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CMA Intermediate · Corporate Accounting and Auditing · Redemption of Preference Shares, Issue and Redemption of Debentures

Rohan Ltd issued Rs 5,00,000 of 10% debentures as collateral security to a bank against a loan. Under the usual accounting treatment, the company should:

The company records no cash entry for collateral debentures, or only a memorandum entry, and discloses the arrangement in notes. The real liability is the bank loan, and showing the debentures also would double count it.

  1. ARecord no entry or only a memorandum note, and disclose the factsCorrect
  2. BCredit Debentures Account and show Rs 5,00,000 as a liability
  3. CDebit Bank Account with Rs 5,00,000
  4. DRecord a loss on issue of Rs 5,00,000

Explanation

Collateral debentures are only additional security; no cash is received for them and the liability is the loan. Either no entry is made, or a memorandum entry is made, with disclosure by note. Showing them as a liability would double count the loan.

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