus
Answer: c) Other current assets
86. Which of these is NOT a type of debenture based on registration?
a) Registered debentures
b) Coupon debentures
c) Secured debentures
d) Bearer debentures
Answer: c) Secured debentures
87. Which of the following represents borrowed capital for a company?
a) Equity shares
b) Debentures
c) Retained earnings
d) Share premium
Answer: b) Debentures
88. Redemption of debentures at par means:
a) Repayment at face value
b) Repayment at a premium
c) Repayment at a discount
d) Repayment in installments
Answer: a) Repayment at face value
89. The issue of debentures at a premium benefits a company by:
a) Increasing cash reserves
b) Reducing the liability of repayment
c) Creating additional reserves
d) Reducing interest payment obligations
Answer: c) Creating additional reserves
90. What entry is passed to record debenture interest paid to debentureholders?
a) Dr. Profit and Loss, Cr. Debenture Interest
b) Dr. Debenture Interest, Cr. Debentureholders
c) Dr. Debentureholders, Cr. Bank
d) Dr. Bank, Cr. Debentureholders
Answer: c) Dr. Debentureholders, Cr. Bank
91. The journal entry for TDS payment to the government is:
a) Dr. Bank, Cr. Income Tax Payable
b) Dr. Income Tax Payable, Cr. Bank
c) Dr. Debenture Interest, Cr. Bank
d) Dr. Securities Premium, Cr. Income Tax Payable
Answer: b) Dr. Income Tax Payable, Cr. Bank
92. Which of the following is NOT a feature of zero-coupon debentures?
a) Issued at a discount
b) No periodic interest payments
c) Redeemed at face value
d) Carry a fixed interest rate
Answer: d) Carry a fixed interest rate
93. The liability for premium on redemption is classified as:
a) Deferred liability
b) Long-term borrowing
c) Provision
d) Contingent liability
Answer: c) Provision
94. What is the primary reason for creating a sinking fund?
a) To secure loans
b) To ensure timely redemption of debentures
c) To pay dividends
d) To account for premium on redemption
Answer: b) To ensure timely redemption of debentures
95. Interest on debentures is calculated based on:
a) Market price
b) Nominal value
c) Redemption value
d) Discounted value
Answer: b) Nominal value
96. Which type of debenture cannot be transferred without execution of a transfer deed?
a) Bearer debentures
b) Registered debentures
c) Coupon debentures
d) Convertible debentures
Answer: b) Registered debentures
97. How is a debenture suspense account treated in the balance sheet?
a) Added to securities premium reserve
b) Deducted from long-term borrowings
c) Recorded as a current liability
d) Not shown in the balance sheet
Answer: b) Deducted from long-term borrowings
98. Which of these is TRUE about collateral security debentures?
a) They are redeemable only on maturity.
b) They serve as additional security for loans.
c) They do not carry interest.
d) They cannot be transferred.
Answer: b) They serve as additional security for loans.
99. When a company purchases assets by issuing debentures, it:
a) Pays in cash and debits the asset account.
b) Credits the vendor and issues debentures.
c) Debits the vendor and credits cash.
d) Debits securities premium and credits debentures.
Answer: b) Credits the vendor and issues debentures.
100. The primary advantage of issuing debentures is:
a) They provide ownership rights.
b) They ensure flexible financing options.
c) They are not subject to repayment.
d) They do not require periodic interest payments.
Answer: b) They ensure flexible financing options.
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