Accounting · Issue of Debentures
When debentures are issued as collateral security for a bank loan, which of the following summaries regarding the bank's position and accounting treatment is correct?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Debenture interest must be treated as an appropriation of profit rather than a charge against profit.
- 2Banks must create a Debenture Redemption Reserve (DRR) for the debentures they hold as collateral.
- 3The bank can only claim interest on the loan, and the debentures are recorded either by a disclosure note or by debiting Debenture Suspense Account.✓
- 4The bank receives regular interest on the collateral debentures in addition to the loan interest.
Correct answer
The bank can only claim interest on the loan, and the debentures are recorded either by a disclosure note or by debiting Debenture Suspense Account.
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