Issue and Redemption of Debentures (Class 12 Accountancy)

Practise chapter-wise MCQs for Class 12 Accountancy — Issue and Redemption of Debentures. Every question comes with the correct answer and an explanation.

Issue and Redemption of Debentures (Class 12 Accountancy)

Practise chapter-wise MCQs for Class 12 Accountancy — Issue and Redemption of Debentures. Every question comes with the correct answer and an explanation.

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Practise chapter-wise MCQs for Class 12 Accountancy — Issue and Redemption of Debentures. Every question comes with the correct answer and an explanation.

Issue and Redemption of Debentures MCQs with Answers & Explanations

Q1. What is the primary purpose of the Debenture Redemption Reserve (DRR)?

  1. To reduce the company's tax liability
  2. To increase the company's profits
  3. To provide for future losses
  4. To ensure availability of funds for redemption ✓ (correct)

Explanation: The DRR is a statutory requirement under the Companies Act to ensure that a portion of the profits is set aside to meet the redemption of debentures, thereby protecting the interests of debenture holders.

Q2. Which of the following is NOT a method of redemption of debentures?

  1. Redemption by appropriation of profit ✓ (correct)
  2. Redemption by issue of new debentures
  3. Redemption by draw of lots
  4. Redemption by conversion into shares

Explanation: Redemption by appropriation of profit refers to setting aside profits for redemption, which is indirectly achieved through the Debenture Redemption Reserve (DRR). It's not a direct method of extinguishing the liability itself.

Q3. A company issued 500, 8% debentures of ₹1,000 each at a discount of 4%. The debentures are redeemable at a premium of 6%. The total loss on issue of debentures will be:

  1. ₹60,000
  2. ₹50,000 ✓ (correct)
  3. ₹30,000
  4. ₹20,000

Explanation: Discount on issue = 4% of ₹5,00,000 = ₹20,000. Premium on redemption = 6% of ₹5,00,000 = ₹30,000. Total loss = ₹20,000 + ₹30,000 = ₹50,000.

Q4. When debentures are redeemed out of capital, the corresponding credit entry is usually made to:

  1. Statement of Profit and Loss
  2. General Reserve
  3. Debenture Redemption Reserve Account ✓ (correct)
  4. Debenture Holders Account

Explanation: When debentures are redeemed out of capital, the Debenture Redemption Reserve (DRR) or any other reserve created for this purpose is utilized. The debenture holders are paid, and their account is debited.

Q5. When debentures are issued at a discount and redeemable at par, the discount on issue of debentures is shown as:

  1. A capital profit
  2. A deduction from share capital
  3. A revenue expenditure
  4. A loss on issue of debentures ✓ (correct)

Explanation: Discount on issue of debentures is a capital loss as it relates to the cost of raising long-term finance. It is often debited to Securities Premium Account or Statement of Profit and Loss.

Q6. A company has ₹5,00,000, 10% debentures due for redemption. It decides to redeem these debentures by issuing new 12% debentures at par. The amount of new debentures to be issued will be:

  1. Exactly ₹5,00,000 ✓ (correct)
  2. More than ₹5,00,000
  3. Cannot be determined
  4. Less than ₹5,00,000

Explanation: When debentures are redeemed by issuing new debentures at par, the nominal value of the old debentures is equal to the nominal value of the new debentures issued.

Q7. ABC Ltd. has 1,000, 10% debentures of ₹100 each, redeemable at a premium of 10%. The company has a sufficient balance in the Securities Premium Reserve. The entry to record the premium on redemption will involve a debit to:

  1. Debenture Holders Account
  2. Securities Premium Reserve Account ✓ (correct)
  3. Statement of Profit and Loss Account
  4. Debenture Redemption Reserve Account

Explanation: If Securities Premium Reserve is sufficient, the premium on redemption of debentures is debited to Securities Premium Reserve Account. Otherwise, it is debited to Statement of Profit and Loss.

Q8. Securities Premium Reserve can be used for writing off discount on issue of debentures, provided that:

  1. The debentures are redeemable at a premium
  2. The debentures are redeemable at a discount
  3. The debentures are redeemable at par ✓ (correct)
  4. The debentures are redeemable within 12 months

Explanation: Securities Premium can be used to write off the discount on issue of debentures. This is allowed when debentures are redeemable at par or at a premium.

Q9. If debentures are issued for a consideration other than cash, and they are redeemable at a premium, the premium on redemption is treated as:

  1. A prior period item
  2. A capital profit
  3. A revenue loss
  4. A capital loss ✓ (correct)

Explanation: Premium on redemption of debentures, like discount on issue, represents a capital loss as it is an additional cost incurred in raising long-term finance.

Q10. XYZ Ltd. issued 10,000, 9% debentures of ₹100 each at a premium of 5%. The debentures are redeemable at par. The amount to be transferred to Debenture Redemption Reserve (DRR) at the end of the first financial year would be:

  1. 10% of ₹10,00,000 ✓ (correct)
  2. 10% of ₹10,50,000
  3. 10% of ₹9,00,000
  4. 10% of ₹9,50,000

Explanation: DRR is created out of profits and is equal to 10% of the nominal value of debentures outstanding. Nominal value of debentures is ₹100 * 10,000 = ₹10,00,000.

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