(a) ______ debentures refer to those debentures where a charge is created on the assets of the company for the

Question

Q. (a) ____________ debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. (A) Unsecured (B) Secured (C) Convertible (D) Registered

(OR)

(b) As per the provisions of Companies Act, 2013, the amount received as Securities Premium cannot be utilised to : (A) Issue fully paid bonus shares to the members (B) Write off preliminary expenses of the company (C) Purchase fixed assets (D) Purchase its own shares, i.e. buyback of shares

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Part (a)Concept understanding — Debenture Definition

Debentures: The Company's Way of Borrowing Money

Think of a debenture like this: you need ₹5,00,000 to expand your business. Instead of asking a bank for a loan, you go to the public and say, "Lend me money, and I'll pay you interest every year. After 5 years, I'll return your full amount." Each person who lends you money gets a certificate — that certificate is a debenture.

The Precise Meaning

A debenture is a written instrument issued by a company under its common seal, acknowledging a debt. It contains a promise to repay the borrowed amount at a specified date (maturity) and to pay interest at a fixed rate at regular intervals (usually half-yearly or yearly).

Note

A debenture holder is a creditor of the company, not an owner. They have no voting rights and no share in profits — only a fixed interest payment.

Why Debentures Matter

Companies issue debentures because:

They raise large funds without diluting ownership (unlike shares)
Interest paid on debentures is a tax-deductible expense (reduces taxable profit)
Debentures are safer for investors than shares (fixed return, priority in repayment)

For investors, debentures offer:

Fixed, predictable income
Higher safety than equity shares
Priority over shareholders if the company is liquidated

Accounting Treatment

When a company issues debentures, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	[Amount received]
To Debentures A/c		[Face value]
To Securities Premium Reserve A/c (if issued at premium)		[Premium amount]
(Being debentures issued at premium)

Key points:

Debit Bank A/c with the actual amount received
Credit Debentures A/c with the face value (nominal value)
If issued at a premium (e.g., ₹100 debenture issued for ₹110), credit the extra ₹10 to Securities Premium Reserve A/c
If issued at a discount (e.g., ₹100 debenture issued for ₹95), debit the discount to Discount on Issue of Debentures A/c (a fictitious asset written off over the debenture's life)

Watch out

Never confuse debentures with shares. Debentures are liabilities (shown under "Non-Current Liabilities" in the Balance Sheet), while shares are equity (shown under "Shareholders' Funds").

Interest on Debentures

Interest is calculated as:

Interest = Face Value of Debentures × Rate of Interest × Time Period

For example, if a company issues ₹10,00,000 worth of 9% debentures, the annual interest is:

₹10,00,000 × 9% = ₹90,000 per year

The journal entry for interest payment:

Part (b)Concept understanding — Uses Of Securities Premium

Let’s start with something you already know. Suppose you buy a ₹10 note from a friend for ₹15. You paid ₹5 more than the face value. That extra ₹5 is a premium. In the business world, when a company issues shares worth ₹10 each but investors are willing to pay ₹15, the extra ₹5 per share is called securities premium. It’s not profit from selling goods — it’s money raised over and above the face value of shares.

Now, the company cannot simply treat this premium as free cash to distribute as dividends. The law (Companies Act, 2013) says this money must be used only for specific purposes. That’s the whole point: securities premium is a reserve with strings attached.

What is Securities Premium?

When a company issues shares at a price higher than their face value, the excess amount collected is credited to a separate account called Securities Premium Reserve. This is shown under Reserves and Surplus on the liabilities side of the Balance Sheet.

For example, if a company issues 10,000 shares of ₹10 each at ₹15, the total amount received is ₹1,50,000. Of this:

₹1,00,000 (10,000 × ₹10) is share capital.
₹50,000 (10,000 × ₹5) is securities premium.

Important

Securities premium is not revenue profit. It is a capital reserve and cannot be used for paying dividends or writing off revenue losses.

Why Does It Matter?

The premium represents extra money investors paid because they believed the company was worth more than its face value. Using it wrongly would mislead shareholders and violate the law. So the Act lists five specific uses — and only these — for securities premium:

Issue of fully paid bonus shares to existing shareholders (capitalisation of reserves).
Writing off preliminary expenses (costs of forming the company).
Writing off expenses, commission, or discount on issue of shares or debentures.
Providing for the premium payable on redemption of preference shares or debentures.
Buying back its own shares (only the premium portion can be used for this).

Watch out

You cannot use securities premium to pay dividends, cover operating losses, or for any purpose not listed above. That’s a common mistake in exams.

Accounting Treatment

When the premium is received, the journal entry is:

Bank A/c Dr. (total amount received)

To Share Capital A/c (face value)

To Securities Premium Reserve A/c (premium amount)

When it is used, the Securities Premium Reserve account is debited (reduced), and the relevant expense or reserve account is credited.

Example: Writing off preliminary expenses of ₹20,000 using securities premium

Particulars	Dr. (₹)	Cr. (₹)
Securities Premium Reserve A/c Dr.	20,000
To Preliminary Expenses A/c		20,000
(Being preliminary expenses written off)

Example: Issuing bonus shares (say 1,000 bonus shares of ₹10 each fully paid)

Particulars	Dr. (₹)	Cr. (₹)
Securities Premium Reserve A/c Dr.	10,000
To Bonus to Shareholders A/c		10,000
(Being amount transferred for bonus issue)

Then, when bonus shares are actually issued: …

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Part (a): Secured debentures — (B). Part (b): Securities Premium cannot be used to purchase fixed assets — (C).

Part (a)

A debenture is a written acknowledgement of a debt. When the company creates a charge on its assets to back repayment, the debentures are secured — on default the holders can enforce the charge and realise their money from those assets. The charge may be fixed (on a specific asset) or floating (on a class of assets).

(A) Unsecured — no charge on assets.
(C) Convertible — can be converted into equity shares (a conversion feature, not a security feature). …

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 112 on this concept.

CBSE 2026Set 67/4/11 markMCQ
$Q. (a) ____________ debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. (A) Unsecured (B) Secured (C) Convertible (D) Registered$
(OR)
$(b) As per the provisions of Companies Act, 2013, the amount received as Securities Premium cannot be utilised to : (A) Issue fully paid bonus shares to the members (B) Write off preliminary expenses of the company (C) Purchase fixed assets (D) Purchase its own shares, i.e. buyback of shares$
›Reveal solutionSolution
Part (a): Secured debentures — (B). Part (b): Securities Premium cannot be used to purchase fixed assets — (C).

Part (a)

A debenture is a written acknowledgement of a debt. When the company creates a charge on its assets to back repayment, the debentures are secured — on default the holders can enforce the charge and realise their money from those assets. The charge may be fixed (on a specific asset) or floating (on a class of assets).

(A) Unsecured — no charge on assets.

(C) Convertible — can be converted into equity shares (a conversion feature, not a security feature). …
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CBSE 2026Set 67/5/11 markMCQ
$Q. (a) Reserve capital is that portion of the ________ capital that can be called only in the event of winding up of the company. (A) called-up (B) uncalled (C) paid-up (D) subscribed$
(OR)
$(b) The debentures which do not carry a specific rate of interest are known as : (A) Irredeemable debentures (B) Bearer debentures (C) Specific coupon rate debentures (D) Zero coupon rate debentures$
›Reveal solutionSolution

Part (a): Reserve capital is a part of uncalled capital — option (B).

Part (b): Debentures with no specific interest rate are Zero coupon rate debentures — option (D).

Part (a)

Under Section 65 of the Companies Act, 2013, a company may by special resolution decide that a portion of its uncalled share capital shall not be called except on winding up. This ring-fenced portion is Reserve Capital — extra security for creditors. …
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CBSE 2026Set MARCH1 mark
$Q. Who is called debenture holder?$
›Reveal solutionSolution
A debenture holder is a creditor (lender) of the company who owns its debentures.

A debenture is a written acknowledgement of a debt taken by a company, usually carrying a fixed rate of interest. The person who buys/holds such debentures is called a debenture holder.

Key points:

He is a creditor of the company, not a shareholder/owner.

He receives a fixed rate of interest whether or not the company earns profit.

He has the right to get his principal back on redemption. …
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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: The rate of return on debentures is called __________. (Dividend/Interest)$
›Reveal solutionSolution

The rate of return on debentures is called interest.

Debentures represent borrowed capital (debt) of the company, not ownership. Therefore debenture-holders are creditors who receive a fixed, pre-agreed rate of return called interest, which is a charge against profit and payable irrespective of profits. 'Dividend' …

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CBSE 2026Set ANNUAL1 mark
$Q. Write any one usage of securities premium amount.$
›Reveal solutionSolution
One lawful use of the securities premium is to issue fully paid bonus shares to members.

Under Section 52 of the Companies Act, 2013, the Securities Premium Account can be applied only for specified purposes, such as:

issuing fully paid bonus shares to members;

writing off preliminary expenses of the company;

writing off expenses, commission or discount on issue of shares/debentures;

providing the premium payable on redemption of redeemable preference shares or debentures; …
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CBSE 2026Set ANNUAL1 mark

Q. Write the difference between share and debenture on the basis of voting right.

›Reveal solution

On the basis of voting right: shareholders have it, debenture-holders do not.

Basis	Share	Debenture
Nature	Ownership capital	Borrowed capital (loan)
Voting right	An equity shareholder has the right to vote in the company's general meetings	A debenture-holder, being only a creditor, has no voting right in company affairs
…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Debenture holders are the$
(a) Customers of the company
(b) Owners of the company
(c) Creditors of the company
(d) All of them
›Reveal solutionSolution

Debenture-holders are creditors of the company - option (c).

A debenture is part of a company's borrowed capital. The debenture-holders have lent money to the company and are therefore its creditors; they are entitled to interest at a fixed rate (whether or not the company earns a profit) …

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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: Debentures represents a ________ term loan taken by the company.$
›Reveal solutionSolution

Answer: Long (long-term loan).

A debenture is a written acknowledgement of a loan raised by a company, usually repayable after a long period. It forms part of the company's borrowed (long-term) capital. Henc …

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CBSE 2026Set ANNUAL1 mark
$Q. State whether True or False: Debentureholders are owners of the company.$
›Reveal solutionSolution

The statement is False.

A debenture is an acknowledgement of a loan given to the company, so debentureholders are creditors who get fixed interest. The owners of the com …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Under which major head are debentures shown on the liabilities side of the balance sheet of a company?$
(a) Current Liabilities
(b) Non-current Liabilities
(c) Share Capital
(d) Reserves and Surplus
(a) Current Liabilities
(b) Non-current Liabilities
(c) Share Capital
(d) Reserves and Surplus
›Reveal solutionSolution
Debentures are shown under the Non-current Liabilities major head.

Under Schedule III, Part I of the Companies Act, 2013, the Equity and Liabilities side of a company's balance sheet is grouped under three major heads:

Shareholders' Funds

Non-current Liabilities — includes Long-term Borrowings (debentures, term loans, etc.), Deferred Tax Liabilities, Long-term Provisions

Current Liabilities — includes Short-term borrowings, Trade payables, Other current liabilities, Short-term provisions …
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CBSE 2026Set ANNUAL1 markMCQ
$Q. What does company pay to debentureholders as return on debentures?$
(a) Interest
(b) Dividend
(c) Salary
(d) Goodwill
(a) Interest
(b) Dividend
(c) Salary
(d) Goodwill
›Reveal solutionSolution
A company pays Interest to debenture holders as the return on their debentures.

Debentures represent borrowed/loan capital of a company; a debenture holder is a creditor of the company, not a member/owner. In return for lending money to the company, a debenture holder is entitled to receive a FIXED rate of return mentioned on the debenture certificate (e.g. 9% Debentures, 12% Debentures), called Interest.

Key distinguishing features of interest on debentures:

It is a CHARGE against profit — the company is legally bound to pay it whether it earns a profit or incurs a loss.

It is paid at a fixed, predetermined rate.

It is a business expense, debited to the Statement of Profit and Loss, and reduces the company's taxable profit. …
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CBSE 2026Set ANNUAL1 mark
$Q. Which type of debentures can not be converted into shares?$
›Reveal solutionSolution
Non-Convertible Debentures cannot be converted into shares.

On the basis of convertibility, debentures are classified into two types:

Convertible Debentures — these carry an option/right for the holder to convert them (fully or partly) into equity shares (or sometimes preference shares) of the company, after a specified period and on specified terms. …
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Q.(a) ____________ debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. (A) Unsecured (B) Secured (C) Convertible (D) Registered

Part (a)

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