CUET UG Accounting Booster Test 3 Collateral and Terms of Issue -

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CUET UG Accountancy Booster Test 2 Collateral and Terms of Issue

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 2 Collateral and Terms of Issue

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QUESTION 1 OF 20

A company requires a total of Rs. 15,00,000 in financing. It provides a building worth Rs. 10,00,000 as primary security and issues 7,000 debentures of Rs. 100 each as collateral. What is the total nominal value of the collateral security?

Answer Review

1 A company requires a total of Rs. 15,00,000 in financing. It provides a building worth Rs. 10,00,000 as primary security and issues 7,000 debentures of Rs. 100 each as collateral. What is the total nominal value of the collateral security?

A Rs. 10,00,000

B Rs. 7,00,000

C Rs. 15,00,000

D Rs. 17,00,000

💡 Short Explanation

Nominal value = Number × Face value. 7,000 × Rs. 100. Total = Rs. 7,00,000.

✅ Correct Answer Explanation

The nominal value of collateral debentures is calculated by multiplying the number of debentures by their face value. 7,000 × Rs. 100 = Rs. 7,00,000 Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Represents primary security value.
Option C → Represents financing requirement.
Option D → Incorrect addition.

🎯 Strategy

Used

Substitution

Application:

�� Multiply number of debentures by face value.

Final Logic:

�� Collateral value depends on nominal debenture amount.

🧠 Memory Trick

"Debentures × Face Value"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Meaning of Collateral – Page X

2 If a bank requires collateral security worth 120% of the loan amount, and the loan is Rs. 5,00,000, how many Rs. 100 debentures must be issued as additional security?

A 6,000

B 5,000

C 1,200

D 7,200

💡 Short Explanation

Required security = 120% of loan. 120% of Rs. 5,00,000 = Rs. 6,00,000. Rs. 6,00,000 ÷ 100 = 6,000 debentures.

✅ Correct Answer Explanation

Required collateral value: Rs. 5,00,000 × 120% = Rs. 6,00,000 Each debenture = Rs. 100 Number of debentures: Rs. 6,00,000 ÷ Rs. 100 = 6,000 debentures Hence, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Equals only loan amount.
Option C → Incorrect division.
Option D → Excess quantity.

🎯 Strategy

Used

Substitution

Application:

�� Calculate required security first.

Final Logic:

�� Number depends on total collateral requirement.

🧠 Memory Trick

"Required Security ÷ Face Value"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Additional Security – Page X

3 In determining the adequacy of a dual loan backing, Total Pledged Security Value is calculated as:

A Collateral Security Value / Primary Security Value

B Primary Security Value - Collateral Security Value

C Collateral Security Value - Loan Amount

D Primary Security Value + Collateral Security Value

💡 Short Explanation

Total pledged security combines both securities. Primary and collateral values are added. Combined value measures loan coverage.

✅ Correct Answer Explanation

Total pledged security includes both the primary security and collateral security provided against the loan. Therefore: Total Security Value = Primary Security Value + Collateral Security Value Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect ratio.
Option B → Incorrect subtraction.
Option C → Loan amount is unrelated.

🎯 Strategy

Used

Formula Recognition

Application:

�� Identify formula for combined security coverage.

Final Logic:

�� Total security equals sum of all pledged securities.

🧠 Memory Trick

"Primary + Collateral"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Primary Security – Page X

4 The invocation of secondary security by a lender implies that the lender is executing their right to:

A Permanently own the primary security regardless of the loan balance

B Receive regular dividends from the borrowing company

C Recover the remaining unpaid debt by selling or redeeming the collateral debentures

D Cancel the debentures and demand equity shares

💡 Short Explanation

Secondary security protects lender. Debentures may be sold or redeemed. Recovery occurs after shortfall.

✅ Correct Answer Explanation

When primary security is insufficient, the lender may invoke collateral security to recover unpaid dues by redeeming or selling the collateral debentures. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Ownership is not unconditional.
Option B → Debenture holders receive interest, not dividends.
Option D → Conversion is not automatic.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Identify lender's recovery rights.

Final Logic:

�� Collateral exists for unpaid debt recovery.

🧠 Memory Trick

"Collateral = Recovery Backup"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Secondary Security – Page X

5 Regarding debentures as security:
1. They represent a contingent liability until the company defaults on the primary loan.
2. They earn interest for the lender even before any default occurs.
3. They are returned to the company once the loan is fully repaid.
Which statements are accurate?

A 1 and 3

B 1, 2, and 3

C 2 and 3

D Only 3

💡 Short Explanation

Collateral debentures are contingent initially. Interest is not earned before default. Debentures are cancelled after repayment.

✅ Correct Answer Explanation

Statement 1 is correct because collateral debentures act as contingent support until default occurs. Statement 2 is false because lenders do not receive debenture interest before invocation. Statement 3 is correct because collateral debentures are returned/cancelled after loan repayment. Hence, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Statement 2 is false.
Option C → Statement 1 is also true.
Option D → Statement 1 is correct too.

🎯 Strategy

Used

Elimination

Application:

�� Identify incorrect statement regarding interest.

Final Logic:

�� Collateral debentures remain inactive until default.

🧠 Memory Trick

"Collateral Sleeps Until Default"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Debentures as Security – Page X

6 Assertion (A): The lender can present collateral debentures for redemption if the loan is in default.
Reason (R): Collateral debentures become an active debt obligation of the company only upon default and insufficiency of the primary security.

A A is false but R is true

B Both A and R are false

C Both A and R are true, but R is not the correct explanation of A

D Both A and R are true, and R is the correct explanation of A

💡 Short Explanation

Lender may redeem collateral after default. Primary security insufficiency activates collateral. Reason explains lender's right.

✅ Correct Answer Explanation

Collateral debentures become enforceable when the company defaults and the primary security fails to fully recover the loan amount. Therefore, the lender can present them for redemption. Hence, both Assertion and Reason are true, and Reason correctly explains Assertion.

❓ Why Other Options Are Incorrect

Option A → Assertion is true.
Option B → Both statements are correct.
Option C → Reason directly explains Assertion.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Connect default with activation of collateral rights.

Final Logic:

�� Insufficient security triggers collateral enforcement.

🧠 Memory Trick

"Default Activates Collateral"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Rights of Lender – Page X

7 Match the accounting method elements for collateral:

List 1	List 2
1. First Method	a. Uses a parenthetical note without a journal entry
2. Second Method	b. Uses Debenture Suspense Account
3. Liability Creation	c. Does not occur at the time of collateral issue
4. Balance Sheet Presentation	d. Shown as a note under Long-term Borrowings

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-d, 3-a, 4-c

C 1-d, 2-a, 3-c, 4-b

D 1-c, 2-a, 3-d, 4-b

💡 Short Explanation

First Method uses disclosure note only. Second Method uses Debenture Suspense. No liability arises initially.

✅ Correct Answer Explanation

First Method uses a note without journal entry. Second Method records collateral using Debenture Suspense A/c. Liability creation does not occur at collateral issue stage. Balance Sheet note appears under Long-term Borrowings. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect pairings.
Option B → First Method incorrectly matched.
Option D → Liability mapping incorrect.

🎯 Strategy

Used

Option Grouping

Application:

�� Match methods with accounting treatment.

Final Logic:

�� Correct conceptual mapping identifies answer.

🧠 Memory Trick

"Second Method Uses Suspense"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: No Entry Method – Page X

8 Determine the sequence of extracting information for the Balance Sheet Note (First Method):
I. Note the nominal value and number of debentures issued as collateral.
II. Identify the principal loan amount.
III. Record the loan amount under Long-term Borrowings.

A III, II, I

B II, III, I

C I, II, III

D II, I, III

💡 Short Explanation

Identify loan first. Record under long-term borrowings. Mention collateral details afterward.

✅ Correct Answer Explanation

The process begins with identifying the principal loan amount. Next, the loan is recorded under Long-term Borrowings. Finally, collateral debenture details are disclosed through a note. Therefore, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Loan identification must occur first.
Option C → Collateral details come later.
Option D → Note follows loan disclosure.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Follow disclosure order logically.

Final Logic:

�� Main borrowing disclosed before collateral note.

🧠 Memory Trick

"Loan First, Note Later"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Balance Sheet Note – Page X

9 Under the Journal Entry Method, what is the ultimate net effect on the total non-current liabilities in the balance sheet before any loan default?

A Total liabilities increase by the value of Debenture Suspense

B Total liabilities decrease by the value of Debenture Suspense

C Total liabilities increase by the value of the nominal debentures issued

D Total liabilities remain unaffected by the collateral debentures due to the deduction of Debenture Suspense

💡 Short Explanation

Debenture Suspense offsets debentures. No net liability increase occurs. Balance sheet remains unaffected.

✅ Correct Answer Explanation

Under the Journal Entry Method, Debentures A/c is credited and Debenture Suspense A/c is debited. Since Debenture Suspense is deducted from Debentures in Notes to Accounts, no net increase in liabilities occurs. Therefore, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Suspense offsets liability.
Option B → No liability reduction occurs.
Option C → Net effect is neutralized.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Understand deduction treatment.

Final Logic:

�� Suspense cancels liability impact.

🧠 Memory Trick

"Suspense Neutralizes Debentures"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Journal Entry Method – Page X

10 A company issues Rs. 5,00,000 debentures as collateral. What balances will be reflected in the ledger for these specific accounts?

A Bank A/c: Dr. 5,00,000; Debentures A/c: Cr. 5,00,000

B Debenture Suspense A/c: Dr. 5,00,000; Bank A/c: Cr. 5,00,000

C Debenture Suspense A/c: Dr. 5,00,000; Debentures A/c: Cr. 5,00,000

D Bank Loan A/c: Dr. 5,00,000; Debentures A/c: Cr. 5,00,000

💡 Short Explanation

Second Method uses Debenture Suspense. Debentures account is credited. No cash entry is passed.

✅ Correct Answer Explanation

Under the Journal Entry Method, collateral debentures are recorded through the entry: Debenture Suspense A/c Dr. To Debentures A/c for Rs. 5,00,000. Hence, option C is correct.

❓ Why Other Options Are Incorrect

Option A → No cash is received.
Option B → Bank is not credited.
Option D → Loan account is unrelated here.

🎯 Strategy

Used

Formula Recognition

Application:

�� Recall standard collateral journal entry.

Final Logic:

�� Suspense entry records collateral formally.

🧠 Memory Trick

"Suspense Dr., Debentures Cr."

📚 Questions 11–20

11 If a Rs. 10,00,000 loan is fully repaid, what amount is passed in the reverse entry for the 10,000 debentures of Rs. 100 each issued as collateral?

A Rs. 8,00,000

B Rs. 10,00,000

C Rs. 1,00,000

D Rs. 12,00,000

💡 Short Explanation

Reverse entry equals nominal value. 10,000 × Rs. 100. Total = Rs. 10,00,000.

✅ Correct Answer Explanation

Collateral debentures issued: 10,000 × Rs. 100 = Rs. 10,00,000 When the loan is repaid, the reverse entry cancels the same nominal value of debentures issued as collateral. Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Understated value.
Option C → Incorrect multiplication.
Option D → Excess amount.

🎯 Strategy

Used

Substitution

Application:

�� Multiply quantity by face value.

Final Logic:

�� Reverse entry equals nominal collateral value.

🧠 Memory Trick

"Cancel Full Nominal Value"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Reverse Entry – Page X

12 Which entry correctly represents the final cancellation of collateral debentures upon loan repayment?

A Debentures A/c Dr. To Debenture Suspense A/c

B Bank Loan A/c Dr. To Bank A/c

C Debenture Suspense A/c Dr. To Debentures A/c

D Bank A/c Dr. To Bank Loan A/c

💡 Short Explanation

Reverse entry cancels collateral effect. Debentures account is debited. Suspense account is credited.

✅ Correct Answer Explanation

At the time of loan repayment, collateral debentures are cancelled through the reverse entry: Debentures A/c Dr. To Debenture Suspense A/c Therefore, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Represents loan repayment only.
Option C → Original collateral entry.
Option D → Incorrect entry direction.

🎯 Strategy

Used

Formula Recognition

Application:

�� Recall cancellation entry.

Final Logic:

�� Reverse entry neutralizes original suspense entry.

🧠 Memory Trick

"Reverse the Original Entry"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Loan Repayment – Page X

13 Which statements accurately describe the disclosure of long-term borrowings?
1. Debenture Suspense is added to total borrowings.
2. Bank loan is explicitly stated under Long-term borrowings.
3. The collateral note specifies the number and type of debentures.

A 1 and 2

B 1 and 3

C 2 and 3

D 1, 2, and 3

💡 Short Explanation

Bank loan appears under long-term borrowings. Collateral note provides debenture details. Debenture Suspense is deducted, not added.

✅ Correct Answer Explanation

Statement 1 is false because Debenture Suspense is deducted from Debentures and does not increase borrowings. Statement 2 is correct since the bank loan is disclosed under Long-term Borrowings. Statement 3 is also correct because the collateral note specifies number and type of debentures issued. Hence, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Statement 1 is false.
Option B → Statement 1 is incorrect.
Option D → Debenture Suspense is not added.

🎯 Strategy

Used

Elimination

Application:

�� Verify disclosure treatment carefully.

Final Logic:

�� Suspense offsets liabilities rather than increasing them.

🧠 Memory Trick

"Suspense Reduces, Note Explains"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Long-term Borrowings – Page X

14 Assertion (A): Debenture Suspense is deducted from the Debentures account in the Notes to Accounts.
Reason (R): Debenture Suspense represents a cash reserve kept aside for paying future interest.

A Both A and R are true, R explains A

B A is true but R is false

C A is false but R is true

D Both A and R are false

💡 Short Explanation

Debenture Suspense offsets collateral liability. It is not a cash reserve. Assertion true, Reason false.

✅ Correct Answer Explanation

Assertion is true because Debenture Suspense is deducted from Debentures in Notes to Accounts to neutralize collateral liability. Reason is false because Debenture Suspense does not represent a cash reserve for future interest payment. Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Reason is incorrect.
Option C → Assertion is definitely true.
Option D → Assertion is correct.

🎯 Strategy

Used

Elimination

Application:

�� Differentiate suspense account from reserve fund.

Final Logic:

�� Debenture Suspense is adjustment account only.

🧠 Memory Trick

"Suspense ≠ Cash Reserve"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Deduction Treatment – Page X

15 Under which condition would the "Loss on Issue of Debentures A/c" definitely be debited at the time of issue?

A Issued at a discount and redeemable at a premium

B Issued at par and redeemable at par

C Issued at a premium and redeemable at par

D Issued for consideration other than cash without any discount

💡 Short Explanation

Discount creates issue loss. Redemption premium creates future loss. Both combined debit Loss on Issue A/c.

✅ Correct Answer Explanation

Loss on Issue of Debentures arises when debentures are issued at discount and/or redeemable at premium. In this case, both losses exist simultaneously. Therefore, option A is correct.

❓ Why Other Options Are Incorrect

Option B → No loss arises.
Option C → Premium issue creates gain, not loss.
Option D → No discount involved.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Identify conditions causing capital loss.

Final Logic:

�� Combined discount and redemption premium create definite loss.

🧠 Memory Trick

"Discount + Premium Redemption = Loss"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Issue Conditions – Page X

16 Premium on redemption of debentures represents what type of balance for the company?

A An operating income

B A current asset

C A capital reserve

D A future liability (provision)

💡 Short Explanation

Premium payable in future. Company must pay excess at redemption. Hence treated as liability.

✅ Correct Answer Explanation

Premium on redemption represents an additional amount payable by the company in future at the time of redemption. Therefore, it is treated as a provision/future liability. Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Not income.
Option B → Not asset.
Option C → Not reserve.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Identify accounting nature of redemption premium.

Final Logic:

�� Future payment obligation creates liability.

🧠 Memory Trick

"Future Payment = Liability"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Redemption Terms – Page X

17 Match the accounting entry components for debentures issued at par:

List 1	List 2
1. Receipt of Application Money	a. Debit Bank A/c
2. Transfer to Debentures	b. Credit Debentures A/c
3. Issue Price	c. Price collected on issue
4. Nominal Value	d. Face value of debenture

A 1-a, 2-b, 3-c, 4-d

B 1-d, 2-a, 3-b, 4-c

C 1-d, 2-c, 3-b, 4-a

D 1-c, 2-d, 3-a, 4-b

💡 Short Explanation

Application money debits Bank A/c. Transfer credits Debentures A/c. Issue price is amount collected.

✅ Correct Answer Explanation

Receipt of application money debits Bank A/c. Transfer entry credits Debentures A/c. Issue Price refers to amount collected on issue. Nominal Value means face value of debenture. Therefore, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect mapping.
Option C → Transfer entry mismatched.
Option D → Multiple incorrect pairings.

🎯 Strategy

Used

Option Grouping

Application:

�� Match accounting elements correctly.

Final Logic:

�� Proper journal structure determines answer.

🧠 Memory Trick

"Bank Dr., Debentures Cr."

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: At Par – Page X

18 Order the elements in the journal entry for Debentures issued at a discount and redeemable at a premium:
I. Debit Debenture Application & Allotment A/c
II. Debit Loss on Issue of Debentures A/c
III. Credit Premium on Redemption of Debentures A/c
IV. Credit Debentures A/c

A I, II, IV, III

B II, I, III, IV

C IV, III, I, II

D I, III, II, IV

💡 Short Explanation

Application & allotment is debited first. Loss account records combined loss. Debentures and redemption premium are credited.

✅ Correct Answer Explanation

The entry structure is: Debenture Application & Allotment A/c Dr. Loss on Issue of Debentures A/c Dr. To Debentures A/c To Premium on Redemption of Debentures A/c Therefore, the correct order is I → II → IV → III.

❓ Why Other Options Are Incorrect

Option B → Loss account cannot precede application account.
Option C → Credits cannot appear first.
Option D → Premium is credited last.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Arrange entry in standard journal format.

Final Logic:

�� Debits precede credits in accounting entry.

🧠 Memory Trick

"Debits First, Credits Later"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: At Premium – Page X

📄 Passage

When debentures are issued at a discount and are redeemable at a premium, the amount of discount on issue is also debited to 'Loss on Issue of Debentures'. Premium on redemption is a liability of a company payable in future. It is a provision and is shown under the head Non-current liabilities under sub-head 'Long-term Borrowings' until debentures are redeemed. Debentures are said to be issued at par when their issue price is equal to the face value. If the issue price is more than nominal or face value, it is said to be issued at a premium.

According to the passage, if debentures are issued at a discount and redeemable at a premium, what constitutes the amount debited to the 'Loss on Issue of Debentures' account?

A Only the premium on redemption

B Only the discount on issue

C The face value of the debentures

D Both the discount on issue and the premium on redemption

💡 Short Explanation

Both discount and redemption premium are losses. Combined amount debited to Loss A/c. Future obligation also included.

✅ Correct Answer Explanation

The passage clearly states that when debentures are issued at discount and redeemable at premium, both the discount on issue and premium on redemption are debited to Loss on Issue of Debentures A/c. Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Discount also included.
Option B → Redemption premium also included.
Option C → Face value is unrelated.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Identify combined loss components from passage.

Final Logic:

�� Total issue loss includes both elements.

🧠 Memory Trick

"Discount + Redemption Premium"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Six Situations – Page X

📄 Passage

How is the 'Premium on redemption' classified in the balance sheet according to the passage?

A As a Current Liability under short-term borrowings

B As an Asset under non-current investments

C As a Non-current liability under Long-term Borrowings

D As a Revenue receipt under reserves and surplus

💡 Short Explanation

Premium payable in future. Treated as provision/liability. Shown under long-term borrowings.

✅ Correct Answer Explanation

The passage specifically states that premium on redemption is a future liability and is shown under Non-current Liabilities → Long-term Borrowings until redemption occurs. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Not current liability.
Option B → It is not an asset.
Option D → Not revenue receipt.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Identify balance sheet classification from passage.

Final Logic:

�� Future redemption obligation creates non-current liability.

🧠 Memory Trick

"Future Premium = Long-term Liability"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Journal Entries – Page X

CUET UG Accountancy Booster Test 2 Collateral and Terms of Issue

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