CUET UG Accountancy Booster Test 2 Collateral and Terms of Issue -

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CUET UG Accountancy Booster Test 1 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 1 Collateral and Terms of Issue

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QUESTION 1 OF 20

Consider the following regarding the meaning of collateral:
I. It replaces the primary security completely.
II. It acts as an additional security besides the primary security.
III. It can be invoked if the primary security falls short.
Which of the statements are true?

Answer Review

1 Consider the following regarding the meaning of collateral:
I. It replaces the primary security completely.
II. It acts as an additional security besides the primary security.
III. It can be invoked if the primary security falls short.
Which of the statements are true?

A I and II

B I and III

C II and III

D I, II, and III

💡 Short Explanation

Collateral is additional security. It supports the primary security. It is used when primary security is insufficient.

✅ Correct Answer Explanation

Collateral security does not replace the primary security; it only acts as additional backing for the lender. If the primary security is inadequate to recover the loan amount, collateral security can be invoked. Hence, Statements II and III are true while Statement I is false. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Statement I is incorrect.
Option B → Statement I is false.
Option D → All statements are not correct.

🎯 Strategy

Used

Elimination

Application:

�� Remove options containing incorrect Statement I.

Final Logic:

�� Collateral supplements rather than replaces primary security.

🧠 Memory Trick

"Collateral = Extra Cover"

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

2 Assertion (A): Additional security in the form of debentures guarantees immediate ownership of the company to the lender.
Reason (R): Collateral debentures confer full voting rights to the lender from the day of issue.

A Both A and R are true, R explains A

B Both A and R are true, R does not explain A

C A is true but R is false

D Both A and R are false

💡 Short Explanation

Debenture holders are creditors, not owners. Debentures do not provide voting rights. Collateral only secures the loan.

✅ Correct Answer Explanation

Debenture holders are lenders to the company and do not become owners immediately. They also do not enjoy voting rights like shareholders. Hence, both Assertion and Reason are false. Therefore, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Both statements are false.
Option B → Neither statement is correct.
Option C → Assertion is also false.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Differentiate between shareholders and debenture holders.

Final Logic:

�� Debentures create creditor relationship, not ownership.

🧠 Memory Trick

"Debenture Holder = Creditor"

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

3 Match the securities involved in loan borrowing:

List 1	List 2
1. Primary Security	a. Main asset mortgaged for loan
2. Collateral Security	b. Subsidiary or secondary backing
3. Lender	c. Institution granting the loan
4. Borrower	d. The company taking the loan

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

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

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

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

💡 Short Explanation

Primary security is main security. Collateral is secondary support. Borrower receives loan.

✅ Correct Answer Explanation

Primary Security refers to the main asset mortgaged for the loan. Collateral Security acts as additional or secondary backing. Lender is the institution granting the loan, while Borrower is the company taking the loan. Hence, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Primary and collateral are interchanged.
Option C → Incorrect mapping.
Option D → Entire matching is wrong.

🎯 Strategy

Used

Option Grouping

Application:

�� Match loan-related terms with definitions.

Final Logic:

�� Correct conceptual pairing identifies answer.

🧠 Memory Trick

"Primary Main, Collateral Extra"

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

4 Order the events related to invoking secondary security:
I. Lender claims the shortfall using collateral security
II. Realisable value of primary security falls short
III. Company fails to repay the loan

A I, II, III

B III, II, I

C II, I, III

D I, III, II

💡 Short Explanation

Default occurs first. Primary security becomes insufficient. Collateral is invoked last.

✅ Correct Answer Explanation

The company first fails to repay the loan. Then the lender realizes that the primary security is insufficient to cover the outstanding amount. Finally, the lender invokes collateral security to recover the shortfall. Therefore, the correct sequence is III → II → I.

❓ Why Other Options Are Incorrect

Option A → Recovery cannot happen first.
Option C → Default must occur before shortfall realization.
Option D → Incorrect order.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Follow logical recovery process.

Final Logic:

�� Loan default precedes collateral claim.

🧠 Memory Trick

"Default → Shortfall → Collateral"

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

5 A company took a loan of Rs. 30,00,000 and issued 4,000, 6% debentures of Rs. 100 each as collateral. What is the total nominal value of debentures issued as collateral?

A Rs. 30,00,000

B Rs. 10,00,000

C Rs. 70,00,000

D Rs. 4,00,000

💡 Short Explanation

Nominal value = Number × Face value. 4,000 × Rs. 100. Total = Rs. 4,00,000.

✅ Correct Answer Explanation

Nominal value of debentures: 4,000 × Rs. 100 = Rs. 4,00,000 Therefore, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Represents loan amount.
Option B → Incorrect multiplication.
Option C → Excess value.

🎯 Strategy

Used

Substitution

Application:

�� Multiply number of debentures by face value.

Final Logic:

�� Nominal value depends on quantity and face value.

🧠 Memory Trick

"Number × Face Value"

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

6 What action can the lender take with collateral debentures if the primary security cannot cover the unpaid loan?

A Present them for redemption or sell them in the open market

B Forfeit them and cancel the entire loan agreement

C Return them to the company without demanding repayment

D Convert them into fixed deposits within the lending bank

💡 Short Explanation

Collateral protects lender's recovery. Lender can realize value from debentures. Sale or redemption helps recover dues.

✅ Correct Answer Explanation

If the primary security is insufficient, the lender may either sell the collateral debentures in the market or present them for redemption to recover the unpaid amount. Hence, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Forfeiture is not the normal remedy.
Option C → Lender seeks recovery, not return.
Option D → No such conversion rule exists.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Identify rights available to lender.

Final Logic:

�� Collateral exists to secure recovery.

🧠 Memory Trick

"Collateral = Recovery Tool"

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

7 Why is no journal entry required under the First Method of treating collateral security?

A Because the loan itself is unrecorded

B Because no liability is created by the issue of collateral debentures

C Because debentures are issued at a premium

D Because collateral security is illegal under the Companies Act

💡 Short Explanation

Collateral creates contingent support only. No additional liability arises. Hence, no journal entry is passed.

✅ Correct Answer Explanation

Under the First Method, debentures issued as collateral security do not create a separate liability because they are only additional security for the loan. Therefore, no journal entry is required. Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Loan is separately recorded.
Option C → Premium is unrelated.
Option D → Collateral issue is legally valid.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Understand rationale behind First Method.

Final Logic:

�� No additional liability means no entry.

🧠 Memory Trick

"No Liability, No Entry"

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

8 A company has a bank loan of Rs. 20,00,000 secured by 25,000 debentures of Rs. 100 each as collateral. What amount appears against "Bank Loan" in the Balance Sheet note under the First Method?

A Rs. 45,00,000

B Rs. 25,00,000

C Rs. 20,00,000

D Rs. 5,00,000

💡 Short Explanation

Only actual loan appears. Collateral is disclosed through note. No addition to liability amount.

✅ Correct Answer Explanation

Under the First Method, no journal entry is passed for collateral debentures. The Balance Sheet shows only the actual bank loan amount, while a note mentions collateral security. Hence, Rs. 20,00,000 appears against Bank Loan.

❓ Why Other Options Are Incorrect

Option A → Incorrect addition.
Option B → Represents debenture value.
Option D → Incorrect amount.

🎯 Strategy

Used

Elimination

Application:

�� Distinguish loan liability from collateral disclosure.

Final Logic:

�� Collateral does not increase recorded loan amount.

🧠 Memory Trick

"Only Loan Appears"

📚 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 correct formula to record the issuance of collateral debentures?

A Debit Debenture Suspense A/c, Credit Debentures A/c

B Debit Bank A/c, Credit Debentures A/c

C Debit Debentures A/c, Credit Debenture Suspense A/c

D Debit Loan A/c, Credit Debenture Suspense A/c

💡 Short Explanation

Suspense account is created. Debentures account is credited. Entry records collateral issue formally.

✅ Correct Answer Explanation

Under the Second Method, collateral debentures are recorded by: Debenture Suspense A/c Dr. To Debentures A/c Hence, option A is correct.

❓ Why Other Options Are Incorrect

Option B → No cash is received.
Option C → Entry is reversed.
Option D → Loan account is not debited.

🎯 Strategy

Used

Formula Recognition

Application:

�� Recall standard collateral journal entry.

Final Logic:

�� Suspense account records temporary collateral issue.

🧠 Memory Trick

"Suspense Dr., Debentures Cr."

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

10 Which of the following statements about Debenture Suspense are correct?
1. It appears as an asset in the Balance Sheet.
2. It appears as a deduction from Debentures in the Notes to Accounts.
3. It represents actual cash received from debenture holders.

A 1 and 3 only

B 2 only

C 1 and 2 only

D 1, 2, and 3

💡 Short Explanation

Debenture Suspense is not an asset. It offsets debenture liability. No actual cash is received.

✅ Correct Answer Explanation

Debenture Suspense is shown as a deduction from Debentures in the Notes to Accounts. It neither represents an asset nor actual cash received. Therefore, only Statement 2 is correct.

❓ Why Other Options Are Incorrect

Option A → Statement 3 is false.
Option C → Statement 1 is false.
Option D → Statements 1 and 3 are incorrect.

🎯 Strategy

Used

Elimination

Application:

�� Verify nature and treatment of Debenture Suspense.

Final Logic:

�� Debenture Suspense offsets liability only.

🧠 Memory Trick

"Suspense Reduces Debentures"

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

11 Assertion (A): When the loan is repaid, the Debenture Suspense account is closed by passing a reverse entry.
Reason (R): This implies that the debentures issued as collateral are converted into equity shares.

A Both A and R are true, R explains A

B Both A and R are true, R does not explain A

C A is true but R is false

D A is false but R is true

💡 Short Explanation

Reverse entry cancels collateral debentures. Collateral debentures are not converted into equity. Suspense account is closed after repayment.

✅ Correct Answer Explanation

When the loan is repaid, the collateral debentures cease to exist as security. Therefore, the reverse entry is passed to cancel Debenture Suspense A/c and Debentures A/c balances. However, collateral debentures are not converted into equity shares. Hence, Assertion is true while Reason is false. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Reason is incorrect.
Option B → Both statements are not true.
Option D → Assertion is definitely true.

🎯 Strategy

Used

Elimination

Application:

�� Verify accounting effect of repayment.

Final Logic:

�� Repayment cancels collateral entry but does not create ownership.

🧠 Memory Trick

"Repayment Cancels Suspense"

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

12 A company repays its Rs. 10,00,000 loan which was secured by 12,000 debentures of Rs. 100 each. The reverse entry to cancel the debentures will be for what amount?

A Rs. 10,00,000

B Rs. 2,00,000

C Rs. 22,00,000

D Rs. 12,00,000

💡 Short Explanation

Reverse entry equals nominal value. 12,000 × Rs. 100. Total = Rs. 12,00,000.

✅ Correct Answer Explanation

Collateral debentures issued: 12,000 × Rs. 100 = Rs. 12,00,000 When the loan is repaid, the reverse entry cancels the same nominal amount of debentures. Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Represents loan amount only.
Option B → Incorrect multiplication.
Option C → Excess amount.

🎯 Strategy

Used

Substitution

Application:

�� Multiply quantity by face value.

Final Logic:

�� Reverse entry equals nominal debenture value issued.

🧠 Memory Trick

"Cancel Same Debenture Value"

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

13 Where are the bank loan and the debentures issued as collateral generally displayed in the Balance Sheet?

A Current Liabilities

B Non-current Liabilities → Long-term Borrowings

C Share Capital

D Non-current Assets

💡 Short Explanation

Loans are long-term obligations. Collateral relates to borrowing disclosure. Appears under non-current liabilities.

✅ Correct Answer Explanation

Bank loans and related collateral debentures are generally shown under "Non-current Liabilities" in the category "Long-term Borrowings" in the Balance Sheet. Therefore, option B is correct.

❓ Why Other Options Are Incorrect

Option A → These are not current liabilities normally.
Option C → Debentures are not share capital.
Option D → Loans are liabilities, not assets.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Identify correct Balance Sheet classification.

Final Logic:

�� Long-term debt belongs under long-term borrowings.

🧠 Memory Trick

"Debentures = Long-term Debt"

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

14 In the Second Method, why is Debenture Suspense deducted from the Debentures Account in the Notes to Accounts?

A To reduce the total interest expense

B To show the exact market value of the debentures

C To indicate that these debentures have not created a net outstanding liability

D To transfer the balance to Securities Premium Reserve

💡 Short Explanation

Collateral debentures are not real liabilities. Suspense offsets the debenture balance. Net liability remains unaffected.

✅ Correct Answer Explanation

Debenture Suspense is deducted from Debentures A/c to indicate that the debentures issued as collateral have not created an actual outstanding liability. It merely records security provided against the loan. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Interest expense is unrelated.
Option B → Market value is not the purpose.
Option D → No transfer to premium reserve occurs.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Understand purpose of deduction treatment.

Final Logic:

�� Deduction prevents overstatement of liability.

🧠 Memory Trick

"Suspense Offsets Liability"

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

15 Match the issue condition with its respective impact:

List 1	List 2
1. Issued at Par	a. Issue price equals nominal value
2. Issued at Premium	b. Credited to Securities Premium Reserve
3. Issued at Discount	c. Issue price is less than nominal value
4. Interest on Debentures	d. Charge against profit

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

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

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

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

💡 Short Explanation

Par means equal value. Premium creates premium reserve. Discount lowers issue price. Interest is expense against profit.

✅ Correct Answer Explanation

Issued at Par means issue price equals nominal value. Issued at Premium creates Securities Premium Reserve. Issued at Discount means issue price is below nominal value. Interest on Debentures is treated as a charge against profit. Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect matching.
Option B → Par and discount are mismatched.
Option C → Premium and discount mappings are incorrect.

🎯 Strategy

Used

Option Grouping

Application:

�� Match issue conditions with accounting outcomes.

Final Logic:

�� Correct conceptual associations determine answer.

🧠 Memory Trick

"Par Equal, Premium Extra"

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

16 Arrange the steps for recording an issue of debentures at a discount and redeemable at par:
I. Receive application money (Debit Bank, Credit Application)
II. Debit Debenture Application & Allotment A/c
III. Debit Discount on Issue of Debentures A/c
IV. Credit Debentures A/c

A I, II, III, IV

B I, III, II, IV

C II, I, IV, III

D IV, III, II, I

💡 Short Explanation

Application money is received first. Application account is adjusted. Discount entry follows. Debentures account is credited finally.

✅ Correct Answer Explanation

The process begins with receipt of application money. Then Debenture Application & Allotment A/c is debited for transfer. Discount on Issue is debited because it represents a loss. Finally, Debentures A/c is credited. Hence, the correct order is I → II → III → IV.

❓ Why Other Options Are Incorrect

Option B → Discount cannot precede adjustment.
Option C → Sequence begins incorrectly.
Option D → Completely reversed order.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Follow standard accounting chronology.

Final Logic:

�� Cash receipt precedes adjustment and issue entries.

🧠 Memory Trick

"Receive → Adjust → Discount → Credit"

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

17 5,000 debentures of Rs. 100 each are issued at par. How much application money is received if the full amount is payable on application?

A Rs. 50,000

B Rs. 4,50,000

C Rs. 5,00,000

D Rs. 5,50,000

💡 Short Explanation

Issue at par means Rs. 100 each. Full amount payable on application. 5,000 × 100 = Rs. 5,00,000.

✅ Correct Answer Explanation

Total application money: 5,000 × Rs. 100 = Rs. 5,00,000 Since the full amount is payable on application, the entire value is received immediately. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used

Substitution

Application:

�� Multiply number of debentures by face value.

Final Logic:

�� Entire issue amount is collected on application.

🧠 Memory Trick

"Full Application = Full Face Value"

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

18 A debenture of Rs. 100 is issued at Rs. 105 and redeemable at Rs. 100. What is the amount of premium on issue per debenture?

A Rs. 100

B Rs. 105

C Rs. 0

D Rs. 5

💡 Short Explanation

Premium = Issue price – Face value. Rs. 105 – Rs. 100. Premium = Rs. 5.

✅ Correct Answer Explanation

Premium on issue is calculated as: Issue Price – Face Value = Rs. 105 – Rs. 100 = Rs. 5 Therefore, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Represents face value.
Option B → Represents issue price.
Option C → There is clearly a premium.

🎯 Strategy

Used

Substitution

Application:

�� Apply premium formula directly.

Final Logic:

�� Premium equals excess over nominal value.

🧠 Memory Trick

"Issue Above Face = Premium"

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

📄 Passage

Debentures issued as collateral security can be dealt within two ways in the books of the company. In the first method, no entry is made in the books of accounts since no liability is created by such issue. However, on the liability side of the balance sheet, below the item of loan, a note to the effect that it has been secured by issue of debentures as a collateral security is appended. In the second method, the issue of debentures as a collateral security may be recorded by means of a journal entry by debiting Debenture Suspense A/c.

Under the first method discussed in the passage, why is no journal entry passed for the debentures?

A Because no liability is created by such an issue

B Because it is prohibited by the Companies Act

C Because the bank loan is already recorded as an asset

D Because debentures can only be issued for cash

💡 Short Explanation

Collateral creates no additional liability. Only disclosure note is required. Hence, no journal entry is passed.

✅ Correct Answer Explanation

The passage clearly states that no journal entry is passed under the First Method because no liability is created by issuing debentures as collateral security. Therefore, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Such issues are legally allowed.
Option C → Bank loan is a liability, not asset.
Option D → Debentures may be issued otherwise than for cash.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Directly identify statement from passage.

Final Logic:

�� Passage explicitly provides the reason.

🧠 Memory Trick

"No Liability, No Entry"

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

📄 Passage

In the second method from the passage, which account is explicitly debited to record the collateral security?

A Bank Account

B Debenture Suspense Account

C Debentures Account

D Long-term Borrowings Account

💡 Short Explanation

Second method records collateral formally. Debenture Suspense is debited. Debentures account is credited.

✅ Correct Answer Explanation

The passage clearly mentions that under the Second Method, the issue of debentures as collateral security is recorded by debiting Debenture Suspense A/c. Therefore, option B is correct.

❓ Why Other Options Are Incorrect

Option A → No cash is received.
Option C → Debentures A/c is credited, not debited.
Option D → Loan account is not debited.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Identify account directly stated in passage.

Final Logic:

�� Passage explicitly names Debenture Suspense A/c.

🧠 Memory Trick

"Second Method Uses Suspense"

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

CUET UG Accountancy Booster Test 1 Collateral and Terms of Issue

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