CUET UG Accountancy Booster Test 3 Introduction to Debentures -

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CUET UG Accountancy Booster Test 2 Introduction to Debentures

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 2 Introduction to Debentures

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QUESTION 1 OF 20

If a debenture is issued at a discount and is also redeemable at a premium, the combined formula representing the total amount debited to 'Loss on Issue of Debentures A/c' is:

Answer Review

1 If a debenture is issued at a discount and is also redeemable at a premium, the combined formula representing the total amount debited to 'Loss on Issue of Debentures A/c' is:

A Premium on Redemption only

B Discount on Issue - Premium on Redemption

C Nominal Value - Issue Price

D Discount on Issue + Premium on Redemption

💡 Short Explanation

Both discount and redemption premium are losses. Both are capital losses to the company. Total loss combines both amounts.

✅ Correct Answer Explanation

When debentures are issued at a discount, the company receives less than face value. Similarly, redemption at premium requires payment above face value at maturity. Both together constitute total loss on issue of debentures. Therefore: Loss on Issue of Debentures = Discount on Issue + Premium on Redemption Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Ignores discount on issue.
Option B → Losses are added, not subtracted.
Option C → Includes only discount element.

🎯 Strategy

Used

Formula Recognition

Application:

�� Identify components contributing to total capital loss.

Final Logic:

�� Both issue discount and redemption premium increase loss.

🧠 Memory Trick

"Discount + Premium = Total Loss"

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

2 Analyze the key technical features of a debenture instrument:
(i) It acts as a written acknowledgement of debt.
(ii) It must always be secured by a fixed charge on machinery.
(iii) It generally carries a prefixed rate of interest (unless it is a Zero Coupon bond).

A (i), (ii), and (iii) are correct

B Only (i) and (iii) are correct

C Only (i) and (ii) are correct

D Only (ii) and (iii) are correct

💡 Short Explanation

Debentures acknowledge debt. Fixed interest is common. Debentures need not always be secured.

✅ Correct Answer Explanation

Statement (i) is correct because a debenture is a written acknowledgement of debt. Statement (ii) is incorrect because debentures may be secured or unsecured and need not always carry a fixed charge on machinery. Statement (iii) is correct because debentures usually carry a fixed interest rate unless they are zero coupon instruments. Therefore, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Statement (ii) is false.
Option C → Statement (iii) is also correct.
Option D → Statement (i) is definitely true.

🎯 Strategy

Used

Elimination

Application:

�� Remove options containing incorrect Statement (ii).

Final Logic:

�� Debentures can exist without fixed security.

🧠 Memory Trick

"Debt + Fixed Interest"

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

3 Section 2(30) of the Companies Act defines Debenture to include bonds and other securities. What implication does the phrase "whether constituting a charge on the assets of the company or not" have on their legal classification?

A Debentures must always be fully secured to be valid

B Unsecured debentures are completely illegal

C A debt instrument is legally a debenture regardless of the presence or absence of underlying security

D A charge on assets invalidates the legal debenture contract

💡 Short Explanation

Debentures may be secured or unsecured. Security is not compulsory. Legal classification remains valid either way.

✅ Correct Answer Explanation

The Companies Act recognizes both secured and unsecured debentures. Therefore, a debt instrument remains legally classified as a debenture irrespective of whether it carries a charge on company assets. Hence, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Security is not mandatory.
Option B → Unsecured debentures are legal.
Option D → Charge strengthens, not invalidates, security.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Interpret legal wording carefully.

Final Logic:

�� Security status does not affect debenture validity.

🧠 Memory Trick

"Secured or Unsecured = Still Debenture"

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

4 Match the distinct natures of debenture contracts to their definitions.

List 1	List 2
1. Perpetual Debenture	a. Repayable only on the winding-up of a company
2. Convertible Debenture	b. Can be swapped for equity shares or other securities
3. Registered Debenture	c. Transferred strictly by executing a regular transfer deed
4. Bearer Debenture	d. Transferred by way of delivery; no company record kept

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

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

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

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

💡 Short Explanation

Perpetual debentures repay on winding up. Convertible debentures convert into shares. Bearer debentures transfer by delivery.

✅ Correct Answer Explanation

Perpetual Debentures are repayable only on winding up. Convertible Debentures may be converted into equity shares. Registered Debentures require transfer deed execution. Bearer Debentures transfer through delivery without company records. Hence, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Multiple mismatches.
Option C → Incorrect definitions.
Option D → Wrong pairings.

🎯 Strategy

Used

Option Grouping

Application:

�� Match debenture types with definitions.

Final Logic:

�� Correct conceptual linkage identifies answer.

🧠 Memory Trick

"Bearer by Delivery"

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

5 XYZ Ltd. issues a deep discount bond with a face value of Rs. 1,000 at an issue price of Rs. 600. It pays no annual interest. To compensate investors, the difference between nominal value and issue price acts as interest. This instrument is essentially a:

A Specific Coupon Rate Debenture

B Bearer Debenture

C Registered Bond

D Zero Coupon Rate Debenture

💡 Short Explanation

No annual interest is paid. Return comes from discount difference. Such instruments are zero coupon debentures.

✅ Correct Answer Explanation

A Zero Coupon Rate Debenture is issued at a heavy discount and carries no periodic interest payment. Investor return arises from the difference between issue price and redemption value. Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Coupon rate debentures pay periodic interest.
Option B → Transferability is unrelated.
Option C → Registration is unrelated to interest structure.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Identify features of zero coupon instruments.

Final Logic:

�� Discount replaces periodic interest.

🧠 Memory Trick

"No Coupon = Discount Return"

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

6 Assertion (A): In modern financial markets, companies issue bonds alongside debentures to raise long-term debt.
Reason (R): The strict historical demarcation where exclusively governments issued bonds no longer applies, making the terms virtually interchangeable.

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

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

C A is true, but R is false

D A is false, but R is true

💡 Short Explanation

Companies now issue bonds widely. Historical distinction has weakened. Terms are often used interchangeably.

✅ Correct Answer Explanation

Modern financial markets permit companies to issue bonds as debt instruments similar to debentures. Historically, governments mainly issued bonds, but that distinction has reduced significantly. Hence, both Assertion and Reason are true, and Reason correctly explains Assertion.

❓ Why Other Options Are Incorrect

Option B → Reason directly explains Assertion.
Option C → Reason is true.
Option D → Assertion is also true.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Evaluate relationship between assertion and reason.

Final Logic:

�� Modern practice explains interchangeable terminology.

🧠 Memory Trick

"Bond and Debenture Often Similar"

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

7 Why is owned capital (shares) fundamentally different in its risk and return profile compared to debentures from the issuing company's perspective?

A Owned capital requires mandatory monthly dividend payouts under the Companies Act

B Dividend on owned capital is an appropriation of profit, thus providing a safety buffer if the company earns zero profits

C Owned capital must necessarily be repaid within a fixed 5-year tenure

D Owned capital represents a fixed charge over all floating assets

💡 Short Explanation

Dividends depend on profits. Debenture interest is compulsory. Shares provide financial flexibility.

✅ Correct Answer Explanation

Dividend on shares is paid only out of profits and is considered an appropriation of profit rather than a fixed charge. Therefore, if the company earns no profit, dividend may not be paid. This provides greater flexibility compared to debenture interest, which remains compulsory. Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Dividends are not mandatory monthly payments.
Option C → Share capital generally has no fixed repayment period.
Option D → Shares do not create fixed charges.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Compare owned capital and borrowed capital characteristics.

Final Logic:

�� Dividend flexibility reduces company risk.

🧠 Memory Trick

"No Profit, No Dividend"

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

8 Arrange the process of recording borrowed capital (debentures) issued as collateral security for a bank loan under the Second Method:
(1) Repayment of Bank Loan
(2) Debenture Suspense A/c Dr. To Debentures A/c
(3) Debentures A/c Dr. To Debenture Suspense A/c (Cancellation)
(4) Taking the bank loan from the institution.

A 1, 2, 3, 4

B 4, 3, 1, 2

C 4, 2, 1, 3

D 2, 4, 3, 1

💡 Short Explanation

Loan is taken first. Collateral entry is passed next. Loan is repaid later. Cancellation entry is passed finally.

✅ Correct Answer Explanation

The company first takes the bank loan. Then collateral debentures are recorded using: Debenture Suspense A/c Dr. To Debentures A/c After loan repayment, cancellation entry is passed: Debentures A/c Dr. To Debenture Suspense A/c Therefore, the correct sequence is 4 → 2 → 1 → 3.

❓ Why Other Options Are Incorrect

Option A → Loan repayment cannot occur first.
Option B → Cancellation precedes issue incorrectly.
Option D → Sequence is illogical.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Follow chronological accounting flow.

Final Logic:

�� Cancellation occurs only after repayment.

🧠 Memory Trick

"Loan → Issue → Repay → Cancel"

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

9 Consider the attributes of long-term finance raised via debentures:
(i) It is formally classified as long-term debt/borrowings.
(ii) It can be successfully raised through private placement.
(iii) It heavily alters the voting control and ownership structure of existing shareholders.

A All are correct

B Only (i) and (iii) are correct

C Only (ii) and (iii) are correct

D Only (i) and (ii) are correct

💡 Short Explanation

Debentures are long-term borrowings. They may be privately placed. Debenture holders do not affect ownership control.

✅ Correct Answer Explanation

Statement (i) is correct because debentures are long-term debt instruments. Statement (ii) is also correct since debentures may be raised through private placement. Statement (iii) is false because debenture holders are creditors, not owners, and therefore do not alter voting control. Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Statement (iii) is false.
Option B → Statement (iii) is incorrect.
Option C → Statement (i) is also correct.

🎯 Strategy

Used

Elimination

Application:

�� Remove options containing incorrect Statement (iii).

Final Logic:

�� Debentures do not dilute ownership control.

🧠 Memory Trick

"Debt, Not Ownership"

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

10 A company requires exactly Rs. 4,75,000 for funding needs. It issues debentures of face value Rs. 100 at a 5% discount (issue price Rs. 95) to raise this amount. How many debentures must exactly be issued to raise the required funds?

A 4,750

B 5,000

C 5,250

D 4,500

💡 Short Explanation

Issue price = Rs. 95. Required amount ÷ issue price. Rs. 4,75,000 ÷ 95 = 5,000.

✅ Correct Answer Explanation

Issue price per debenture: Rs. 100 – 5% = Rs. 95 Number of debentures required: Rs. 4,75,000 ÷ 95 = 5,000 debentures Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Lower than required.
Option C → Excess quantity.
Option D → Incorrect calculation.

🎯 Strategy

Used

Substitution

Application:

�� Divide required funds by issue price.

Final Logic:

�� Quantity depends on actual issue proceeds per debenture.

🧠 Memory Trick

"Funds ÷ Issue Price"

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

11 A company suffers a net loss of Rs. 2 Lakhs. It has Rs. 10 Lakhs in 10% Debentures outstanding. Which of the following statements is legally and conceptually correct regarding the fixed interest?

A The interest payment is waived due to the net loss

B The interest is automatically carried forward to the next profitable year

C Interest of Rs. 1 Lakh must be paid out regardless, as it is a strict charge against profits

D Only 50% of the interest is paid to mitigate losses

💡 Short Explanation

Debenture interest is compulsory. Interest is a charge against profits. Losses do not cancel interest liability.

✅ Correct Answer Explanation

Interest on debentures must be paid irrespective of whether the company earns profit or incurs loss because it is a fixed financial obligation. 10% of Rs. 10 Lakhs = Rs. 1 Lakh interest payable. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Interest cannot be waived automatically.
Option B → Interest is not postponed automatically.
Option D → Partial payment is not legally permitted without agreement.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Distinguish between fixed charge and profit appropriation.

Final Logic:

�� Debenture interest remains compulsory even during losses.

🧠 Memory Trick

"Interest Never Waits"

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

12 If a company fails to meet its debenture principal or payment schedule, what immediate status is typically triggered for unsecured debentures?

A A floating charge may be created on them by default

B They automatically convert to equity shares at par

C They are completely written off as bad debts by law

D The shareholders must personally pay the debt out of pocket

💡 Short Explanation

Unsecured creditors seek protection on default. Floating charge may arise over company assets. Debentures do not automatically convert to shares.

✅ Correct Answer Explanation

When a company defaults on repayment, lenders may seek security through a floating charge over company assets to protect their claims. Therefore, option A is the most appropriate answer.

❓ Why Other Options Are Incorrect

Option B → Conversion requires specific terms.
Option C → Debts are not automatically written off.
Option D → Shareholders generally have limited liability.

🎯 Strategy

Used

Elimination

Application:

�� Remove legally incorrect consequences.

Final Logic:

�� Default increases creditor protection measures.

🧠 Memory Trick

"Default Creates Security Pressure"

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

13 Arrange the accounting steps of redeeming debentures at maturity by payment in lump sum (at par) from a company's perspective:
(1) Calculate the total maturity amount due
(2) Transfer outstanding debenture value (Debentures A/c Dr.) To Debenture holders A/c
(3) Deduct TDS if applicable (if interest is paid concurrently)
(4) Final payment (Debenture holders A/c Dr. To Bank A/c)

A 1, 3, 2, 4

B 1, 2, 3, 4

C 2, 1, 4, 3

D 4, 3, 2, 1

💡 Short Explanation

Amount due is calculated first. Liability transfers to debenture holders. TDS adjustments occur before payment. Final payment closes liability.

✅ Correct Answer Explanation

The company first calculates the maturity amount due. Then Debentures A/c is transferred to Debenture holders A/c. If interest is paid simultaneously, TDS is deducted before final payment is made through Bank A/c. Therefore, the correct order is 1 → 2 → 3 → 4.

❓ Why Other Options Are Incorrect

Option A → TDS cannot precede transfer entry.
Option C → Sequence is illogical.
Option D → Payment cannot occur first.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Follow chronological redemption process.

Final Logic:

�� Liability transfer precedes final payment.

🧠 Memory Trick

"Calculate → Transfer → Deduct → Pay"

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

14 A company redeems 2,000, 10% Debentures of Rs. 100 each at a premium of 5%. What is the exact total amount transferred to the Debenture holders A/c upon maturity before final cash payment?

A Rs. 2,00,000

B Rs. 10,000

C Rs. 1,90,000

D Rs. 2,10,000

💡 Short Explanation

Face value = Rs. 2,00,000. Premium on redemption = Rs. 10,000. Total payable = Rs. 2,10,000.

✅ Correct Answer Explanation

Face value of debentures: 2,000 × Rs. 100 = Rs. 2,00,000 Premium on redemption: 5% of Rs. 2,00,000 = Rs. 10,000 Total amount transferred to Debenture holders A/c: Rs. 2,00,000 + Rs. 10,000 = Rs. 2,10,000 Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Excludes premium.
Option B → Represents premium only.
Option C → Incorrect reduction.

🎯 Strategy

Used

Substitution

Application:

�� Add face value and redemption premium.

Final Logic:

�� Redemption liability includes premium payable.

🧠 Memory Trick

"Redemption = Face + Premium"

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

15 Using the formula for calculating asset valuations in vendor payouts:
If Net Assets Taken Over = Rs. 3,00,000 and Purchase Consideration = Rs. 3,15,000 paid via debentures. The difference (excess) of Rs. 15,000 is accounted as:

A Goodwill

B Capital Reserve

C Discount on Issue of Debentures

D Loss on Issue of Debentures

💡 Short Explanation

Purchase consideration exceeds net assets. Excess payment creates goodwill. Goodwill is an intangible asset.

✅ Correct Answer Explanation

When Purchase Consideration exceeds Net Assets acquired, the excess amount is treated as Goodwill. Rs. 3,15,000 – Rs. 3,00,000 = Rs. 15,000 Therefore, Rs. 15,000 is recorded as Goodwill. Hence, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Capital Reserve arises when net assets exceed consideration.
Option C → Unrelated to business purchase.
Option D → Not a debenture issue loss.

🎯 Strategy

Used

Formula Recognition

Application:

�� Compare purchase consideration and net assets.

Final Logic:

�� Excess payment over net assets creates goodwill.

🧠 Memory Trick

"PC Greater = Goodwill"

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

16 Regarding security and types of charges:
(i) Assets under a fixed charge can be freely sold in operations without the lender's permission.
(ii) A floating charge hovers over the general assets of the company, crystallizing upon default.

A Both are correct

B Only (i) is correct

C Only (ii) is correct

D Neither is correct

💡 Short Explanation

Fixed charge restricts disposal. Floating charge covers general assets. Floating charge crystallizes on default.

✅ Correct Answer Explanation

Statement (i) is false because assets under fixed charge cannot generally be sold without lender consent. Statement (ii) is correct because a floating charge remains over general assets until crystallization upon default or liquidation. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Statement (i) is false.
Option B → Statement (ii) is also correct.
Option D → Statement (ii) is definitely true.

🎯 Strategy

Used

Elimination

Application:

�� Distinguish fixed and floating charges carefully.

Final Logic:

�� Fixed charge restricts free disposal.

🧠 Memory Trick

"Floating Floats Until Default"

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

17 Assertion (A): The Companies Act does not normally grant voting rights to debenture holders.
Reason (R): Debenture holders do not bear the ultimate residual risk of ownership; instead, they have a prior claim on assets and fixed, scheduled returns.

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

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

C A is true, but R is false

D A is false, but R is true

💡 Short Explanation

Debentureholders are creditors. Ownership risk belongs to shareholders. Voting rights generally belong to owners.

✅ Correct Answer Explanation

Debentureholders are creditors and receive fixed returns with priority claims over assets. They do not bear residual ownership risk like shareholders. Therefore, they generally do not receive voting rights. Hence, both Assertion and Reason are true, and Reason correctly explains Assertion.

❓ Why Other Options Are Incorrect

Option B → Reason directly explains Assertion.
Option C → Reason is true.
Option D → Assertion is also true.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Link creditor status with absence of voting rights.

Final Logic:

�� Voting rights arise from ownership, not lending.

🧠 Memory Trick

"No Ownership, No Voting"

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

18 In the extreme event of a company winding up, how does the creditor status of a secured debenture holder mathematically protect them compared to an equity shareholder?

A They receive their invested capital back only after shareholders are paid in full

B They share the residual assets equally with all shareholders

C Their claims are settled strictly first from the specific assets on which the charge is created

D They are guaranteed a government bailout matching their exact loss

💡 Short Explanation

Secured debenture holders have priority claims. Specific charged assets secure repayment. Shareholders receive residual assets only.

✅ Correct Answer Explanation

Secured debenture holders hold a legal charge over specific company assets. In winding up, these assets are first used to satisfy their claims before shareholders receive anything. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Debenture holders are paid before shareholders.
Option B → Shareholders bear residual risk.
Option D → No such guarantee exists.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Compare rights of creditors and owners.

Final Logic:

�� Secured claims receive legal priority.

🧠 Memory Trick

"Secured Gets Paid First"

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

📄 Passage

When debentures are issued as collateral security, it serves as a secondary security besides the primary security when a company obtains a loan from a bank. The lending institution may insist on additional assets. If the company fails to repay the loan along with interest, the lender is free to receive money from the sale of primary security. If the realisable value falls short to cover the entire amount, the lender has the right to invoke the benefit of collateral security whereby debentures may either be presented for redemption or sold in the open market. This contrasts fundamentally with shares, which represent an absolute ownership stake and cannot serve as secondary debt collateral by the issuing company itself.

Why can't equity shares generally be issued as collateral security in the same manner as debentures by the issuing company itself?

A Because shares yield prefixed interest

B Because shares are legally always secured by assets

C Because shares must be redeemed within 5 years

D Because shares represent absolute ownership, not secondary acknowledgement of debt

💡 Short Explanation

Shares indicate ownership. Debentures acknowledge debt. Collateral requires debt-based security.

✅ Correct Answer Explanation

Equity shares represent ownership in the company, whereas debentures represent debt obligations. Since collateral security functions as secondary debt protection, shares cannot normally serve in the same manner as debentures. Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Shares do not provide fixed interest.
Option B → Shares are not always asset-backed.
Option C → Equity shares are not compulsorily redeemable.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Differentiate ownership instruments from debt instruments.

Final Logic:

�� Collateral security requires creditor relationship.

🧠 Memory Trick

"Shares = Ownership, Debentures = Debt"

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

📄 Passage

If the realisable value of the primary security falls short to cover the bank loan, what is the lender's direct next contractual right according to the passage?

A To sue the shareholders personally for the remainder

B To invoke the collateral security (debentures) for presentation of redemption or market sale

C To convert the bank loan into guaranteed dividend payments

D To legally write off the loan completely

💡 Short Explanation

Collateral protects lender from shortfall. Debentures may be redeemed or sold. Recovery rights arise after security shortfall.

✅ Correct Answer Explanation

The passage clearly states that if the value of the primary security is insufficient, the lender may invoke collateral security. The debentures may then either be presented for redemption or sold in the open market to recover the remaining loan amount. Therefore, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Shareholders generally have limited liability.
Option C → Loan cannot convert into dividends automatically.
Option D → Loans are not automatically written off.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Identify lender's contractual recovery right from passage.

Final Logic:

�� Collateral security exists specifically for shortfall recovery.

🧠 Memory Trick

"Shortfall → Invoke Collateral"

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

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