Tag: debentures / bonds

Questions Related to debentures / bonds

Which of the following security cannot be forfeited for non-payment of allotment or call money?

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Equity shares

  2. Preference shares

  3. Debentures

  4. Both (A) & (B)

Show answer
Correct Option: C
Explanation:
Generally total face value of debenture is demanded by company in installments I.e. Debenture application, Debenture allotment and Debentures calls accounts. It is usual that some of the debenture-holders fail to pay the amount of different installments when these are demanded by company. Such unpaid calls (installments) are called ‘Calls in arrears’. Under the provisions of Companies Act, 1956 debentures cannot be forfeited by company.

Because under section 122 of the Companies Act 1956 a contract with a company to take up and pay for any debenture may be enforced by a decree for specific performance. For the realisation of calls in arrears on debentures the company can only file a suit in the court. Company can charge interest on calls-in-arrears as provided in prospectus.

Sometimes, certain debenture-holders pay money against those calls also which have not yet en demanded by company. In such cases the amount received is credited to calls in advance account. If provided in prospectus, the company pays interest on this amount to debenture-holders at a specified rate. Interest is always calculated for the period, the advance has been received.

If the value of debentures allotted to vendors for acquiring some assets as payment for purchase consideration is more than the agreed purchase price, the difference is credited to __________.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Capital reserve account

  2. Debenture suspense account

  3. Goodwill account

  4. Profit & loss account

Show answer
Correct Option: C
Explanation:

Goodwill Account-

  • Sometimes a company purchases some assets and liabilities from the vendor and purchase consideration (amount of payment) is determined in advance. 
  • Payment is made by issuing debentures by the company; it is called issue of debentures for consideration other than cash. Such issue of debentures may be at par, discount or premium.
  •  The entry for acquisition of assets & liabilities and issuance of debenture is shown as above:

         a.   Assets A/c                     Dr.

                  To Liabilities A/c

                  To Vendor’s A/c

             (Purchase of assets & liabilities from vendor)

         b.  Vendor’s A/c                 Dr.

                   To Debentures A/

              (Issue of debentures to vendors)

  •  In such cases, if purchase consideration is more than assets & liabilities acquired then the difference is goodwill and amount of difference to “Goodwill A/c” which is calculated as below:

     Goodwill= Purchase consideration- Assets acquired- Liabilities taken over

  • The entry of goodwill will be as shown below:
           Assets A/c                     Dr.

           Goodwill A/c                 Dr.

                     To Liabilities A/c

                     To Vendor’s A/c

         (Purchase of assets & liabilities from vendor)

Debentures may be issued by a company for ________.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Cash

  2. Consideration other than cash

  3. As a collateral security

  4. Any of above

Show answer
Correct Option: D
Explanation:
Issue of Debentures for Cash :-
Debentures in the general course of business are issued for cash. This issue of debentures that happens can be of three kinds, just like an issue of shares, at par, at a discount, and at a premium. So let us take a look at all three and their respective accounting entries as well.

Issue at Par :-
Here the debentures will be issued exactly at their nominal price, i.e. not above or below the face value of the debentures. Now the company can decide to collect the cash all at once, in a lump sum. Or the money will be collected in installments, like with allotment, first call, second call, last call etc.

Issue at Discount :-
When the debentures are issued at below face value, such issue of debentures is known as a discount issue. Like, say for example the debenture has a nominal value of 100/- but is issued for 90/-. Then such debentures are said to be issued at discount.
Discount on issue of debentures is treated as a capital loss and put under “Miscellaneous Expenses” on the asset side of the balance sheet until it can be written off. Then during the life of the debentures, such discount amount is written off by debiting it to the Profit and Loss A/c. It can also be charged against the Capital Profits of the company.

Issue at Premium:-
Now we come to the issue of debentures at a premium, that is when more money than the nominal value is charged. So if a debenture with a face value of 100/- is sold at 110/- then it is issued at a premium. The amount of the premium is charged to a special account known as Securities Premium Reserve Account. This account will be shown on the liabilities side of the Balance Sheet under the heading of Reserves and Surplus.


Issue of Debentures for Consideration other than Cash :-
Debentures can be issued for non-cash considerations. The company may have purchased assets from some vendors or acquired some other business. Then instead of paying cash, the company may issue debentures to such vendors. Such an issue for debentures can be at par, or for a discount or at a premium.

Issue of Debentures as Collateral Security :-
Debentures can also be issued by a company as collateral security against a bank loan or any such borrowings. A collateral security is like a parallel security which is provided along with the actual security against the loan taken. Debentures issued as such a collateral liability are a contingent liability for the company, i.e. the liability may or may not arise. Only when the company defaults on such a loan will this liability arise.

In the company's balance sheet, debentures are shown under the head _____________.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Secured Loans

  2. Non-Current Liabilities

  3. Current Liabilities

  4. Capital Employed

Show answer
Correct Option: B
Explanation:

Noncurrent liabilities are those obligations not due for settlement within within one year. These liabilities are separately classified in an entity's balance sheet, away from current liabilities. Examples of noncurrent liabilities are:

  • Long-term portion of debt payable

  • Long-term portion of bonds payable

The aggregate amount of noncurrent liabilities is routinely compared to the cash flows of a business, to see if it has the financial resources to fulfill its obligations over the long term. If not, creditors will be less likely to do business with the organization, and investors will not be inclined to invest in it. A factor to be considered in this evaluation is the stability of an organization's cash flows, since stable flows can support a higher debt load with a reduced risk of default.

If the debentures are issued at a price higher than the nominal value of the debentures, the premium should be credited to ______________.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. General Reserve

  2. Securities Premium Account

  3. Reserve Capital

  4. Profit & Loss Account

Show answer
Correct Option: B
Explanation:

Securities Premium Account-

·  When debenture is issued at a price more than its face value, they are said to be issued at a premium.

·  For example: if a debenture of ₹10 is issued at ₹12; ₹2 will be called as premium on that debenture.

·  The amount of premium on debenture is a capital profit so it is credited to a separate account called “Securities Premium Account” or “Securities Premium Reserve” and it is shown in Balance sheet under the head “Reserved and Surplus”.

· Though there is no legal restriction on issue of debenture at premium but there is restriction on utilization of securities premium a/c.

·  Utilization of securities premium a/c is restricted to following purposes:

       a.  Writing off preliminary expenses

       b.  Writing off expenses, discount allowed on issue of shares/debentures or commission paid on issue of debentures/shares (underwriting commission)

       c.  Issue of fully paid bonus shares to equity shareholders

       d.  Providing for payment of premium payable on redemption of preference shares or debenture

       e.  For buy back of its own shares.

The company may allot debentures to the vendors for a acquiring some assets as payment for purchase consideration, such issue of debentures to vendors is known as issue of debentures for _______.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Cash

  2. Consideration other than cash

  3. With consideration

  4. Without consideration

Show answer
Correct Option: B
Explanation:
Issue of Debentures for Consideration other than Cash
Debentures can be issued for non-cash considerations. The company may have purchased assets from some vendors or acquired some other business. Then instead of paying cash, the company may issue debentures to such vendors. Such an issue for debentures can be at par, or for a discount or at a premium.

If face value of debentures is more than issue price, then the debentures are said to be issued at a _________.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Premium

  2. Discount

  3. Par

  4. None of above

Show answer
Correct Option: B
Explanation:
Issue of Debentures at Discount:

When debentures are issued by company at a price less than its nominal value (face value) it is said to be issued at discount. It is important to note that the Companies Act has not put any restriction on the maximum limit of discount. For example, if a debenture of Rs. 1,000 is offered to public at Rs. 950, it is issue at a discount. Here Rs. 50 on each debenture is loss to the company. As a principle of equity, it is desirable to write off this loss.

Disclosure of Discount in Balance Sheet:
It is a capital loss and until it is written off-completely, it is shown on the asset side of balance sheet, under the heading ‘Miscellaneous Expenditure’, as a fictitious asset. Discount on issue of debentures account is supposed to be allowed on allotment, unless, otherwise, mentioned.

Accounting Treatment:
The requisite entries to be passed are as follows:
(a) When allotment money becomes due

Debenture allotment a/c
Discount on issue of debenture a/c
To Debentures a/c

(b) When allotment money is received
Bank a/c
To Debenture allotment a/c

(c) To Write off Discount
Profit & Loss A/c
To Discount on Issue of Debenture A/c.

Discount on issue of debentures is ____________.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Revenue loss

  2. Capital profits

  3. Capital loss

  4. Capital receipt

Show answer
Correct Option: C
Explanation:
 Capital Loss :-

A capital loss is the loss incurred when a capital asset, such as an investment or real estate, decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price. 
Capital losses are generally tax deductible, but only when they are realized. That is, they only become deductible when the asset is actually sold (unless the stock is legally deemed worthless). Until that point, any losses are considered unrealized and are not deductible. 
The IRS considers nearly every asset owned by individuals and companies as capital assets and thus subject to capital gains taxes and capital loss deductions.

Debenture holders are the _________of the company.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Creditors

  2. Owners

  3. Quasi

  4. Deemed owner

Show answer
Correct Option: A
Explanation:

A creditor is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed.[1] The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property and service. The second party is frequently called a debtor  or borrower. The first party is called the creditor, which is the lender of property, service, or money.

Creditors can be broadly divided into two categories: secured and unsecured. A secured creditor has a security or charge, which is some or all of the company’s assets, to secure the debt owed to him. This could be, for example, a mortgage, where the property represents the security. An unsecured creditor does not have a charge over the company’s assets.

Debentures ______________ forfeited for non-payment of call moneys.

commercial studies sources of business finance - 2 debentures / bonds debentures non-institutional sources - long-term

  1. Can be

  2. Cannot be

  3. Both (A) & (B)

  4. None of above

Show answer
Correct Option: B
Explanation:
Generally total face value of debenture is demanded by company in installments I.e. Debenture application, Debenture allotment and Debentures calls accounts. It is usual that some of the debenture-holders fail to pay the amount of different installments when these are demanded by company. Such unpaid calls (installments) are called ‘Calls in arrears’. Under the provisions of Companies Act, 1956 debentures cannot be forfeited by company.

Because under section 122 of the Companies Act 1956 a contract with a company to take up and pay for any debenture may be enforced by a decree for specific performance. For the realisation of calls in arrears on debentures the company can only file a suit in the court. Company can charge interest on calls-in-arrears as provided in prospectus.

Sometimes, certain debenture-holders pay money against those calls also which have not yet en demanded by company. In such cases the amount received is credited to calls in advance account. If provided in prospectus, the company pays interest on this amount to debenture-holders at a specified rate. Interest is always calculated for the period, the advance has been received.