Q.(OR) Define Debenture. What is meant by issue of debentures as collateral security? Explain with the help of example. (3+4+3)
🔒You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
🔒 Start your 14-day free trial to unlock the full solution →Concept understanding — Issue of Debentures
A debenture is a written acknowledgement of a company's debt, usually carrying a fixed rate of interest. In CBSE Class 12 Accountancy, Issue of Debentures covers how a company records debentures issued for cash (at par, at a premium, or at a discount, received in a lump sum or by instalments) and for consideration other than cash (to vendors for assets purchased) as well as as collateral security for a loan. …
A debenture is a written acknowledgement of a company's debt carrying fixed interest; issuing debentures as collateral security means giving debentures as a secondary/additional security for a loan, which become effective only if the main security fails. The concept and treatment, with an example, answer the question. …
A debenture is a company's written acknowledgement of debt with fixed interest; issued 'as collateral security' it is an additional security for a loan, effective only if the loan is not repaid. Either no entry (only a note) or the Debenture Suspense method is used.
Meaning of debenture: A debenture is an instrument issued by a company under its common seal acknowledging a debt and containing a promise to pay a stated sum with interest at a fixed rate on fixed dates.
Issue of debentures as collateral security: When a company takes a loan from a bank or financial institution, it may, besides the principal (primary) security, give its own debentures as an additional or secondary security. These are called debentures issued as collateral security. The lender holds them only as a cover; so long as the loan is repaid regularly, these debentures are not entitled to any interest and are returned to the company on repayment. If the company fails to repay, the lender can realise the loan from these debentures.
Accounting treatment (two methods):
- No entry method: no journal entry is passed; only a note is given below the loan/under Long-term Borrowings stating that it is secured by the issue of debentures as collateral security. …
Showing the 12 most recent of 45 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.At what rate debentures would be issued at discount?(a) 10%(b) 5%(c) 20%(d) Rates as decided by board of directors
›Reveal solutionSolution
The discount rate on debentures is decided by the board of directors, so the answer is (d).
Debentures represent borrowed capital, and the law does not fix any maximum rate of discount on their issue (the restriction of a maximum applies to the discount on shares, not debentures). The company's board of directors decides the dis …
- CBSE 2026Set ANNUAL1 markMCQQ.(Based on the passage: "Vishakha Limited had purchased a plant of ₹ 2,97,000 from Snehlata Limited. It was agreed that purchase consideration is to be paid by issuing 8% debentures of ₹ 1,000 each at discount of 10%.") How much amount will be debited in "discount on issues of debentures account" in above question? A) ₹ 27,000 B) ₹ 27,500 C) ₹ 33,000 D) ₹ 29,700
›Reveal solutionSolution
Discount on Issue of Debentures Account is debited with ₹33,000 - option (C).
From the previous part, 330 debentures of ₹1,000 each are issued at a 10% discount.
Discount per debenture = 10% of ₹1,000 = ₹100.
Total discount = 330 x ₹100 = ₹33,000.
…
- CBSE 2026Set ANNUAL1 markMCQQ.(Based on the passage: "Vishakha Limited had purchased a plant of ₹ 2,97,000 from Snehlata Limited. It was agreed that purchase consideration is to be paid by issuing 8% debentures of ₹ 1,000 each at discount of 10%.") How much amount will be credited in 8% debentures account in above question? A) ₹ 2,75,000 B) ₹ 3,00,000 C) ₹ 2,97,000 D) ₹ 3,30,000
›Reveal solutionSolution
The 8% Debentures Account is credited with ₹3,30,000, their face value - option (D).
When debentures are issued at a discount, the debentures account is still credited at FACE value; the discount is debited separately to the Discount on Issue of Debentures Account. The settlement entry here is:
Snehlata Ltd.'s A/c ... Dr 2,97,000
Discount on Issue of Debentures A/c ... Dr 33,000 …
- CBSE 2026Set ANNUAL1 markQ.Ramkrishna Limited purchased furniture from Rajesh Limited for ₹ 1,98,000. Ramkrishna Limited issued 1800; 7% debentures of ₹ 100 each in full settlement. What is the rate of premium on debentures?
›Reveal solutionSolution
The debentures are issued at a 10% premium.
Issue price per debenture = Purchase consideration / Number of debentures
= 1,98,000 / 1,800
= ₹110 per debenture.
…
- CBSE 2026Set ANNUAL1 markMCQQ.Assertion (A) : A company can issue debentures as collateral security against loans taken from banks or other agencies. Reason (R) : Collateral Security is to be realised only when the principal security fails to meet the amount of loan. In the context of the above two statements, which of the following is correct?(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A)(c) Assertion (A) is true but Reason (R) is false(d) Assertion (A) is false but Reason (R) is true(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A)(c) Assertion (A) is true but Reason (R) is false(d) Assertion (A) is false but Reason (R) is true
›Reveal solutionSolution
Both Assertion and Reason are true, and Reason correctly explains the Assertion (Option A).
A company can issue debentures as collateral security in addition to the primary (principal) security already offered against a loan from a bank or other lending agency. These debentures do not create any additional liability on the company; they merely serve as a secondary, backup security. The lender can enforce/realise this collateral security only if the principal security proves insufficient to recover the loan amount — i.e., only on a default where the main security fails to cover what i …
- CBSE 2026Set ANNUAL1 markQ.What is issue of debentures as collateral security?
›Reveal solutionSolution
Debentures as "collateral security" are an extra backup pledge, not the primary loan security — they only come into play if the company defaults, and carry no interest of their own.
When a company takes a loan or obtains credit facilities (say, from a bank or financial institution), the lender usually asks for some security against which the loan is granted (the primary security, e.g., a mortgage of property or hypothecation of fixed assets). In some cases, the lender also asks for additional, secondary security, over and above the primary one — this additional security can take the form of the company's own debentures, issued directly to the lender. This is called "issue of debentures as collateral security."
Key points about such debentures:
- They give the lender an additional right to recover the loan from the company's assets by enforcing these debentures, but only if the primary security proves insufficient or the company defaults.
- No interest is payable on debentures issued purely as collateral security, since they are not raising fresh funds — the company is already paying interest on the loan itself. Interest becomes payable on these debentures only if the lender actually has to enforce them due to default. …
- CBSE 2025Set ANNUAL1 markMCQQ.According to Companies (Share capital and Debenture) Rules, 2014 by which percentage of the amount of debentures will have to create Debenture Redemption Reserve, before the commencement of redemption of debentures ? (A) 25% (B) 50% (C) 100% (D) Zero
›Reveal solutionSolution
As per the Companies (Share Capital and Debentures) Rules, 2014, a company had to create a Debenture Redemption Reserve (DRR) of 25% of the outstanding debentures out of profits before it started redeeming them. Hence the answer is (A) 25%.
The Debenture Redemption Reserve (DRR) protects debenture holders by ensuring part of the redemption amount is set aside out of divisible profits rather than paid entirely out of fresh borrowing. For the BSEB Inter / Bihar Class-12 Accountancy syllabus, the rule as prescribed under the Companies (Share Capital and Debentures) Rules, 2014 is:
…
- CBSE 2025Set ANNUAL1 markMCQQ.The balance of 'Sinking Fund Account' after the redemption of debentures is transferred to (A) Profit & Loss Statement (B) General Reserve A/c (C) Sinking Fund A/c (D) None of these
›Reveal solutionSolution
A Sinking Fund (Debenture Redemption Fund) is built up to redeem debentures; once redemption is complete the fund is no longer needed, so its balance is transferred to the General Reserve. Hence the answer is (B) General Reserve A/c.
Under the sinking fund method (BSEB Inter / Bihar Class-12 Accountancy), a fixed sum is set aside and invested every year so that enough cash is available to redeem debentures on maturity. After the debentures are redeemed:
- The sinking fund investments are sold to provide cash for redemption. …
- CBSE 2025Set ANNUAL1 markMCQQ.Method(s) of redemption of debenture is/are (A) Redemption by conversion (B) Redemption on instalments (C) Lumpsum payment method (D) All of these
›Reveal solutionSolution
Debentures may be redeemed by conversion, in instalments, or by lumpsum payment, so every option listed is a valid method and the answer is (D) All of these.
For the BSEB Inter / Bihar Class-12 Accountancy syllabus, the main methods of redemption of debentures are:
- Lumpsum payment (in one lot): the entire amount is paid on the maturity date out of accumulated funds.
- Payment in instalments (by draw of lots): a fixed portion of debentures is redeemed each year. …
- CBSE 2025Set ANNUAL1 markMCQQ.What is the nature of Debenture application account ? (A) Real A/c (B) Personal A/c (C) Nominal A/c (D) None of these
›Reveal solutionSolution
The Debenture Application account deals with the applicants (persons), so it is a Personal account — option (B).
When a company invites the public to subscribe to its debentures, the money received with the applications is credited to the Debenture Application account. This account represents the amount owed to / received from the applicants, who are persons. Under the traditional classification of accounts, any account recording dealings with persons, firms or companies is a Personal account.
- (A) Real A/c is WRONG — real accounts record assets/property (e.g. Building, Cash), not persons. …
- CBSE 2025Set ANNUAL1 markMCQQ.Interest payable on debentures is (A) An appropriation of profits of the company (B) Transfer to sinking fund (C) A charge against the profit of the company (D) None of these
›Reveal solutionSolution
Interest on debentures is a compulsory contractual payment to lenders, so it is a charge against profit — option (C).
Debenture interest is payable at a fixed rate irrespective of whether the company makes a profit or a loss. Because it is an obligation the company cannot avoid, it is treated as an expense (a charge against profit) and debited to the Statement of Profit and Loss to compute the net profit. It is not distributed out of profits.
- (A) An appropriation of profits is WRONG — appropriations (like dividend, transfer to reserves) are made only when profit exists; debenture interest is paid even in a loss. …
- CBSE 2025Set ANNUAL1 markMCQQ.In case of issue of debentures as a collateral security for the loan taken from the bank, which account will be debited ? (A) Bank A/c (B) Bank Loan A/c (C) Debenture A/c (D) Debenture Suspense A/c
›Reveal solutionSolution
When the issue of debentures as collateral security is recorded in the books, Debenture Suspense A/c is debited — option (D).
Debentures issued as collateral (secondary) security for a loan can be dealt with in two ways. If the company chooses to record the issue in its books, the journal entry is:
Debenture Suspense A/c Dr.
To Debentures A/c
The Debenture Suspense account (a nominal/contra item shown as a deduction from debentures in the Balance Sheet) is debited to acknowledge the debentures held by the lender as collateral; it is cancelled when the loan is repaid.
- (A) Bank A/c is WRONG — no cash is received when debentures are merely pledged as collateral. …
🎓Unlock everything free for 14 days
- ✓Full step-by-step solutions
- ✓Concept-first explanations
- ✓Methods, shortcuts & mistakes
- ✓PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.