CBSE Class 12 Accountancy Chapter 7 Issue and Redemption of Debentures — 20 MCQs with Answers

When a company needs long-term capital without diluting equity, it issues debentures. Issue at par means face value equals issue price. Issue at premium means investors pay more than face value; the excess goes to Securities Premium Reserve. Issue at discount means investors pay less; the shortfall is Discount on Issue of Debentures, written off from the Statement of Profit & Loss over the debenture term. NCERT Class 12 Accountancy Part I devotes Section 7.1 to these fundamentals. These MCQs check whether you can identify the correct journal entry and ledger posting for each scenario.

Companies often issue debentures to vendors as payment for assets purchased or to settle outstanding liabilities. NCERT Section 7.2 explains that the accounting treatment mirrors a cash issue, except Vendor's Account or Asset Account is debited instead of Bank. Premium and discount rules apply identically. These MCQs test application skills—can you draft the journal entry when a machine worth ₹2,00,000 is purchased by issuing debentures at a premium or discount?

NCERT Section 7.3 lists four primary methods: payment in lump sum at maturity, redemption by draw of lots (installment), purchase in the open market, and conversion. Each method has distinct journal entries. For lump sum, the entire face value is paid on a single date. Draw of lots spreads redemption over years; the company randomly selects debenture certificates for early redemption. Open-market purchase allows the company to buy back debentures below face value, booking a capital profit. Conversion replaces old debentures with new ones or shares. These MCQs ensure you can match the method to the correct accounting treatment.

The Companies Act 2013 mandates listed companies to create a Debenture Redemption Reserve equal to 25% of the nominal value of debentures before redemption. Unlisted companies must set aside 25% if they issue debentures with a maturity exceeding 18 months. DRR is created by transferring an amount from the Statement of Profit & Loss to DRR Account. It ensures liquidity and protects debenture holders. After redemption, the reserve may be utilised only for issuing fully paid bonus shares. NCERT Section 7.4 explains the regulatory framework. These MCQs test your knowledge of DRR creation, minimum percentages, and permissible utilisation.

Companies may promise to redeem debentures at a premium—for example, ₹100 face value redeemed at ₹105. This ₹5 premium is a loss to the company and must be provided for at the time of issue by debiting Loss on Issue of Debentures and crediting Premium on Redemption of Debentures Account. At redemption, the liability is cleared. If Securities Premium Reserve has a sufficient balance, the premium may be written off against it. NCERT emphasises that premium on redemption is a capital loss, not a revenue expense. These MCQs check your ability to journalise both the creation of the liability and its settlement.

CBSE introduced assertion-reason (A-R) MCQs in 2023 to assess conceptual depth. Each A-R question has two statements: Assertion (A) and Reason (R). You must decide if both are true and whether R correctly explains A. These questions demand not just factual recall but logical reasoning. HOTS MCQs ask you to apply concepts to novel scenarios—for instance, calculating the net cash outflow when debentures are redeemed partly by conversion and partly in cash. Practicing these sharpens analytical skills essential for scoring 90+ in Accountancy.

The 2025 CBSE Class 12 Accountancy paper carries roughly 16 one-mark MCQs (Part A), including 3–4 from Chapter 7. Time per MCQ: 45–60 seconds. First, read the question stem carefully; watch for keywords like 'at par,' 'premium,' 'discount,' 'lump sum,' 'DRR.' Eliminate obviously wrong options. If calculation is involved, jot rough work in the margin—never skip steps mentally. For assertion-reason MCQs, evaluate A and R independently before checking the relationship. If stuck, mark your best guess and flag the question number on the OMR sheet margin (pencil only); return during revision time. Never leave an MCQ blank—there is no negative marking. Practice 50+ MCQs from NCERT Exemplar, CBSE sample papers, and this page to build speed and confidence.

Year after year, CBSE examiners' reports highlight recurring errors. One: confusing 'premium on issue' with 'premium on redemption'—the former goes to Securities Premium Reserve, the latter is a capital loss. Two: forgetting that DRR is 25% only for listed companies; unlisted companies have different rules. Three: miscalculating discount or premium amounts—students often forget to multiply by the number of debentures. Four: in assertion-reason MCQs, marking option (a) when R is true but does not explain A. Awareness of these pitfalls, combined with focused practice, can lift your score by 3–5 marks in MCQs alone.

Debentures are not abstract theory. Tata Steel, Reliance Industries, and NTPC regularly issue debentures to fund expansion without diluting promoter equity. The 2023 SEBI guidelines tightened DRR norms for listed non-convertible debentures, requiring stricter escrow mechanisms. Understanding these regulatory changes enriches your answers in Board exams and competitive tests like CA Foundation. When an MCQ asks 'Why is DRR mandatory?' connect it to investor protection and corporate governance. This contextual thinking also prepares you for case-study questions in the descriptive section and impresses examiners during answer-book evaluation.

Most students rely on coaching notes or YouTube for MCQ practice, but both lack instant doubt resolution. CBSETUTOR.ai changes that. Snap a photo of any MCQ from your textbook, sample paper, or this page, and the AI tutor explains why each option is right or wrong within seconds. It tracks which topics—issue at premium, DRR calculation, assertion-reason logic—you repeatedly get wrong and auto-generates a personalised quiz. Parents love the single ₹999/month fee covering Classes 6–12, all subjects, with a 3-day free trial. During Board exam revision, students report solving 100+ MCQs daily using the platform, boosting confidence and speed. It is like having a patient Accountancy teacher available at midnight before your exam.