CBSE Class 12 Accountancy Chapter 7: Issue and Redemption of Debentures - NCERT Solutions
This chapter delves into the intricacies of issuing and redeeming debentures, a crucial aspect of corporate finance for Class 12 Accountancy students following the CBSE curriculum. The NCERT Solutions provide clear explanations for fundamental concepts like the definition of a debenture, its origin from the Latin word 'debere', and its role as a long-term borrowing instrument. Students will learn about different types of debentures, including bearer debentures, which are transferable without formal record-keeping, and debentures issued as collateral security, serving as an additional safeguard for lenders. The solutions also clarify the concept of issuing debentures for consideration other than cash, often used when acquiring assets. These solutions are designed to help students grasp the theoretical underpinnings of debenture financing, preparing them for examinations by offering detailed explanations and clear definitions.
Quick info
| Board | CBSE |
|---|---|
| Class | Class 12 |
| Subject | Accountancy |
| Session | 2026 |
| Language | English |
| Type | NCERT Solutions |
| Chapter | Chapter 7 |
Chapter summary
Chapter 7 of the CBSE Class 12 Accountancy syllabus focuses on the 'Issue and Redemption of Debentures'. The NCERT Solutions provided here cover the essential definitions and concepts related to debentures. Key topics include understanding what a debenture is, its legal and contractual nature, and the distinction between different types such as bearer debentures. The solutions also explain the practical application of issuing debentures as collateral security and for acquiring assets without direct cash payment. This chapter's solutions aim to build a strong foundational understanding of debenture financing for students.
Learning outcomes
- Understand the definition and origin of a debenture.
- Differentiate between various types of debentures, including bearer debentures.
- Explain the concept of debentures issued as collateral security.
- Define and illustrate the issuance of debentures for consideration other than cash.
Topics covered
Paper topics
- Definition of Debenture
- Origin of Debenture
- Debenture Certificate
- Interest on Debentures
- Long-term Borrowings
- Bearer Debentures
- Transferability of Debentures
- Debentures issued as Collateral Security
- Primary Security
- Additional Security
- Issue of Debentures for Consideration other than Cash
- Purchase of Assets
Important topics
- Definition and Purpose of Debentures
- Bearer Debentures
- Debentures as Collateral Security
- Issue of Debentures for Consideration other than Cash
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Questions and Solutions
Question 1
A debenture is a financial instrument that represents a company's debt. The term originates from the Latin word 'debere', meaning 'to borrow'. When a company issues debentures, it is essentially taking a loan from the public or specific investors. This issuance is formalized through a certificate, sealed by the company, which contractually obligates the company to repay the principal amount to the certificate holder after a specified period. Additionally, the company agrees to pay a fixed rate of interest at regular intervals, typically semi-annually. Debentures are a primary means for companies to secure long-term borrowings, providing capital for expansion, projects, or other significant financial needs.
Question 2
A bearer debenture is a type of debenture where the company does not maintain a register of its holders. Ownership is determined by possession; whoever holds the debenture certificate is considered the owner. These debentures are freely transferable by mere delivery, without any need for endorsement or formal transfer procedures. The interest payments are usually made through detachable coupons attached to the debenture certificate. The holder presents these coupons at a specified bank to receive the interest amount. This lack of registration makes them easily transferable but also poses challenges in tracking ownership.
Question 3
Debentures issued as collateral security are used as an additional form of security for a loan, beyond the primary security already provided. In certain situations, financial institutions may require more assurance than just the main asset pledged as security. In such cases, a company might issue debentures to the lender as a secondary or backup security. If the company defaults on the loan repayment (either principal or interest), and the primary security proves insufficient to cover the outstanding amount, the lender has the right to claim the debentures and sell them to recover the remaining debt. This provides an extra layer of protection for the lender.
Question 4
The 'Issue of debentures for consideration other than cash' refers to a transaction where a company issues its debentures not in exchange for money, but as payment for assets acquired or services received. This is a common practice when a company purchases assets, such as land, buildings, or machinery, from vendors. Instead of paying the purchase price in cash, the company issues debentures to the vendor. This method can be advantageous for the company as it conserves cash. For the debenture holder (the vendor in this case), they receive a promise of future repayment with interest, similar to holding debentures issued for cash, and are entitled to interest if payments are delayed.
Common mistakes
- Confusing debentures with shares.
- Misunderstanding the implications of bearer debentures.
- Not clearly distinguishing between primary and collateral security.
Revision tips
- Focus on understanding the core definition of a debenture and its purpose.
- Pay close attention to the specific characteristics of bearer debentures.
- Review the scenarios where debentures are used as collateral or for non-cash considerations.
- Use the provided definitions to explain these concepts in your own words.
Practice MCQs
Q1. What is the Latin origin of the word 'Debenture'?
Explanation: The term 'Debenture' is derived from the Latin word 'debere', which means 'to borrow'. This reflects the nature of debentures as a debt instrument.
Q2. Which type of debenture is transferable without formal record-keeping by the company?
Explanation: Bearer debentures are transferable by mere delivery, and the company does not maintain records of their holders. Interest is paid to the coupon holder.
Q3. When are debentures issued as collateral security?
Explanation: Debentures are issued as collateral security when a financial institution requires more than just primary security for a loan, serving as a backup.
Q4. Issuing debentures instead of cash for purchasing an asset is known as:
Explanation: This refers to the scenario where debentures are given in exchange for assets, rather than making a cash payment.
Q5. What is the primary purpose of issuing debentures?
Explanation: Debentures are a common instrument for companies to secure long-term funds through borrowing.
Frequently asked questions
What is a debenture in simple terms?
A debenture is a debt instrument issued by a company to raise long-term funds. It's essentially a loan certificate where the company promises to repay the principal amount after a fixed period and pay regular interest.
What is the difference between a bearer debenture and other types?
Bearer debentures are payable to whoever holds them (the bearer) and are transferable by delivery without the company needing to record the holder's name. Other debentures, like registered debentures, have their holders' names recorded.
Why would a company issue debentures as collateral security?
A company issues debentures as collateral security to provide an additional layer of security to lenders, beyond the primary security offered for a loan. If the primary security is insufficient to cover the loan, the debentures can be used.
What does it mean to issue debentures for consideration other than cash?
This means a company issues debentures as payment for assets purchased, instead of paying cash. For example, if a company buys a building, it might issue debentures to the seller as the purchase price.
How do these NCERT solutions help with Class 12 Accountancy exams?
These solutions provide clear, rewritten explanations of key concepts in Chapter 7, helping students understand the definitions and applications of debentures, which are frequently tested in exams.
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