Question 1.

Debenture holders are :

(A) Owners of the Company
(B) Lenders of the Company
(C) Vendors of the Company
(D) Customers of the Company
Answer:
(B) Lenders of the Company

Explanation:
Debentures are like loans taken by the company from public, so debenture I holders are lenders of the company.

Question 2.

Debentures are shown in the Balance sheet of a company under the head of :

(A) Non-current Liabilities
(B) Current Liabilities
(C) Share Capital
(D) None of the above
Answer:
(A) Non-current Liabilities

Explanation:
As debentures are long-term debt instruments they are shown in the non-current liabilities of the balance sheet.

Question 3.

Debentures are considered as equity.

(A) External
(B) Internal
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) External

Explanation:
As the debenture holders do not become the owners of the company when they purchase debentures, they are considered to be external equity.

Question 4.

Interest on Debentures is a charge against ………

(A) Profit
(B) Share Capital
(C) Dividend
(D) General Reserve
Answer:
(A) Profit

Question 5.

Pick the odd one out:

(A) Preference Debentures
(B) Ordinary Debentures
(C) Convertible Debentures
(D) Redeemable Debentures
Answer:
(A) Preference Debentures

Explanation:
There is no debenture called preference debentures.

Question 6.

Debenture interest is paid as :

(A) Based on the net profit of company
(B) At a predetermined rate
(C) At variable rate
(D) None of the above
Answer:
(B) At a predetermined rate

Explanation:
The interest rate of debentures is predetermined as it is mentioned in the debenture bond itself.

Question 7.

At the time of issue of Debentures, Debentures Account is :

(A) Credited by the amount received
(B) Credited by issues price of debentures
(C) Credited by the nominal (face) value of the debentures
(D) None of the above
Answer:
(C) Credited by the nominal (face) value of the debentures

Question 8.

Premium on Redemption of Debentures Account is a Account.

(A) Real Account
(B) Nominal Account
(C) Personal Account
(D) None of these
Answer:
(C) Personal Account

Question 9.

The loss on issue of Debentures is written-off from:

(A) Capital Reserve
(B) Secret Reserve
(C) Reserve Capital
(D) Share Premium Reserve Account
Answer:
(A) Capital Reserve

Question 10.

Pick the odd one out :

(A) Issue of debentures to vendor
(B) Issue of debentures ot public
(C) Issue of debentures as collateral security
(D) Issue of debentures to promoters
Answer:
(B) Issue of debentures ot public

Explanation:
Issue of debenture to public is the only debenture issued without any consideration.

Question 11.

What journal entry will be passed when purchase consideration is equal to net assets while purchasing business from vendor:

(A) Sundry Assets A/c Dr.
Goodwill A/c Dr.
To Vendor’s A/c

(B) Sundry Assets A/c Dr.
To Capital Reserve A/c To Vendor’s A/c

(C) Sundry Assets A/c Dr.
To Sundry Liabilities A/c To Vendor’s A/c

(D) Capital Reserve A/c Dr.
To Vendor’s A/c E
Answer:
(C) Sundry Assets A/c Dr.
To Sundry Liabilities A/c To Vendor’s A/c

Explanation:
When the purchase consideration is equ’al to net assets while purchasing business from vendor the Asset Account is debited and the Liability Account and Vendor Account are credited.

Question 12.

When the debenture of face value ₹ 100 is issued at ₹ 100 is called, issue of debenture at:

(A) Par
(B) Premium
(C) Discount
(D) None of the above
Answer:
(A) Par

Explanation:
When debentures are issued at par they are issued at the face value itself. In discount they are issued at an amount less than the nominal value and debentures issued at premium are issued at a price more than the face value.

Assertion And Reason Based MCQs 

Directions: In the following questions, a statement of Assertion (A) is followed by a statement of
Reason (R). Mark the correct choice as:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).
(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
(C) Assertion (A) is true, but Reason (R) is false.
(D) Assertion (A) is false, but Reason (R) is true.

Question 1.

Assertion (A): Debenture holders are the creditors of the company carrying a fixed rate of interest.
Reason (R): Debentures are short-term loan taken from the public.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
If a company needs funds for extension and development purpose without increasing its share capital, it can borrow from the general public by issuing certificates called debentures for a fixed period of time and at a fixed rate of interest. Debenture is a long-term debt instruments.

Question 2.

Assertion (A): Debenture holders do not enjoy any voting right.
Reason (R): A debenture holder just lends money but does not become an owner of the company with the purchase of debentures.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
Debenture holders are only the creditor of the company as debentures are the part of loan.

Question 3.

Assertion (A): Issue of debenture does not result in dilution of interest of equity shareholders.
Reason (R): Debenture holders have voting rights.

Answer:
(C) Assertion (A) is true, but Reason (R) is false.

Explanation:
Issue of debenture does not result in dilution of interest of equity shareholders as they do not have right either to vote or to take part in the management of the company.

Question 4.

Assertion (A): Debentures saves income tax.
Reason (R): Interest on debenture is tax deductible expenditure.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Question 5.

Assertion (A): The ‘discount on debentures’ issuance is charged to ‘Securities Premium Account’ and is reflected as an asset.
Reason (R): The ‘discount on debentures’ issuance is noted as a capital loss side as a fictitious assets. Hence, has to be written off during the years of its issue.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
The ‘discount on debentures’ issuance is noted as a capital loss and is charged to ‘Securities Premium Account’ and is reflected in the asset side as fictitious asset. Hence, has to be written off during the year of its issue.

Question 6.

Assertion (A): The Bank account is debited when the money is received for debentures.
Reason (R): Bank being a real account needs to be debited when something comes in.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Question 7.

Assertion (A): Sarita Pvt. Ltd. issued 15% 10,000 debentures at par ₹ 100 per debenture. The company suffered a loss but still the directors of the company paid interest on debentures.
Reason (R): Interest on debenture is a charge against profits and therefore, its payment is not subject to the earning of profit.

Answer:
(A) Both Assertion (A) and Reason (R) are true, and Reason (R) is the correct explanation of Assertion (A).

Explanation:
Interest on debenture is to be paid even if the company suffers a loss.

Case-Based MCQs

I. Analyse the case given below and answer the questions that follow :
Nikhil Technologies Ltd. issued 5,000; 9% Debentures of ₹ 100 each at a premium of ₹ 20 payable as follows:
(i) ₹ 40 including premium of ₹ 10 on application
(ii) ₹ 40 including premium of ₹ 10 on allotment
(iii) Balance as first and final call.
Applications were received for 5,000 debentures and allotment was made to all the applicants. All the calls were made, and amounts received.

Question 1.

The amount of money received during application is:

(A) ₹ 1,00,000
(B) ₹ 4,00,000
(C) ₹ 2,00,000
(D) ₹ 50,000
Answer:
(C) ₹ 2,00,000

Explanation:
5000 x ₹ 40 = ₹ 2,00,000

Question 2.

What amount of the money received in application is transferred to the securities premium reserve account:

(A) ₹ 5,00,000
(B) ₹ 50,000
(C) ₹ 00,00
(D) ₹ 2,00,000
Answer:
(B) ₹ 50,000

Explanation:
5000 x ₹ 10 = ₹ 50,000

Question 3.

The is’ the balance amount per debenture to be received at the first and final call is:

(A) ₹ 20
(B) ₹ 40
(C) ₹ 30
(D) no
Answer:
(B) ₹ 40

Question 4.

What is the total interest payable on the debentures issued?

(A) ₹ 1,20,000
(B) ₹ 45,000
(C) ₹ 18,000
(D) ₹ 54,000
Answer:
(B) ₹ 45,000

Explanation:
\(\frac {₹ 50,000 x 9}{100}\) = ₹ 45,000

II. Read the following information and answer the given questions:
Charan Ltd. took over Assets of ₹ 6,00,000 and Liabilities of ₹ 40,000 of Paras Ltd. at an agreed value of ₹ 6,30,000. Charan Ltd. issued 10% Debentures of n00 each at a discount of 10% to Paras Ltd. in full satisfaction of the price. Charan Ltd. writes off any capital losses incurred during a year, at the end of that financial year.

Question 1.

In which account is the difference between the assets and liabilities taken over and the payment made be transferred to?

(A) General Reserve
(B) Debenture Redemption Reserve
(C) Capital Reserve
(D) Goodwill
Answer:
Option (D) is correct

Question 2.

What is the amount of discount given to Paras Ltd. on the issue of debentures?

(A) ₹ 60,000
(B) ₹ 70,000
(C) ₹ 75,000
(D) ₹ 65,000
Answer:
Option (B) is correct.

Explanation:
₹ 7,00,000 – ₹ 6,30,000

Question 3.

As Charan Ltd. writes off the capital losses where will the discount on issue of debentures be transferred to?

(A) Statement of Profit and Loss
(B) General Reserve
(C) Capital Reserve
(D) Securities Premium
Answer:
Option (A) is correct.

Question 4.

Which amount of interest will be paid by Charan Ltd. to Paras Ltd.?

(A) ₹ 60,000
(B) ₹ 63,000
(C) ₹ 64,000
(D) ₹ 70,000
Answer:
Option (D) is correct.

Explanation:
10% of ₹ 7,00,000 = ₹ 70,000

MCQ Questions for Class 12 Accountancy with Answers