Chapter MCQ Test 2 — Company Accounts: Issue of Debentures
10 Questions • 12 min • Chapter MCQ
12:00
Question 1 of 10
Debentures of face value Rs 2,00,000 are issued at a 5% discount but redeemable at a 10% premium. The total capital loss provided at issue is:
Rs 30,000
Rs 10,000
Rs 20,000
Rs 15,000
Explanation: Discount 5% = 10,000 + redemption premium 10% = 20,000; total 30,000 debited at issue.
Question 2 of 10
Why must a company provide for the redemption premium AT ISSUE rather than at redemption?
Prudence — a known future loss is recognised as soon as it is certain
It increases profit
It is optional
To avoid interest
Explanation: The prudence convention requires anticipating the certain extra payment on redemption immediately.
Question 3 of 10
A firm buys a running business: assets Rs 9,00,000, liabilities Rs 2,00,000, for Rs 6,50,000 paid in debentures. The difference is:
Capital reserve Rs 50,000
Goodwill Rs 50,000
Goodwill Rs 6,50,000
Loss Rs 50,000
Explanation: Net assets = 9,00,000 − 2,00,000 = 7,00,000; consideration 6,50,000 is less, so capital reserve of 50,000.
Question 4 of 10
Interest on debentures differs from a dividend because it is:
Payable even when the company makes a loss
Variable
Paid only out of profit
Voted by shareholders
Explanation: Interest is a contractual charge, payable regardless of profit, unlike a discretionary dividend.
Question 5 of 10
1,000 debentures of Rs 100 are issued at par, redeemable at a 5% premium. At issue, 'Premium on Redemption of Debentures A/c' is credited with:
Rs 5,000
Rs 50,000
Rs 1,000
Nil
Explanation: Redemption premium = 5% × 1,00,000 = 5,000, a liability credited and matched by Loss on Issue debited.
Question 6 of 10
Debentures issued as collateral security, if recorded, use which account?
Debenture Suspense A/c Dr; To Debentures A/c
Bank A/c Dr; To Debentures A/c
Loss on Issue A/c
Securities Premium A/c
Explanation: The accounting-entry method debits Debenture Suspense and credits Debentures; alternatively only a note is given.
Question 7 of 10
When the purchase consideration EXCEEDS the net assets taken over, the company records:
Goodwill
Capital reserve
Discount
A premium
Explanation: Paying more than the net assets are worth creates goodwill.
Question 8 of 10
A Rs 100 debenture is issued at Rs 110 and is redeemable at par. The Rs 10 is:
Securities premium (a capital reserve)
Discount on issue
Loss on issue
Interest
Explanation: Issue above face value with par redemption gives a securities premium of Rs 10.
Question 9 of 10
Compared with equity, debentures are 'cheaper but riskier' chiefly because:
Interest is a fixed obligation that must be paid even in bad years
They give voting control
They never need repaying
They earn dividends
Explanation: The fixed interest commitment lowers cost (and is tax-deductible) but adds financial risk in lean years.
Question 10 of 10
Discount on issue of debentures appears in the balance sheet until written off as:
Other non-current/current asset (to be amortised)
A liability
Share capital
Revenue
Explanation: The unwritten-off discount is a capital loss carried as an asset and amortised over the debentures' life.