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CMA Inter Paper 10 study materials
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CMA Inter Paper 10 practice questions

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Question 1Introduction to Corporate Accounting

Which of the following consequences follows from the principle that a company is a separate legal entity?

  1. The company dissolves whenever a member dies
  2. Directors are personally liable for all contracts
  3. Members have unlimited liability for company debts
  4. The company can hold assets in its own name Correct answer.

Explanation

A company is a legal person distinct from its members, so it can own, hold and dispose of property in its own name. Members' liability is generally limited to unpaid amounts on their shares, and the company's existence is not affected by the death or insolvency of a member.

Question 2Introduction to Corporate Accounting

Under Schedule III to the Companies Act, 2013, which item forms part of 'Shareholders' Funds' in the balance sheet of a company?

  1. Trade payables
  2. Long-term borrowings
  3. Short-term provisions
  4. Share capital Correct answer.

Explanation

Schedule III groups balance-sheet items under equity and liabilities and assets. Share capital, reserves and surplus, and money received against share warrants together make up Shareholders' Funds.

Question 3Introduction to Corporate Accounting

When equity shares are issued at a price above their face value, the excess amount is credited to which account?

  1. Capital Redemption Reserve
  2. Securities Premium Account Correct answer.
  3. General Reserve Account
  4. Share Forfeiture Account

Explanation

When shares are issued at a premium, the face value is credited to Share Capital and the excess to Securities Premium Account. Securities premium is a capital receipt and is shown under Reserves and Surplus.

Question 4Introduction to Corporate Accounting

A company invited applications for 50,000 shares. Applications were received for 75,000 shares and allotment was made pro rata. An applicant who applied for 3,000 shares was allotted 2,000 shares. The applicant paid Rs. 2 per share on application and Rs. 3 per share on allotment. How much allotment money is still due from the applicant?

  1. Rs. 9,000
  2. Rs. 6,000
  3. Rs. 2,000
  4. Rs. 4,000 Correct answer.

Explanation

On a pro-rata allotment, excess application money is adjusted against the amount due on allotment. The applicant applied for 3,000 shares but got 2,000, so Rs. 2,000 of application money was excess and was adjusted against the allotment due of Rs. 6,000, leaving Rs. 4,000 payable.

Question 5Introduction to Corporate Accounting

A company issued 8,000 10% debentures of Rs. 100 each at a premium of 10%, redeemable at par. What is the total amount received on issue?

  1. Rs. 7,20,000
  2. Rs. 9,60,000
  3. Rs. 8,80,000 Correct answer.
  4. Rs. 8,00,000

Explanation

The issue price per debenture is Rs. 100 plus 10% premium, i.e., Rs. 110. For 8,000 debentures, the total amount received is 8,000 multiplied by Rs. 110, which equals Rs. 8,80,000.

Question 6Introduction to Corporate Accounting

A company forfeited 500 equity shares of Rs. 10 each, fully called up, on which Rs. 6 per share had been paid. These shares were later reissued at Rs. 8 per share, fully paid. What amount is transferred to Capital Reserve?

  1. Rs. 2,000 Correct answer.
  2. Rs. 1,000
  3. Rs. 3,000
  4. Rs. 5,000

Explanation

The amount received on forfeited shares was 500 multiplied by Rs. 6, i.e., Rs. 3,000. On reissue at Rs. 8 for shares of Rs. 10, the loss on reissue is 500 multiplied by Rs. 2, i.e., Rs. 1,000, which is set off against the forfeiture balance; the remaining Rs. 2,000 is transferred to Capital Reserve.

Question 7Introduction to Corporate Accounting

Under the Companies Act, 2013, which of the following is a permitted source for a company to buy back its own shares?

  1. Capital reserve on amalgamation
  2. Free reserves Correct answer.
  3. Revaluation reserve
  4. Share forfeiture account

Explanation

Section 68 permits buy-back out of free reserves, securities premium account, or proceeds of a fresh issue of shares or other specified securities. Revaluation reserves and capital reserves arising from amalgamation are not free reserves for this purpose.

Question 8Introduction to Corporate Accounting

While computing profit prior to incorporation, which expense is normally apportioned between the pre-incorporation and post-incorporation periods solely on the basis of time?

  1. Commission on sales
  2. Discount on sales
  3. Carriage outward
  4. Rent Correct answer.

Explanation

Expenses that accrue with time, such as rent, salaries and interest, are apportioned on a time basis. Expenses driven by sales, such as commission and carriage outward, are apportioned on a sales or turnover basis.

Question 9Introduction to Corporate Accounting

A company issued 1,000 12% debentures of Rs. 1,000 each at a discount of 10%, redeemable at a premium of 5% after five years. Under the straight-line method, what is the annual amount of discount and premium on redemption to be written off?

  1. Rs. 30,000 Correct answer.
  2. Rs. 20,000
  3. Rs. 50,000
  4. Rs. 25,000

Explanation

Total loss on issue is the discount of Rs. 1,00,000 plus premium on redemption of Rs. 50,000, i.e., Rs. 1,50,000. Under the straight-line method this is spread equally over five years, giving Rs. 30,000 per year.

Question 10Introduction to Corporate Accounting

A firm's net assets taken over by a newly formed company were valued at Rs. 4,80,000. The purchase consideration was discharged by issuing 40,000 equity shares of Rs. 10 each at par and paying Rs. 50,000 in cash. What is the amount and nature of the difference arising on takeover?

  1. Capital reserve of Rs. 80,000
  2. Goodwill of Rs. 50,000
  3. Capital reserve of Rs. 30,000 Correct answer.
  4. Goodwill of Rs. 30,000

Explanation

Purchase consideration is 40,000 shares multiplied by Rs. 10, i.e., Rs. 4,00,000, plus cash Rs. 50,000, totalling Rs. 4,50,000. Since net assets taken over are Rs. 4,80,000, the excess of net assets over purchase consideration is capital reserve of Rs. 30,000.

Question 11Introduction to Corporate Accounting

In company accounting, the portion of share capital that has actually been received from shareholders against the amount called up by the company is described as:

  1. Reserve capital
  2. Authorised capital
  3. Paid-up capital Correct answer.
  4. Issued capital

Explanation

Paid-up capital is the amount actually received from shareholders on the shares allotted, measured as called-up capital less calls in arrears, plus any amount credited as paid up otherwise than in cash. Authorised capital is the maximum capital stated in the memorandum, while issued capital is the part of authorised capital actually offered for subscription. Reserve capital is the uncalled portion that a company resolves to call only on winding up.

Question 12Introduction to Corporate Accounting

A company made a first and final call of Rs. 4 per share on 20,000 equity shares of Rs. 10 each. Calls in advance of Rs. 12,000 received earlier were adjusted against this call, and the actual amount collected on the call was Rs. 60,000. What is the amount of calls in arrears?

  1. Rs. 20,000
  2. Rs. 12,000
  3. Rs. 8,000 Correct answer.
  4. Rs. 4,000

Explanation

The call due is 20,000 shares × Rs. 4 = Rs. 80,000. Calls in advance of Rs. 12,000 adjusted against the call reduce the amount collectible to Rs. 68,000, and since only Rs. 60,000 was actually received, the shortfall debited to Calls in Arrears is Rs. 8,000.

Question 13Accounting for Issue, Redemption and Buy-Back of Shares

Under the Companies Act, 2013, which of the following is a permitted application of a company's securities premium account?

  1. Writing off a loss arising from the sale of a factory building
  2. Premium payable on redemption of redeemable preference shares Correct answer.
  3. Payment of interest on a term loan taken for working capital
  4. Payment of dividend on equity shares in a year when profits are insufficient

Explanation

Section 52(2) permits the securities premium account to be applied only for issuing fully paid bonus shares, writing off preliminary expenses, writing off issue expenses/commission/discount, providing for premium on redemption of preference shares or debentures, and buy-back under Section 68. It is a capital receipt and cannot be used to pay dividends or meet routine revenue expenses.

Question 14Accounting for Issue, Redemption and Buy-Back of Shares

When redeemable preference shares are redeemed out of profits, what amount must be transferred to the Capital Redemption Reserve Account?

  1. Nominal value of shares redeemed less the proceeds of a fresh issue Correct answer.
  2. Market value of the shares on the date of redemption
  3. Premium paid on redemption of the preference shares
  4. Paid-up value of the shares redeemed, irrespective of whether a fresh issue was made

Explanation

Section 55(2)(c) requires a sum equal to the nominal value of shares redeemed out of profits to be transferred to the Capital Redemption Reserve, reduced by the nominal value of shares issued afresh for the purpose. The reserve thus keeps capital intact by replacing the extinguished share capital.

Question 15Accounting for Issue, Redemption and Buy-Back of Shares

Under the Companies Act, 2013, issue of shares at a discount is:

  1. Prohibited, except for sweat equity shares Correct answer.
  2. Permitted with the approval of the Board of Directors at a duly convened meeting
  3. Permitted if authorised by the articles and approved by a special resolution of members
  4. Permitted when the shares are offered to existing members on a rights basis

Explanation

Section 53 prohibits issue of shares at a discount save for sweat equity shares issued in accordance with Section 54 and the prescribed rules. An issue in contravention is voidable at the option of the allottee and attracts penalty on the company and its officers.

Question 16Accounting for Issue, Redemption and Buy-Back of Shares

A company issued 1,00,000 equity shares of Rs.10 each at a premium of Rs.2, with Rs.4 payable on application (including Rs.1 premium), Rs.5 on allotment (including Rs.1 premium) and Rs.3 on first and final call. Applications were received for 1,50,000 shares and allotment was made pro rata. An applicant who applied for 15,000 shares was allotted 10,000 shares. What is the excess application money available for adjustment against allotment?

  1. Rs.40,000
  2. Rs.20,000 Correct answer.
  3. Rs.60,000
  4. Rs.10,000

Explanation

The applicant paid Rs.4 per share on 15,000 shares, i.e. Rs.60,000, while only 10,000 shares were allotted, on which Rs.40,000 was due on application. The excess of Rs.20,000 is credited to share allotment, or refunded if not adjusted.

Question 17Accounting for Issue, Redemption and Buy-Back of Shares

A company forfeited 900 equity shares of Rs.10 each, Rs.8 called up, for non-payment of the final call of Rs.3 per share. The shares were later reissued at Rs.7 per share, fully paid. What amount is transferred to Capital Reserve?

  1. Rs.2,700
  2. Rs.900
  3. Rs.1,800 Correct answer.
  4. Rs.4,500

Explanation

The Forfeited Shares Account is credited with the Rs.5 per share already received (900 x Rs.5 = Rs.4,500). Reissue at Rs.7 against Rs.10 paid-up creates a discount of Rs.3 per share (Rs.2,700), which is debited to that account, leaving Rs.1,800 as a capital profit transferred to Capital Reserve.

Question 18Accounting for Issue, Redemption and Buy-Back of Shares

Z Ltd. has paid-up equity share capital of Rs.70,00,000 and free reserves of Rs.30,00,000. During the current financial year it has already bought back its own shares for Rs.6,00,000. What is the maximum further amount that may be applied for buy-back during the year under Section 68(2)(c) of the Companies Act, 2013?

  1. Rs.25,00,000
  2. Rs.31,00,000
  3. Rs.17,50,000
  4. Rs.19,00,000 Correct answer.

Explanation

Section 68(2)(c) caps buy-back during a financial year at 25% of the aggregate of paid-up capital and free reserves, i.e. 25% of Rs.1,00,00,000 = Rs.25,00,000. Since Rs.6,00,000 has already been utilised, the balance available is Rs.19,00,000.

Question 19Accounting for Issue, Redemption and Buy-Back of Shares

A company's free reserves are not sufficient to fund a proposed buy-back of its own shares. Which of the following sources may it lawfully use under Section 68(1) of the Companies Act, 2013?

  1. Securities premium account Correct answer.
  2. Cash credit facility sanctioned by its bankers
  3. Unsecured loans taken from its directors
  4. Sale proceeds of its long-term investments

Explanation

Section 68(1) allows buy-back out of free reserves, the securities premium account, or the proceeds of a fresh issue of shares or other specified securities. Borrowings and proceeds from sale of assets are not permitted sources, since buy-back is a return of capital and must not be financed by debt.

Question 20Accounting for Issue, Redemption and Buy-Back of Shares

The Capital Redemption Reserve created on redemption of preference shares out of profits may be applied for which purpose?

  1. Writing off the debit balance of the statement of profit and loss
  2. Redemption of debentures of the company
  3. Issue of fully paid bonus shares to members Correct answer.
  4. Payment of dividend on preference shares

Explanation

The Capital Redemption Reserve is treated as paid-up share capital and, under the law, may be applied only in paying up unissued shares of the company to be issued to members as fully paid bonus shares. It cannot be used for dividends, for writing off losses, or for redeeming debentures.

Question 21Accounting for Issue, Redemption and Buy-Back of Shares

P Ltd. has secured and unsecured borrowings of Rs.90,00,000 and paid-up capital plus free reserves of Rs.45,00,000, with no securities premium. It proposes to buy back shares for Rs.10,00,000. Which statement is correct?

  1. Not permitted, as the post-buy-back debt-equity ratio exceeds 2:1 Correct answer.
  2. Permitted, provided the borrowed funds are repaid within seven days of the buy-back
  3. Permitted, because Rs.10,00,000 is within 25% of paid-up capital and free reserves
  4. Permitted, because the pre-buy-back debt-equity ratio is exactly 2:1

Explanation

Buy-back must satisfy the debt-equity condition that, after the buy-back, total secured and unsecured debts do not exceed twice the paid-up capital plus free reserves and securities premium. Here equity falls to Rs.35,00,000 while debt stays at Rs.90,00,000, giving a ratio of about 2.57:1, so the buy-back cannot be made even though the 25% limit is satisfied.

Question 22Accounting for Issue, Redemption and Buy-Back of Shares

R Ltd. has 50,000 8% redeemable preference shares of Rs.100 each, fully paid, to be redeemed at a premium of 10%. It has free reserves of Rs.12,00,000 and securities premium of Rs.3,00,000, and redeems the shares by issuing 20,000 equity shares of Rs.100 each at par. What amount must be transferred to the Capital Redemption Reserve?

  1. Rs.20,00,000
  2. Rs.5,00,000
  3. Rs.30,00,000 Correct answer.
  4. Rs.35,00,000

Explanation

Where redemption is funded partly by a fresh issue, the transfer to the Capital Redemption Reserve equals the nominal value redeemed (50,000 x Rs.100 = Rs.50,00,000) less the nominal value of the fresh issue (20,000 x Rs.100 = Rs.20,00,000), i.e. Rs.30,00,000. The redemption premium of Rs.5,00,000 is provided out of the securities premium account or profits and is not part of the transfer.

Question 23Accounting for Issue, Redemption and Buy-Back of Shares

Under the Companies Act, 2013, a public company making a public offer of equity shares of Rs. 10 each must ensure that the amount payable on application per share is at least:

  1. 5% of the nominal value Correct answer.
  2. 1% of the nominal value
  3. 10% of the nominal value
  4. 25% of the nominal value

Explanation

Section 39(2) of the Companies Act, 2013 requires that the amount payable on application on every security be not less than 5% of the nominal amount of that security. This minimum ensures that an applicant commits a real financial stake before allotment is made.

Question 24Accounting for Issue, Redemption and Buy-Back of Shares

A company has completed the buy-back of its equity shares. Within what period must the bought-back shares be extinguished and physically destroyed?

  1. 7 days from the date of completion of the buy-back Correct answer.
  2. 30 days from the date of completion of the buy-back
  3. 15 days from the date of the board resolution approving the buy-back
  4. 60 days from the date of the special resolution approving the buy-back

Explanation

Section 68(7) of the Companies Act, 2013 requires the company to extinguish and physically destroy the shares bought back within seven days of the last date of completion of the buy-back. The shares cannot be kept alive or resold, since a company cannot hold its own shares as treasury stock.

Question 25Accounting for Issue, Redemption and Buy-Back of Shares

In a company's balance sheet prepared under Schedule III to the Companies Act, 2013, how is the share forfeiture account presented?

  1. As a deduction from the paid-up equity share capital
  2. As part of share capital, added to paid-up capital Correct answer.
  3. As a current liability until the forfeited shares are reissued
  4. As a capital reserve under reserves and surplus

Explanation

Schedule III requires the amount originally paid up on forfeited shares to be shown under share capital as an addition to paid-up capital, clearly identified as forfeited shares. The balance is not a free reserve and is not a liability, because the amount already belongs to the company as capital.

Question 26Accounting for Issue, Redemption and Buy-Back of Shares

A company issued 2,00,000 equity shares of Rs. 10 each at par, payable Rs. 3 on application, Rs. 4 on allotment and Rs. 3 on first and final call. Applications were received for 3,00,000 shares and allotment was made pro rata. An applicant who applied for 6,000 shares was allotted 4,000 shares. What amount of that applicant's excess application money was adjusted against the allotment due?

  1. Rs. 2,000
  2. Rs. 6,000 Correct answer.
  3. Rs. 12,000
  4. Rs. 8,000

Explanation

The applicant paid 6,000 x Rs. 3 = Rs. 18,000 on application, while the application money due on the 4,000 shares allotted is 4,000 x Rs. 3 = Rs. 12,000. The excess of Rs. 6,000 is adjusted against the allotment money of 4,000 x Rs. 4 = Rs. 16,000, leaving Rs. 10,000 to be received on allotment.

Question 27Accounting for Issue, Redemption and Buy-Back of Shares

Which of the following cannot be used by a company as a source for issuing fully paid bonus shares?

  1. Capital redemption reserve
  2. Free reserves
  3. Securities premium account
  4. Revaluation reserve Correct answer.

Explanation

Section 63 of the Companies Act, 2013 permits capitalisation of profits only out of free reserves, the securities premium account or the capital redemption reserve. A revaluation reserve arises from writing up assets and is not a realised profit, so it cannot fund a bonus issue.

Question 28Accounting for Issue, Redemption and Buy-Back of Shares

X Ltd. forfeited 1,000 equity shares of Rs. 10 each, Rs. 7 called up, for non-payment of the second and final call of Rs. 2 per share. All the forfeited shares were later reissued as fully paid at Rs. 8 per share. What amount is transferred to capital reserve on reissue?

  1. Rs. 3,000 Correct answer.
  2. Rs. 7,000
  3. Rs. 2,000
  4. Rs. 5,000

Explanation

The amount forfeited is Rs. 7 less the unpaid call of Rs. 2, i.e. Rs. 5 per share, totalling Rs. 5,000. On reissue at Rs. 8 for a Rs. 10 fully paid share, the discount is Rs. 2 per share, totalling Rs. 2,000, which is charged against the forfeited amount. The gain of Rs. 3,000 is transferred to capital reserve.

Question 29Accounting for Issue, Redemption and Buy-Back of Shares

A company has paid-up equity share capital of Rs. 8 crore and free reserves of Rs. 4 crore. Its board proposes to buy back equity shares worth Rs. 1.5 crore. Which approval is required for this buy-back?

  1. Board resolution passed at a board meeting
  2. Prior approval of the National Company Law Tribunal
  3. Special resolution of the shareholders Correct answer.
  4. Ordinary resolution of the shareholders

Explanation

A buy-back is permitted by board resolution only up to 10% of the aggregate of paid-up capital and free reserves, which here is 10% of Rs. 12 crore, i.e. Rs. 1.2 crore. Since the proposed buy-back of Rs. 1.5 crore exceeds this ceiling, it must be authorised by a special resolution of the shareholders under section 68(2).

Question 30Accounting for Issue, Redemption and Buy-Back of Shares

A company received application money under a private placement but failed to allot the securities within sixty days. Within what time and at what rate must the money be repaid?

  1. 7 days, with interest at 12% per annum
  2. 15 days, with interest at 12% per annum Correct answer.
  3. 30 days, with interest at 10% per annum
  4. 15 days, with interest at 15% per annum

Explanation

Section 42(6) of the Companies Act, 2013 requires that if allotment is not made within sixty days of receipt of application money, the money must be refunded within fifteen days from the date the sixty-day period ends. The refund carries interest at 12% per annum from the date of receipt of the money.

Question 31Accounting for Issue, Redemption and Buy-Back of Shares

A company has existing paid-up equity share capital of Rs. 40 crore. It wishes to issue sweat equity shares during the current financial year. What is the maximum value of sweat equity shares it may issue in that year?

  1. Rs. 5 crore
  2. Rs. 10 crore
  3. Rs. 40 crore
  4. Rs. 6 crore Correct answer.

Explanation

Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014 caps sweat equity issued in a year at 15% of the existing paid-up equity capital or Rs. 5 crore, whichever is higher. Here 15% of Rs. 40 crore is Rs. 6 crore, which exceeds Rs. 5 crore, so Rs. 6 crore is the annual ceiling, subject also to the overall 25% limit on sweat equity outstanding at any time.

Question 32Accounting for Issue, Redemption and Buy-Back of Shares

A company completed a buy-back of its equity shares on 10 July 2024. Which of the following issues of equity shares can it validly make before 10 January 2025?

  1. Preferential allotment to a new investor
  2. Bonus issue of equity shares Correct answer.
  3. Rights issue of equity shares
  4. Further public offer of equity shares

Explanation

Section 68(8) bars a company from making a further issue of the same kind of shares within six months of completion of a buy-back, except by way of bonus issue or to discharge subsisting obligations such as conversion of warrants, stock options, sweat equity or convertible securities. A bonus issue is therefore the only permitted route in the listed choices during the six-month window.

Question 33Accounting for Issue and Redemption of Debentures

X Ltd. issued 10,000 9% debentures of ₹100 each at par, redeemable at a premium of 10%. The amount debited to 'Loss on Issue of Debentures Account' is:

  1. ₹1,00,000 Correct answer.
  2. ₹1,10,000
  3. ₹10,000
  4. Nil

Explanation

The premium payable on redemption is a loss at the time of issue; it is debited to Loss on Issue of Debentures with a corresponding credit to Premium on Redemption of Debentures. The issue at par creates no discount, so the loss equals 10% of ₹10,00,000.

Question 34Accounting for Issue and Redemption of Debentures

Interest on debentures is:

  1. An appropriation of profits, like dividend
  2. A charge against profits, payable irrespective of profits Correct answer.
  3. Payable only when the company earns sufficient profits
  4. Payable only if declared by shareholders

Explanation

Debenture interest is a charge on profits and must be paid whether or not the company makes a profit; unpaid interest can lead to default. Dividend, by contrast, is an appropriation of profits and depends on availability and declaration.

Question 35Accounting for Issue and Redemption of Debentures

When debentures are issued to vendors as consideration for purchase of assets, the assets are generally recorded at:

  1. Nominal value of the debentures plus accrued interest
  2. Market value of the debentures on the balance sheet date
  3. Agreed purchase consideration of the assets acquired Correct answer.
  4. Face value of the debentures issued

Explanation

Assets acquired in exchange for debentures are recorded at the agreed purchase consideration, while the Debentures Account is credited at nominal value. Any premium or discount on issue is adjusted separately, so the nominal value alone is not the measurement basis.

Question 36Accounting for Issue and Redemption of Debentures

A company has ₹50,00,000 10% debentures outstanding on 31 March 2024. It must redeem ₹10,00,000 of these debentures during the year ending 31 March 2025. The minimum Debenture Redemption Reserve required, if it is a manufacturing company, is:

  1. ₹7,50,000
  2. ₹1,50,000
  3. ₹5,00,000 Correct answer.
  4. ₹1,00,000

Explanation

For a manufacturing company, the Companies Act, 2013 requires a Debenture Redemption Reserve of at least 10% of the nominal value of debentures outstanding. Here 10% of ₹50,00,000 is ₹5,00,000; the amount maturing during the year does not reduce the base.

Question 37Accounting for Issue and Redemption of Debentures

As per the Companies (Share Capital and Debentures) Rules, 2014, the minimum amount to be invested in Debenture Redemption Investment before redemption is what percentage of the face value of debentures maturing during the year ending 31 March?

  1. 20%
  2. 25%
  3. 10%
  4. 15% Correct answer.

Explanation

The rules require a Debenture Redemption Investment equal to at least 15% of the face value of debentures maturing during the year ending 31 March. The investment must be made on or before 30 April of that year and kept unencumbered.

Question 38Accounting for Issue and Redemption of Debentures

A company issued ₹20,00,000 12% debentures at a discount of 5%. It has a Securities Premium balance of ₹60,000. The amount of discount that can be written off against Securities Premium is:

  1. Nil
  2. ₹1,00,000
  3. ₹60,000 Correct answer.
  4. ₹40,000

Explanation

Securities premium may be used to write off discount on issue of debentures, but only to the extent of the available balance. The discount is ₹1,00,000 and the premium balance is ₹60,000, so ₹60,000 is adjusted and the remaining ₹40,000 is charged to profit or loss.

Question 39Accounting for Issue and Redemption of Debentures

P Ltd. purchased its own 10% debentures of face value ₹1,00,000 at ₹98,000 cum-interest. Interest for six months is outstanding. The cost of investment (ex-interest) is:

  1. ₹1,03,000
  2. ₹98,000
  3. ₹93,000 Correct answer.
  4. ₹95,000

Explanation

A cum-interest price includes interest accrued up to the date of purchase. Six months' interest on ₹1,00,000 at 10% is ₹5,000, so the ex-interest cost is ₹98,000 − ₹5,000 = ₹93,000.

Question 40Accounting for Issue and Redemption of Debentures

A company issued 5,000 10% debentures of ₹100 each on 1 July 2024. Interest is payable half-yearly on 31 March and 30 September. The interest accrued for the year ended 31 March 2025 is:

  1. ₹37,500 Correct answer.
  2. ₹25,000
  3. ₹50,000
  4. ₹12,500

Explanation

Interest runs from the date of issue, 1 July 2024, to 31 March 2025, which is nine months. On ₹5,00,000 at 10%, nine months' interest is ₹37,500.

Question 41Accounting for Issue and Redemption of Debentures

A company purchased its own 10% debentures of face value ₹2,00,000 at a cum-interest price of ₹1,92,000. Interest for six months is accrued. It cancelled the debentures immediately. The profit on cancellation is:

  1. ₹28,000
  2. ₹8,000
  3. ₹10,000
  4. ₹18,000 Correct answer.

Explanation

The cum-interest purchase price includes six months' accrued interest of ₹10,000. The ex-interest cost is therefore ₹1,82,000, and cancelling debentures of face value ₹2,00,000 gives a profit of ₹18,000.

Question 42Accounting for Issue and Redemption of Debentures

A company redeemed ₹8,00,000 debentures by converting them into equity shares of ₹10 each issued at a premium of 25%. The number of equity shares to be issued is:

  1. 80,000
  2. 72,000
  3. 64,000 Correct answer.
  4. 50,000

Explanation

Conversion is made at the issue price of the shares, which is ₹10 plus 25% premium, or ₹12.50 per share. Dividing the ₹8,00,000 debentures by ₹12.50 gives 64,000 shares.

Question 43Accounting for Issue and Redemption of Debentures

Debentures that give the holder a right to convert them into equity shares at a specified future date, as per the terms of issue, are known as:

  1. Convertible debentures Correct answer.
  2. Redeemable debentures
  3. Registered debentures
  4. Secured debentures

Explanation

A convertible debenture carries an embedded right or obligation to exchange the debenture for equity shares after a stated period, so the holder becomes a shareholder. The other labels describe repayment, security cover or the manner in which ownership is recorded, not conversion into shares.

Question 44Accounting for Issue and Redemption of Debentures

A company issues 8% debentures of ₹100 each at par, redeemable at ₹105. In the journal entry recorded on issue, the amount credited to 'Premium on Redemption of Debentures Account' is:

  1. ₹5 per debenture issued Correct answer.
  2. Nil, because the debentures were issued at par
  3. ₹105 per debenture issued
  4. ₹5 per debenture only when redemption becomes due

Explanation

When debentures are redeemable at a price above face value, the excess is recognised at the time of issue by crediting Premium on Redemption of Debentures, creating a liability that is settled on redemption. Here the excess is ₹105 − ₹100 = ₹5 per debenture.

Question 45Accounting for Issue and Redemption of Debentures

A company issued 10,000 10% debentures of ₹100 each at a discount of 6%, redeemable at par after five years, and writes off the discount in equal annual instalments. The amount charged to the Statement of Profit and Loss in the second year is:

  1. ₹6,000
  2. ₹60,000
  3. ₹12,000 Correct answer.
  4. ₹10,000

Explanation

Total discount is 10,000 × ₹100 × 6% = ₹60,000. Writing it off in five equal instalments gives ₹12,000 per year, and the same amount is charged in the second year as in the first.

Question 46Accounting for Issue and Redemption of Debentures

A company issued 10% debentures of face value ₹100 each at an issue price of ₹94. The annual interest payable per debenture is:

  1. ₹10.64
  2. ₹4
  3. ₹10 Correct answer.
  4. ₹9.40

Explanation

Interest on debentures is always calculated on the face (nominal) value, not on the issue price or the amount actually received. Hence 10% of ₹100 = ₹10 per debenture per year.

Question 47Accounting for Issue and Redemption of Debentures

When debentures for which a Debenture Redemption Reserve was created are actually redeemed, the balance standing in the Debenture Redemption Reserve Account is transferred to:

  1. Statement of Profit and Loss
  2. Securities Premium Account
  3. General Reserve Correct answer.
  4. Capital Redemption Reserve

Explanation

The reserve is built out of profits and is no longer needed once the debentures are redeemed, so it is transferred to General Reserve. It is not routed back through profit or loss, and Capital Redemption Reserve is used for redemption of preference shares out of capital.

Question 48Accounting for Issue and Redemption of Debentures

A company had ₹50,00,000 9% debentures outstanding on 1 April 2024. It issued a further ₹10,00,000 9% debentures on 1 July 2024 and redeemed ₹5,00,000 debentures on 1 January 2025. Interest for the year ended 31 March 2025 is:

  1. ₹5,06,250 Correct answer.
  2. ₹5,40,000
  3. ₹5,17,500
  4. ₹4,95,000

Explanation

Interest is computed on the amount outstanding for the period: ₹50,00,000 × 9% = ₹4,50,000; ₹10,00,000 × 9% × 9/12 = ₹67,500; less ₹5,00,000 × 9% × 3/12 = ₹11,250. The total is ₹5,06,250.

Question 49Accounting for Issue and Redemption of Debentures

A company issued 8,000 10% debentures of ₹100 each at a premium of 10%, redeemable at a premium of 4%. The total of the amounts credited to Securities Premium Account and Premium on Redemption of Debentures Account is:

  1. ₹32,000
  2. ₹1,20,000
  3. ₹80,000
  4. ₹1,12,000 Correct answer.

Explanation

Securities Premium is the issue premium: 8,000 × ₹100 × 10% = ₹80,000. Premium on Redemption is the excess payable on maturity: 8,000 × ₹100 × 4% = ₹32,000; together ₹1,12,000.

Question 50Accounting for Issue and Redemption of Debentures

A company purchased its own 9% debentures of face value ₹2,00,000 for ₹1,92,000 (ex-interest) and cancelled them immediately. The gain of ₹8,000 is credited to:

  1. Statement of Profit and Loss as other income
  2. Debenture Redemption Reserve
  3. Capital Reserve Correct answer.
  4. Securities Premium Account

Explanation

When a company buys and cancels its own debentures at a price below the face value, the resulting gain is not a trading profit; it is treated as capital in nature and credited to Capital Reserve. The debentures and the related liability are removed from the books on cancellation.