Accountancy Test - 22

The correct answer is Debentures Suspense Account

Key Points

Debentures:

• A debenture is a written instrument that accepts a debt under the enterprise's general certification.
• It includes an agreement for the repayment of principal after a set amount of time, at intervals, or at the enterprise's discretion, as well as the payment of interest at a specified rate, usually yearly or half-yearly on fixed dates.
• According to section 2(30) of the Companies Act, 2013, a 'debenture' is defined as: Debenture Inventory, Bonds, and any other securities of a company, whether or not they include a charge on the enterprise's assets.

Important Points

Issue of Debentures as Collateral

• Debentures offered as collateral security serve as a backup or supplement to the company's original loan.
• If the borrower fails to repay the original loan, the lender can seize the collateral security.

There are the following two methods for recording this kind of debentures:

• Method 1: The company makes no entry when issuing these debentures using this manner. It reveals them in the 'Notes to Accounts' section of the Balance Sheet as a note under the liability secured by the issue of debentures and outstanding.
• Method 2: Under this method, a journal entry to record the issue of such debentures:
  • Debentures Suspense A/c Dr
    To Debentures A/c

In the second case, we will show the debentures account on the liabilities side of the Balance Sheet. While we will show the Debentures Suspense A/c on the assets side of the Balance Sheet under Other Non-Current Assets.

Additional Information

Collateral Security:

Collateral is a term used to describe an asset that a lender accepts as security for a loan. Collateral may take the form of real estate or other kinds of assets, depending on the purpose of the loan.

The correct answer is A - II, B - IV, C - III, D - I.

Key Points

• Current Ratio - Liquidity Ratios (A - II).
  • This ratio measures a company's ability to pay short-term obligations or those due within one year.
  • It is an indication of a firm’s market liquidity and ability to meet creditor’s demands. Acceptable current ratios vary by industry.
• Inventory Turnover Ratio - Activity Ratios (B - IV).
  • This ratio shows how many times a company's inventory is sold and replaced over a period.
  • A higher ratio implies more efficient management of inventory whereas a lower ratio indicates inefficiency in controlling inventory levels.
• Return on Investment - Profitability Ratios (C - III).
  • This ratio measures the gain or loss generated on an investment relative to the amount of money invested.
  • ROI is used to evaluate the efficiency or profitability of an investment or compare the efficiency of several different investments.
• Proprietory Ratio - Solvency Ratios (D - I).
  • This ratio indicates the long-term or overall solvency position of the business.
  • The proprietary ratio is calculated by dividing the proprietor's funds by the total assets. It shows the proportion of the total assets financed by the owners.

Therefore the correct pairing is:

A - II: Current Ratio - Liquidity Ratios

B - IV: Inventory Turnover Ratio - Activity Ratios

C - III: Return on Investment - Profitability Ratios

D - I: Proprietary Ratio - Solvency Ratios

The correct answer is (A) - (IV), (B) - (I), (C) - (II), (D) - (III).

Key Points

• Application money should be at least 5% of the face value of the share.
  • This requirement ensures that investors are genuinely interested in the shares and have a stake in the application process.
  • It acts as a commitment from the investors to purchase the shares at the given price.
• The amount of Call should not exceed 25% of the face value of the share.
  • This limitation is set to protect investors from being asked to pay too high an amount in a single installment after the initial application stage.
  • It helps in managing the financial burden on shareholders.
• Minimum subscription of capital cannot be less than 90% of the issued amount according to SEBI guidelines.
  • This rule ensures that there is sufficient interest and financial backing for the venture before it goes ahead.
  • It serves as a safeguard for the company and its investors, ensuring the company has enough capital to operate.
• Interest charged on call-in-arrears is @ 10% p.a.
  • This interest rate is charged to encourage shareholders to pay their due amounts on time.
  • It acts as a penalty for late payments, ensuring the company receives the funds it needs in a timely manner.

The correct answer is (A), (B) and (D) only.

Key Points

• Debentures issued to bank as additional security.
  • This is correct.
  • Companies sometimes issue debentures to banks as an additional form of security for loans or overdrafts taken. This is a common practice to provide assurance to the bank regarding the repayment of borrowed funds.
• Debentures issued to vendor.
  • This statement is correct.
  • Issuing debentures to vendors is a method used by companies to settle accounts payable or to finance the purchase of goods and services. This is considered a transaction in kind, where debentures are issued in lieu of cash payments to vendors.
• Debentures issued to public.
  • This statement is incorrect in the context of the question.
  • Issuing debentures to the public typically involves cash transactions where the public invests money into the company by purchasing debentures. Thus, it does not fit the criterion of being issued for consideration other than cash.
• Debentures issued to creditor.
  • This statement is correct.
  • When debentures are issued to creditors, it is usually done to convert existing debt or loans into debentures. This can be a strategic move to manage the company's debt by changing the terms of repayment or to take advantage of lower interest rates.
• Debentures issued for cash.
  • This statement is incorrect in the context of the question.
  • Issuing debentures for cash is essentially the opposite of what is being asked, as the question focuses on debentures issued for consideration other than cash.

Hence, the statements (A) Issued to bank as additional security, (B) Issued to vendor, and (D) Issued to creditor are correct, making option 2 the correct answer.

Working capital = Current assets - Current liabilities

Current liabilities = Current assets - Working capital

= 6,00,000 - 2,00,000 = ₹ 4,00,000

Current ratio = Current assets/Current liabilities = 6,00,000/4,00,000 = 1.5

Working capital = Current assets - Current liabilities

Operating Ratio = Operating Cost/Net Sales × 100

Also, Operating Cost = Cost of Goods Sold + Operating Expenses

Since cost of goods sold includes purchases as well as closing stock so a purchase of ₹ 40,000 worth of goods will increase the value of both closing stock as well as purchases and hence will lead to change in the value of COGS.

Thus, the operating ratio will remain unchanged.

Accounting data provides information about quantitative (or monetary) aspects of business. Hence, the ratios also reflect only the monetary aspects, ignoring completely the non-monetary (qualitative) factors.

Repayment of bills payable will reduce current assets and liabilities by the same amount. This will improve the current ratio. Other two options will deteriorate it

Repayment of bills payable will reduce current assets and liabilities by the same amount. This will improve the current ratio.