Frequently Asked MCQs on Issue and Redemption of Debentures in Class 12 Accountancy
MCQs for Accountancy Class 12 Chapter 7 are a crucial tool for mastering the concepts of financial statements of a company. This topic is highly relevant for CBSE board exams and competitive tests, helping students understand company accounts and improve their problem-solving skills through practical application.
| Main Component | Description | Common MCQ Focus |
|---|---|---|
| Balance Sheet | Statement showing assets, liabilities, and equity | Classification of assets & liabilities, Schedule III format |
| Statement of Profit and Loss | Shows net profit or loss over an accounting period | Items included, format, treatment of exceptional items |
| Notes to Accounts | Provide explanations and details of key items in statements | Disclosure requirements, contingent liabilities |
MCQs for Accountancy Class 12 Chapter 7: Financial Statements of Company
The financial statements of a company chapter includes important MCQs that test core knowledge about statement preparation, company law formats, and interpretation. Practicing these questions helps students perform well in school and board exams and strengthens their understanding for business careers.
Sample MCQs and Answers
- Financial analysis can be limited because it:
- a) Measures profitability
- b) Measures solvency
- c) Lacks qualitative analysis
- d) Makes a comparative study
- Main purpose of financial statement analysis is:
- a) Assess financial strength
- b) Compare with other firms
- c) Evaluate management efficiency
- d) All of the above
- Contingent liabilities are disclosed:
- a) Under fixed liabilities
- b) Under current liabilities
- c) As a footnote
- d) None of these
- Which is shown under 'Non-Current Assets' as per Schedule III?
- a) Motor Vehicles, Stock in trade, Goodwill, Cash at bank, Loose tools
- b) Bills receivable, Goodwill, Motor Vehicles, Loose tools
- c) Goodwill, Motor Vehicles, Loose tools
- d) Goodwill, Motor Vehicles
- Calls in advance appear on a company’s balance sheet under:
- a) Share Capital
- b) Current Liabilities
- c) Long-term Borrowings
- d) Reserves & Surplus
- Which is NOT a limitation of financial statement analysis?
- a) Window dressing
- b) Ignores price level changes
- c) Subjectivity
- d) Intra-firm comparison possible
- The reserve created for a specific purpose as a charge against revenue is:
- a) Capital Reserve
- b) General Reserve
- c) Secret Reserve
- d) Specific Reserve
- Dynamic (time-based) analysis is:
- a) Horizontal Analysis
- b) Vertical Analysis
- c) Internal Analysis
- d) External Analysis
- Bank overdraft and cash credit are 'short-term borrowings':
- a) True
- b) False
- c) Partially true
- d) Can't say
- Who benefits from financial statement analysis?
- a) Creditors
- b) Managers
- c) Employees
- d) All the above
Key Concepts Tested in Chapter 7 MCQs
MCQs for Accountancy Class 12 Chapter 7 often include classification of assets and liabilities, understanding of Schedule III, treatment of specific items like calls in advance, and disclosures like contingent liabilities. Knowing these helps with accuracy in board exams and competitive commerce tests.
Classification of Assets and Liabilities (As per Schedule III)
| Head | Example Items | Treatment |
|---|---|---|
| Non-Current Assets | Goodwill, Motor Vehicles, Plant, Equipment | Appear on balance sheet as per Schedule III |
| Current Assets | Inventory, Trade Receivables, Cash at Bank | Expected to turn to cash within one year |
| Current Liabilities | Trade Payables, Calls in Advance, Bank Overdraft | Due within a year; shown together |
| Reserves & Surplus | General reserve, Retained earnings | Part of shareholder’s funds |
Why Practice MCQs for Accountancy Class 12 Chapter 7?
Regularly solving MCQs from this chapter builds speed and confidence. These questions cover all major points, from format compliance to interpretation. For CBSE board exams, competitive tests, or basic business knowledge, a solid grasp here is essential. At Vedantu, we help students get exam-ready with up-to-date company account questions.
Real-World Uses of Chapter 7 Concepts
Financial statements are used by managers, investors, and auditors. Understanding their structure helps analyze any company's health. Whether for board exams, CA preparation, or handling business files, these concepts have practical importance beyond the classroom.
Related Topics and Further Reading
- Financial Statements of a Company – Learn the format, key terms, and preparation methods.
- Final Accounts – Essential for MCQs on company financial reporting.
- Difference Between Assets and Liabilities – Clarifies classification in balance sheets.
- Ledger Accounts – Practice financial statement items and postings.
- Accounting Ratios – Often form part of analysis questions.
Answer Key and Explanations: Sample MCQs
- c) Lacks qualitative analysis – Financial analysis mainly focuses on quantitative data and ignores non-numeric factors.
- d) All of the above – Each mentioned is a key purpose for analysis.
- c) As a footnote – Contingent liabilities are disclosed in notes, not in the main body.
- d) Goodwill, Motor Vehicles – Only these are non-current assets (as per Schedule III).
- b) Current Liabilities – Calls in advance must be shown as a current liability.
- d) Intra-firm comparison possible – This is actually an advantage, not a limitation.
- d) Specific Reserve – Created for specific purposes and charged against revenue.
- a) Horizontal Analysis – Compares financial data over multiple periods.
- a) True – Both are categorized as short-term borrowings.
- d) All the above – Each party uses financial statements for decision-making.
In summary, MCQs for Accountancy Class 12 Chapter 7 provide focused practice on financial statements, essential company law formats, and real accounting situations. Regular practice improves exam scores, business aptitude, and overall understanding of company accounts. Explore more detailed resources at Vedantu to master these critical Commerce concepts.
FAQs on Accountancy Class 12 Chapter 7 MCQs with Answers and Explanations
1. What are the main components of a company's Balance Sheet as per Schedule III for the 2025-26 session?
As per Schedule III of the Companies Act, 2013, a company's Balance Sheet has two main sides: Equity and Liabilities and Assets. The key components under each are:
- Equity and Liabilities: This includes Shareholders' Funds (Share Capital, Reserves and Surplus), Non-Current Liabilities (Long-term Borrowings like Debentures), and Current Liabilities (Trade Payables, Short-term Provisions).
- Assets: This is divided into Non-Current Assets (Property, Plant, and Equipment; Intangible Assets) and Current Assets (Inventories, Trade Receivables, Cash and Cash Equivalents).
2. What is a debenture and how does it fundamentally differ from a share?
A debenture is a formal document that acknowledges a debt owed by a company. Essentially, it is a loan taken from the public that carries a fixed rate of interest. The fundamental difference from a share is that a debenture holder is a creditor of the company and has no ownership rights, whereas a shareholder is an owner of the company who receives a dividend from profits.
3. What are the different conditions under which debentures can be issued by a company?
A company can issue debentures under three distinct financial conditions based on their price relative to their face value:
- Issue at Par: When the issue price is exactly equal to the nominal (face) value of the debenture.
- Issue at a Premium: When the issue price is higher than the nominal value. The excess amount collected is treated as a capital profit.
- Issue at a Discount: When the issue price is lower than the nominal value. This is a capital loss for the company.
4. Why is it important for a company to create a Debenture Redemption Reserve (DRR)?
Creating a Debenture Redemption Reserve (DRR) is crucial as a financial safeguard for debenture holders. Its main purpose is to ensure the company systematically sets aside adequate profits to repay the debenture amount at maturity. This legally mandated reserve prevents the company from distributing all profits as dividends, thereby ensuring that funds are available for redemption and protecting the creditors' interests.
5. What does 'redemption of debentures' mean and what are the common methods for it?
Redemption of debentures is the process of repaying the loan amount to the debenture holders, thereby discharging the liability. The most common methods a company can use for redemption are:
- Lump-Sum Payment: Repaying the entire amount at the end of a specified period.
- Draw of Lots: Paying off debentures in instalments to a selection of holders chosen randomly.
- Purchase in Open Market: Buying back its own debentures from the stock market, usually when they are trading at a discount.
- Conversion: Offering debenture holders the option to convert their debentures into new shares or debentures.
6. How does issuing debentures at a discount or premium impact a company's financial statements?
The issuance condition directly impacts the Balance Sheet. A discount on issue is a capital loss, which is shown under 'Other Non-Current/Current Assets' and is written off over the debenture's life, affecting reported profits. Conversely, a premium on issue is a capital gain, shown under 'Securities Premium' within 'Reserves and Surplus' on the Equity and Liabilities side. This strengthens the company's financial reserves.
7. What is the primary purpose of preparing a company's Statement of Profit and Loss?
The primary purpose of the Statement of Profit and Loss is to showcase a company's financial performance over a specific accounting period. It systematically matches the revenue generated with the expenses incurred to earn that revenue. The final outcome, a net profit or net loss, is a critical indicator of the company's operational efficiency and profitability to its stakeholders.
8. Beyond just listing assets and liabilities, what story does a company's Balance Sheet tell an investor?
For an investor, a Balance Sheet reveals the underlying story of a company's financial health and strategic choices. It shows how the company is structured, indicating its reliance on equity versus debt. It also provides insights into its short-term survival capability (liquidity) and its long-term stability (solvency). Analysing it over time helps an investor understand the management's effectiveness in using assets to create value and manage risk.
9. What are 'Contingent Liabilities' and where are they shown in a company's financial report?
A Contingent Liability is a potential obligation that may arise in the future based on the outcome of an uncertain event, like a pending lawsuit. Since it is not a confirmed debt, it is not recorded within the main Balance Sheet. Instead, it is disclosed separately as a footnote to the financial statements to ensure transparency and inform users about potential risks.
10. From an accounting perspective, why is the 'issue of debentures for consideration other than cash' treated differently?
This transaction is treated differently because there is no direct cash flow, making valuation a key challenge. When a company acquires assets by issuing debentures, it must record the transaction at the fair value of either the assets received or the debentures issued. This requires careful accounting to prevent overstating asset values and to ensure the company's financial position is represented accurately, a complexity not present in a simple cash deal.
