CUET UG Accountancy Booster Test 2 Introduction to Debentures -

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CUET UG Accountancy Booster Test 1 Introduction to Debentures

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 1 Introduction to Debentures

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QUESTION 1 OF 20

A company issues a written instrument under its common seal acknowledging a long-term loan of Rs. 5 Lakhs. The document states a principal repayment after 5 years and half-yearly interest. This document precisely defines a:

Answer Review

1 A company issues a written instrument under its common seal acknowledging a long-term loan of Rs. 5 Lakhs. The document states a principal repayment after 5 years and half-yearly interest. This document precisely defines a:

A Share certificate

B Dividend warrant

C Debenture

D Promissory note

💡 Short Explanation

Debenture acknowledges company debt. It includes repayment and interest terms. It is issued under company seal.

✅ Correct Answer Explanation

A debenture is a written instrument issued under the company's common seal acknowledging borrowed money along with repayment and interest obligations. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Share certificate shows ownership.
Option B → Dividend warrant relates to dividend payment.
Option D → Promissory note is different negotiable instrument.

🎯 Strategy

Used

Definition Identification

Application:

Core characteristics of debenture identified from scenario.

Final Logic:

Debt acknowledgement instrument = Debenture.

🧠 Memory Trick

"Debenture = Debt Instrument"

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

2 Consider the features of debt instruments (debentures):
(i) They contain a contract for repayment of principal.
(ii) Interest is payable usually half-yearly or yearly.
(iii) They grant voting rights to the holder.

A Only (i) and (ii) are correct

B Only (ii) and (iii) are correct

C All statements are correct

D Only (i) is correct

💡 Short Explanation

Debentures require repayment. Interest is paid periodically. Debenture holders generally lack voting rights.

✅ Correct Answer Explanation

Statements (i) and (ii) are correct because debentures involve repayment obligations and periodic interest. Statement (iii) is false because debenture holders normally do not enjoy voting rights. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Voting rights statement incorrect.
Option C → All statements are not correct.
Option D → Statement (ii) is also correct.

🎯 Strategy

Used

Statement Verification

Application:

Features of debt instruments analyzed.

Final Logic:

Debentureholders are creditors, not owners.

🧠 Memory Trick

"Interest Without Voting"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Features – Page X

3 As per the Companies Act 2013, if a company wants to classify an instrument as a Debenture, which structural condition must legally be true?

A It must always constitute a fixed charge on assets

B It includes inventory, bonds, and other securities whether constituting a charge or not

C It must be strictly convertible into equity within 5 years

D It must lack a prefixed interest coupon rate

💡 Short Explanation

Companies Act gives broad definition. Security may exist with or without charge. Bonds and similar securities included.

✅ Correct Answer Explanation

Under the Companies Act 2013, debentures include debenture stock, bonds, and other securities whether secured or unsecured. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Fixed charge not compulsory.
Option C → Convertibility not mandatory.
Option D → Debentures may carry fixed interest.

🎯 Strategy

Used

Legal Recall

Application:

Statutory definition applied.

Final Logic:

Debenture definition is broad and inclusive.

🧠 Memory Trick

"Debentures Include Bonds"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Companies Act Definition – Page X

4 Arrange the events reflecting the contractual lifecycle of a debenture:
(1) Payment of half-yearly interest
(2) Repayment of principal at maturity
(3) Issue of prospectus
(4) Allotment acknowledging debt

A 3, 1, 4, 2

B 4, 3, 1, 2

C 1, 2, 3, 4

D 3, 4, 1, 2

💡 Short Explanation

Prospectus issued first. Allotment acknowledges debt. Interest paid periodically before repayment.

✅ Correct Answer Explanation

Correct sequence: 1. Issue prospectus 2. Allot debentures 3. Pay periodic interest 4. Repay principal at maturity Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Interest cannot precede allotment.
Option B → Prospectus must come first.
Option C → Repayment cannot occur before issue.

🎯 Strategy

Used

Sequential Logic

Application:

Lifecycle of debenture issue arranged chronologically.

Final Logic:

Issue → Allotment → Interest → Redemption.

🧠 Memory Trick

"Prospectus Before Payment"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Nature of Contract – Page X

5 Traditionally, Government issued bonds, but nowadays semi-government and non-governmental organizations also issue them. Which of the following is correct regarding Bonds and Debentures today?

A The terms 'debentures' and 'bonds' are now being used interchangeably

B Bonds can strictly only be issued by the central government

C Debentures are solely issued by non-governmental organizations

D Bonds never carry any form of debt acknowledgement

💡 Short Explanation

Both represent debt instruments. Historical distinction has reduced. Terms commonly overlap now.

✅ Correct Answer Explanation

Modern financial usage treats bonds and debentures similarly as debt instruments. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Bonds issued by many organizations now.
Option C → Debentures not limited to non-government bodies.
Option D → Bonds acknowledge debt.

🎯 Strategy

Used

Conceptual Understanding

Application:

Modern terminology usage analyzed.

Final Logic:

Bonds and debentures both represent borrowing.

🧠 Memory Trick

"Both Mean Borrowed Funds"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Bonds – Page X

6 Assertion (A): Zero Coupon Rate Debentures/Bonds carry a specific prefixed rate of interest.
Reason (R): To compensate investors, they are issued at a substantial discount, and the difference between nominal value and issue price is treated as interest.

A Both A and R are true

B Both A and R are false

C A is true, but R is false

D A is false, but R is true

💡 Short Explanation

Zero coupon debentures pay no fixed interest. Investor gains through discount. Therefore, assertion is false.

✅ Correct Answer Explanation

Assertion is false because zero coupon debentures do not carry regular interest. Reason is true because investors are compensated through issue discount. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Assertion incorrect.
Option B → Reason is true.
Option C → Reason not false.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Zero coupon mechanism analyzed.

Final Logic:

Discount replaces periodic interest.

🧠 Memory Trick

"No Coupon, Big Discount"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Zero Coupon Debentures – Page X

7 Match the following elements correctly.

List 1	List 2
1. Dividend	a. Expected return on shares
2. Shareholder	b. Person holding ownership of the company
3. Owned Capital	c. Part of the total capital that represents ownership
4. Voting Rights	d. Right enjoyed by owners, not typically by creditors

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

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

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

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

💡 Short Explanation

Dividend is return on shares. Shareholder is company owner. Owned capital represents ownership funds.

✅ Correct Answer Explanation

Correct matching: 1. Dividend → b 2. Shareholder → d 3. Owned Capital → a 4. Voting Rights → c Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect pairings.
Option B → Dividend incorrectly matched.
Option D → Multiple mismatches.

🎯 Strategy

Used

Option Grouping

Application:

Ownership-related concepts matched carefully.

Final Logic:

Only Option C is fully correct.

🧠 Memory Trick

"Owners Get Dividend and Votes"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Owned Capital – Page X

8 A company's total capital structure equals Rs. 50 Lakhs. Rs. 30 Lakhs is equity and Rs. 10 Lakhs is reserves. The rest is raised by issuing 10% debentures of Rs. 100 each. How many debentures are issued as borrowed capital?

A 5,000

B 10,000

C 1,000

D 15,000

💡 Short Explanation

Borrowed capital calculated first. Remaining amount raised through debentures. Number obtained by dividing face value.

✅ Correct Answer Explanation

Borrowed capital: 50,00,000 - (30,00,000 + 10,00,000) = 10,00,000 Number of debentures: 10,00,000 ÷ 100 = 10,000 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Half the correct quantity.
Option C → Much lower than actual.
Option D → Excess quantity.

🎯 Strategy

Used

Substitution

Application:

Remaining capital divided by face value.

Final Logic:

10,00,000 ÷ 100 = 10,000.

🧠 Memory Trick

"Borrowed Capital ÷ Face Value"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Borrowed Capital – Page X

9 Why are funds raised through the issue of shares seldom completely adequate for most established companies?

A Because shareholders demand impractically high dividends

B Because shares are designed strictly for short-term working capital

C Because modern companies turn to long-term funds to meet extensive financial needs that exceed equity limitations

D Because shares cannot be issued at a premium legally

💡 Short Explanation

Large companies need huge long-term funds. Equity alone is often insufficient. Debentures help meet extensive requirements.

✅ Correct Answer Explanation

Modern businesses require large long-term finance beyond what equity capital alone can provide, so companies also issue debentures. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Dividend expectations are not main reason.
Option B → Shares are not limited to short-term finance.
Option D → Shares can legally be issued at premium.

🎯 Strategy

Used

Conceptual Application

Application:

Purpose of borrowed capital analyzed.

Final Logic:

Extensive financial needs require additional funding sources.

🧠 Memory Trick

"Big Needs Need Borrowed Funds"

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

10 Regarding long-term funding needs, debentures can be issued to the market through:
(i) Private placement
(ii) Offering to the public
(iii) Short-term money markets only

A Only (i) is correct

B Both (i) and (ii) are correct

C Only (ii) and (iii) are correct

D All are correct

💡 Short Explanation

Debentures may be privately placed. They may also be publicly offered. Short-term money market restriction incorrect.

✅ Correct Answer Explanation

Statements (i) and (ii) are correct because debentures can be issued through private placement or public offer. Statement (iii) is incorrect because debentures are long-term instruments. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Public issue also possible.
Option C → Statement (iii) incorrect.
Option D → All statements not correct.

🎯 Strategy

Used

Statement Verification

Application:

Methods of issuing debentures analyzed.

Final Logic:

Debentures are long-term financing instruments.

🧠 Memory Trick

"Private or Public"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Funding Needs – Page X

11 A company issued 5,000, 12% debentures of Rs. 100 each. The interest is paid half-yearly. Calculate the amount of each half-yearly interest payment.

A Rs. 30,000

B Rs. 60,000

C Rs. 15,000

D Rs. 12,000

💡 Short Explanation

Total debenture value calculated first. Annual interest determined. Half-yearly payment equals half annual interest.

✅ Correct Answer Explanation

Total value of debentures: 5000 \times 100 = 500000 Annual interest: 12% × 500000 = 60000 Half-yearly payment: 60000 ÷ 2 = 30000 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Represents full annual interest.
Option C → Half of correct half-yearly amount.
Option D → Incorrect calculation.

🎯 Strategy

Used

Substitution

Application:

Interest formula applied stepwise.

Final Logic:

Annual interest divided into two payments.

🧠 Memory Trick

"Half-Year = Half Interest"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Fixed Interest – Page X

12 Arrange the logical sequence of accounting entries for the payment of scheduled debenture interest:
(1) Transferring Debenture Interest to P&L A/c
(2) Payment of cash to Debenture holders
(3) Debenture Interest becoming due

A 1, 2, 3

B 2, 3, 1

C 1, 3, 2

D 3, 2, 1

💡 Short Explanation

Interest first becomes due. Cash paid afterward. Expense transferred to P&L finally.

✅ Correct Answer Explanation

Correct sequence: 1. Debenture Interest becomes due 2. Payment made to debenture holders 3. Interest transferred to P&L Account Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Transfer cannot precede due entry.
Option B → Payment cannot occur before due.
Option C → P&L transfer cannot happen first.

🎯 Strategy

Used

Sequential Logic

Application:

Interest accounting process arranged chronologically.

Final Logic:

Due → Payment → Transfer.

🧠 Memory Trick

"Due, Pay, Transfer"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Interest Payment – Page X

13 A company does not give any undertaking for the repayment of borrowed money, and debentures are repayable only on the winding-up of the company or on the expiry of a long period. These are known as:

A Redeemable Debentures

B Irredeemable (Perpetual) Debentures

C Convertible Debentures

D Bearer Debentures

💡 Short Explanation

No fixed repayment undertaking exists. Repayment occurs only on winding-up or very late. Therefore debentures are perpetual.

✅ Correct Answer Explanation

Debentures repayable only on winding-up or after extremely long periods are called irredeemable or perpetual debentures. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Redeemable debentures have fixed repayment.
Option C → Convertibility unrelated.
Option D → Bearer refers to transferability.

🎯 Strategy

Used

Definition Recall

Application:

Nature of perpetual debentures identified.

Final Logic:

Absence of repayment commitment defines irredeemable debentures.

🧠 Memory Trick

"No Redemption = Perpetual"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Maturity Period – Page X

14 The accounting process of discharging or extinguishing liability on account of debentures in accordance with the terms of issue is formally called:

A Allotment

B Conversion

C Redemption

D Forfeiture

💡 Short Explanation

Redemption means repayment of debenture liability. Liability gets extinguished. Occurs according to issue terms.

✅ Correct Answer Explanation

The repayment and discharge of debenture liability is known as redemption of debentures. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Allotment occurs during issue stage.
Option B → Conversion means changing into shares.
Option D → Forfeiture applies to shares.

🎯 Strategy

Used

Definition Identification

Application:

Meaning of redemption directly applied.

Final Logic:

Repayment of debentures = redemption.

🧠 Memory Trick

"Redeem Means Repay"

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

15 To protect debenture holders, a fixed charge is formulated and created exclusively against assets:

A Held by the company meant for immediate inventory sale

B Not legally owned by the company

C Already assigned to unsecured creditors

D Held by a company for use in operations and not meant for sale

💡 Short Explanation

Fixed charge applies to specific operational assets. Such assets are not meant for sale. Security protects debenture holders.

✅ Correct Answer Explanation

Fixed charge is created on identifiable assets used in operations rather than inventory held for sale. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Inventory normally unsuitable.
Option B → Company must legally own assets.
Option C → Unsecured creditors have no assigned assets.

🎯 Strategy

Used

Conceptual Understanding

Application:

Nature of fixed charge examined.

Final Logic:

Operational assets provide stable security.

🧠 Memory Trick

"Fixed Charge = Fixed Assets"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Charge on Assets – Page X

16 Which type of debenture does not explicitly carry a specific initial charge on the assets of the company, but a floating charge may be created by default?

A Unsecured Debentures

B First Charge Debentures

C Mortgaged Debentures

D Fixed Charge Debentures

💡 Short Explanation

Unsecured debentures lack specific charge. Floating protection may arise generally. No fixed security exists initially.

✅ Correct Answer Explanation

Unsecured debentures do not carry a specific fixed charge on company assets. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → First charge implies secured priority.
Option C → Mortgaged debentures are secured.
Option D → Fixed charge clearly creates security.

🎯 Strategy

Used

Definition Matching

Application:

Security status of debentures analyzed.

Final Logic:

No explicit charge = unsecured debenture.

🧠 Memory Trick

"Unsecured = No Fixed Charge"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Types of Charge – Page X

17 Assertion (A): Shareholders enjoy voting rights whereas debenture holders do not normally enjoy any voting right.
Reason (R): The payment of dividend to shareholders is a strict charge on profits, granting them this control.

A Both A and R are true

B Both A and R are false

C A is true, but R is false

D A is false, but R is true

💡 Short Explanation

Shareholders generally have voting rights. Debenture holders are creditors. Dividend is not a charge on profits.

✅ Correct Answer Explanation

Assertion is true because shareholders are owners and normally enjoy voting rights. Reason is false because dividend is an appropriation of profits, not a charge on profits. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Reason incorrect.
Option B → Assertion true.
Option D → Assertion not false.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Rights and profit treatment compared.

Final Logic:

Ownership gives voting rights, not dividend nature.

🧠 Memory Trick

"Owners Vote, Creditors Don't"

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

18 Match the following roles and returns correctly based on creditor and owner status.

List 1	List 2
1. Debenture holders	a. Creditor of the company
2. Shareholders	b. Owner of the company
3. Return on Debenture	c. Interest (Charge on profits)
4. Return on Share	d. Dividend (Appropriation of profits)

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

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

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

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

💡 Short Explanation

Debentureholders are creditors. Shareholders are owners. Interest and dividend differ fundamentally.

✅ Correct Answer Explanation

Correct matching: 1. Debenture holders → c 2. Shareholders → d 3. Return on Debenture → a 4. Return on Share → b Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Returns and roles mismatched.
Option B → Ownership classification reversed.
Option C → Multiple incorrect pairings.

🎯 Strategy

Used

Option Grouping

Application:

Ownership and return concepts matched carefully.

Final Logic:

Debentures = Interest; Shares = Dividend.

🧠 Memory Trick

"Creditors Earn Interest"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Creditor Status – Page X

📄 Passage

"The procedure for the issue of debentures is the same as that for the issue of shares. The intending investors apply for debentures on the basis of the prospectus. The company may ask for the entire amount on application or by instalments. Debentures can be issued at par, at a premium or at a discount. Unlike shares, which generally cannot be issued at a discount, the Companies Act does not impose restrictions on issuing debentures at a discount. Furthermore, shares cannot be converted into debentures, but debentures can be converted into shares if the terms of issue so provide."

Based on the passage, what is a distinct regulatory difference regarding the issue price of shares versus debentures?

A Both can be freely issued at a discount with no limits.

B The Companies Act does not impose restrictions on issuing debentures at a discount, unlike shares.

C Debentures can never legally be issued at a discount.

D Shares can be issued at a discount without restrictions.

💡 Short Explanation

Debentures may be freely discounted. Shares face stricter restrictions. Passage directly states distinction.

✅ Correct Answer Explanation

The passage clearly explains that debentures may be issued at discount without the same restrictions imposed on shares. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Shares face restrictions.
Option C → Debentures may be discounted.
Option D → Shares cannot freely issue at discount.

🎯 Strategy

Used

Passage-Based Identification

Application:

Regulatory distinction extracted directly.

Final Logic:

Debentures enjoy greater flexibility in discount issue.

🧠 Memory Trick

"Debentures Allow Discount"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Shares vs Debentures – Page X

20 "The procedure for the issue of debentures is the same as that for the issue of shares. The intending investors apply for debentures on the basis of the prospectus. The company may ask for the entire amount on application or by instalments. Debentures can be issued at par, at a premium or at a discount. Unlike shares, which generally cannot be issued at a discount, the Companies Act does not impose restrictions on issuing debentures at a discount. Furthermore, shares cannot be converted into debentures, but debentures can be converted into shares if the terms of issue so provide."
According to the passage, which directional conversion is legally permissible?

A Debentures into shares

B Shares into debentures

C Both A and B

D Neither A nor B

💡 Short Explanation

Convertible debentures may become shares. Reverse conversion not allowed. Passage directly confirms.

✅ Correct Answer Explanation

The passage states that debentures can be converted into shares if terms permit, but shares cannot be converted into debentures. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Reverse conversion not permitted.
Option C → Both directions not allowed.
Option D → One direction is permitted.

🎯 Strategy

Used

Passage-Based Identification

Application:

Permissible conversion direction identified directly.

Final Logic:

Only debentures may convert into shares.

🧠 Memory Trick

"Debt Can Become Ownership"

📚 Class XII – Accountancy – Chapter: Issue and Redemption of Debentures – Topic: Ownership Difference – Page X

CUET UG Accountancy Booster Test 1 Introduction to Debentures

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