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Chapter Analysis
Intermediate34 pages • EnglishQuick Summary
This chapter primarily focuses on the concept of debentures as a method for companies to raise long-term funds, highlighting the accounting treatments for the issuance and redemption of debentures. It covers various types of debentures, the differences between shares and debentures, and details the journal entries required for different scenarios of issuance and redemption. The chapter also explores how debentures can be issued for considerations other than cash and used as collateral securities.
Key Topics
- •Meaning and Characteristics of Debentures
- •Types of Debentures
- •Accounting Treatment for Issue and Redemption
- •Difference between Shares and Debentures
- •Debentures as Collateral Security
- •Sinking Fund for Redemption
- •Methods of Redemption
Learning Objectives
- ✓Understand the concept of debentures and distinguish them from shares
- ✓Record journal entries for various debenture transactions
- ✓Explain different methods of debenture redemption
- ✓Understand the use and accounting of debentures as collateral security
- ✓Examine the accounting method for debentures issued for consideration other than cash
Questions in Chapter
State whether the following statements are True (T) or False (F): Debenture is a part of owned capital.
Answer: False
Page 110
State whether the following statements are True (T) or False (F): The payment of interest on debentures is a charge on the profits of the company.
Answer: True
Page 110
State whether the following statements are True (T) or False (F): The debentures cannot be issued at a discount of more than 10% of the face value.
Answer: True
Page 110
Select the correct answer for the following multiple choice questions: Debentures which are transferable by mere delivery are (a) Registered debentures, (b) First debentures, (c) Bearer debentures.
Answer: c) Bearer debentures
Page 136
Journalise the following: Issue of debentures at a discount redeemable at a premium.
Page 141
Additional Practice Questions
What is the primary difference between debentures and shares?
mediumAnswer: The primary difference is that shares represent ownership in the company while debentures are a form of loan capital to the company. Shareholders earn dividends which vary with profits, whereas debenture holders receive a fixed interest.
Describe the process of issuing debentures at par and redeemable at a premium. Include the necessary journal entries.
hardAnswer: The process includes recognizing the debenture application money, transferring it upon allotment, and recognizing the premium at redemption. Journal entries include: 1) Bank A/c Dr. to Debenture Application & Allotment A/c (for receipt), and 2) Debenture Application & Allotment A/c Dr. and Loss on Issue of Debentures A/c Dr. to Debentures A/c and Premium on Redemption of Debenture A/c (for allotment and recognition of premium).
How do convertible debentures function and at what conditions can they be converted?
mediumAnswer: Convertible debentures can be converted into equity shares or another form of security, either at the company's or the debenture holder's option. This usually occurs in situations where market conditions or company terms set favorable conversion rates.
What factors should a company consider when opting to redeem debentures early?
easyAnswer: A company should consider its current financial condition, the terms specified in its articles of association, the effect on financial statements, potential penalties, and the overall impact on future cash flows.
Explain Debenture Redemption Reserve and its significance.
mediumAnswer: Debenture Redemption Reserve is a mandatory reserve that a company must create to protect debenture holders against default. It ensures that the company sets aside funds to meet its future redemption obligations.