Issue and Redemption of Debentures - Class 12 Accountancy - Chapter 6 - Notes, NCERT Solutions & Extra Questions
Renews every month. Cancel anytime
Extra Questions - Issue and Redemption of Debentures | NCERT | Accountancy | Class 12
What does "insolvent" in the context of eligibility of becoming a Lok Sabha mean?
A) Having enough money to pay debt
B) Not having enough money to pay debts
C) Having enough debts
D) Having no debts
The correct answer is B) Not having enough money to pay debts.
The term "insolvent" in the context of eligibility for becoming a member of the Lok Sabha refers to not having sufficient financial resources to settle debts.
Is it possible that some shareholders do not pay the installment amount due on allotment or calls?
A) Yes, it is possible.
B) No, it is not possible.
The correct answer is A) Yes, it is possible.
It is indeed possible for some shareholders to fail to pay the installment amount due on allotment or calls.
Give the major heading and sub-heading of the following items which are to be presented in the Balance Sheet of a company: (i) Sundry Creditors (ii) Calls-in-Advance (iii) Copyrights (iv) Investment (Trade)
The items presented in a company's Balance Sheet can be classified under specific major headings and sub-headings. Here's the classification for each of the given items:
Items | Major Heading | Sub-Heading |
---|---|---|
Sundry Creditors | Current Liabilities | Trade Payable |
Calls-in-Advance | Current Liabilities | Other Current Liabilities |
Copyrights | Non-current Assets | Fixed-Intangible Assets |
Investment (Trade) | Non-current Assets | Non-current Investment |
- Sundry Creditors are classified under Current Liabilities as Trade Payable.
- Calls-in-Advance fall under Current Liabilities but are categorized specifically as Other Current Liabilities.
- Copyrights, being long-term in nature, are listed under Non-current Assets and more specifically as Fixed-Intangible Assets.
- Investment (Trade) is placed under Non-current Assets with the sub-heading Non-current Investment to indicate investments not meant for immediate liquidation.
The Debt Equity ratio is 3. What will be the impact on the following transactions, and find out the increase, decrease, or no change in the ratio. (i) Buyback of equity shares. (ii) Purchase of a building on a deferred payment basis. (iii) Issued shares in consideration of purchase of machinery. (iv) Debentures matured but not paid.
Solution
Debt Equity Ratio ( = 3:1 )
Assuming, Debt ( = $300,000 ) and Equity ( = $100,000 ):
(i) Buyback of Equity Shares worth $20,000
- Reduces equity to $80,000, no effect on debt.
- New Debt Equity Ratio: $$ \frac{\text{Debt}}{\text{Equity}} = \frac{300,000}{80,000} = 3.75:1 $$ (Increases the ratio)
(ii) Purchase of a Building on a Deferred Payment Basis worth $50,000
- No impact on equity, increases debt to $350,000.
- New Debt Equity Ratio: $$ \frac{\text{Debt}}{\text{Equity}} = \frac{350,000}{100,000} = 3.5:1 $$ (Increases the ratio)
(iii) Issuance of Shares for Machinery Purchase worth $30,000
- Increases equity to $130,000, no change in debt.
- New Debt Equity Ratio: $$ \frac{\text{Debt}}{\text{Equity}} = \frac{300,000}{130,000} \approx 2.31:1 $$ (Reduces the ratio)
(iv) Debentures Matured but Not Paid worth $30,000
- Reduces debt to $270,000, no effect on equity.
- New Debt Equity Ratio: $$ \frac{\text{Debt}}{\text{Equity}} = \frac{270,000}{100,000} = 2.7:1 $$ (Reduces the ratio)
In summary, transactions that decrease equity or increase debt generally increase the Debt Equity Ratio, and transactions increasing equity or reducing debt decrease the ratio.
Original cost of an asset is Rs. 2,00,000 and depreciation is charged at written down value. Calculate the amount of depreciation for the next 4 years, if the year ending is 31st December in each of the following conditions: (i) The rate of depreciation is 10% per annum and the asset was purchased on 1st January. (ii) The rate of depreciation is 10% per annum and the asset was purchased on 1st April. (iii) The rate of depreciation is 10% and the asset was purchased on 1st October.
Solution
For the problem of depreciation calculation on an asset over 4 years, we will use different starting points as provided in the scenarios:
(i) Asset purchased on 1st January (Full year depreciation)
- Depreciation Rate: 10% per annum
-
Calculation:
-
1st Year:
- Depreciation = $$ 2,00,000 \times \frac{10}{100} = \text{Rs. } 20,000 $$
- Book Value at Year End = $$ 2,00,000 - 20,000 = \text{Rs. } 1,80,000 $$
-
2nd Year:
- Depreciation = $$ 1,80,000 \times \frac{10}{100} = \text{Rs. } 18,000 $$
- Book Value at Year End = $$ 1,80,000 - 18,000 = \text{Rs. } 1,62,000 $$
-
3rd Year:
- Depreciation = $$ 1,62,000 \times \frac{10}{100} = \text{Rs. } 16,200 $$
- Book Value at Year End = $$ 1,62,000 - 16,200 = \text{Rs. } 1,45,800 $$
-
4th Year:
- Depreciation = $$ 1,45,800 \times \frac{10}{100} = \text{Rs. } 14,580 $$
- Book Value at Year End = $$ 1,45,800 - 14,580 = \text{Rs. } 1,31,220 $$
-
1st Year:
(ii) Asset purchased on 1st April (Depreciation for 9 months for the first year)
- Depreciation Rate: 10% per annum
-
Calculation:
-
1st Year:
- Depreciation for 9 months = $$ 2,00,000 \times \frac{10}{100} \times \frac{9}{12} = \text{Rs. } 15,000 $$
- Book Value at Year End = $$ 2,00,000 - 15,000 = \text{Rs. } 1,85,000 $$
- Subsequent years will see full year depreciation calculated similarly to the first scenario.
-
1st Year:
(iii) Asset purchased on 1st October (Depreciation for 3 months for the first year)
- Depreciation Rate: 10% per annum
-
Adjustment for 3 months: Multiply the annual depreciation by $ \frac{3}{12} $
-
1st Year:
- Depreciation for 3 months = $$ 2,00,000 \times \frac{10}{100} \times \frac{3}{12} = \text{Rs. } 5,000 $$
- Book Value at Year End = $$ 2,00,000 - 5,000 = \text{Rs. } 1,95,000 $$
- Subsequent years will see full-year depreciation.
-
1st Year:
In all cases, the subsequent years (2nd to 4th years) proceed with the recalculated book value from the preceding year as the base for the next year's depreciation calculation. For example, following (ii):
-
2nd Year:
- Depreciation = $$ 1,85,000 \times \frac{10}{100} = \text{Rs. } 18,500 $$
-
3rd Year:
- Depreciation = $$ Book Value , of , Previous , Year \times \frac{10}{100} $$
-
4th Year:
- Depreciation = $$ Book Value , of , Previous , Year \times \frac{10}{100} $$
By following these methods, we can systematically determine the depreciation and resulting book values for each year depending on the start date of the asset's valuation.
Suppose that a bond promises Rs. 500 at the end of two years with no intermediate return. If the rate of interest is 5% per annum, what is the price of the bond?
Solution
To find the price of the bond, we use the formula for compounding interest:
$$ A = P \left(1 + \frac{r}{100}\right)^n $$
Where:
- $A$ is the future value of the bond (amount to be received)
- $P$ is the present value of the bond (price of the bond)
- $r$ is the annual interest rate
- $n$ is the number of years
Given:
- $A = Rs. 500$
- $r = 5%$
- $n = 2$ years
Substituting the values we get: $$ 500 = P \left(1 + \frac{5}{100}\right)^2 $$
Expanding the equation: $$ 500 = P \left(1.05\right)^2 \ 500 = P \left(1.05 \times 1.05\right) \ 500 = P \left(1.1025\right) $$
Solving for $P$: $$ P = \frac{500}{1.1025} \ P \approx 453.51 $$
Therefore, the price of the bond is Rs. 453.51.
Explain the merits and demerits of public deposits as a source of finance.
Public deposits are a significant source of financing for companies, but they come with both advantages and disadvantages. Below is a detailed description of each:
Merits of Public Deposits:
-
No Security Required: Public deposits do not require any collateral. Hence, the assets of the company remain unencumbered, which may increase its creditworthiness.
-
Cost-Effective: Public deposits are comparatively less expensive to secure. They do not demand expenses related to issuing a prospectus or paying underwriter commissions. Moreover, the interest rates on public deposits are usually lower than those on other forms of borrowed capital.
-
Simple Procedure: There are minimal legal formalities required to obtain public deposits. Companies do not need to seek approval from the controller of capital, nor is there a necessity to be listed on a stock exchange—as would be required for issuing shares or debentures.
Demerits of Public Deposits:
-
Limited Amount: The amount of capital that can be raised through public deposits is constrained due to legal limitations; deposits cannot exceed 25% of share capital and free reserves.
-
Uncertain and Unreliable: Public deposits are an unpredictable source of finance. Their effectiveness can dip during economic downturns in capital markets, making them unreliable. Additionally, the stability of deposits is not guaranteed.
-
Short-term Financial Strategy: Public deposits are generally not suitable for long-term financial needs as their maturity period ranges from six months to three years, making them more feasible for short-term requirements.
Thus, while public deposits can be a strategic choice for immediate, uncomplicated, and economical financing, their limitations make them unsuitable for long-term financial sustainability and during times of economic instability.
Which account needs to be debited for writing off discount on issue of debentures over the span of debentures?
A) Profit and Loss A/c
B) Discount on issue of debentures
C) Securities Premium A/c
D) None of these
Correct answer: A) Profit and Loss A/c
Explanation:
To handle the writing off of discount on issue of debentures over their duration, it is standard accounting practice to debit the Profit and Loss Account. This approach distributes the cost related to the discount across the lifetime of the debentures. This action acknowledges the discount as an expense over time, aligning with the principle of matching expenses with revenues in the periods they relate to.
Which of the following are features of bills of exchange?
It must be in writing
It must be stamped
It must be an unconditional order
All of the above
The correct option is D: All of the above.
All of the above are features of a bill of exchange:
It must be in writing.
It must be stamped.
It must be an unconditional order.