Question

In case debentures were issued as collateral security for taking loan from ABC Bank. Choose the correct journal entry for cancellation of debentures as collateral security on repayment of bank loan.

• A. % Debentures A/c Dr.
  To Bank A/c
• B. Debenture Suspense A/c Dr.
  To % Debentures A/c
• C. % Debentures A/c Dr.
  To Debenture Suspense A/c
• D. Bank A/c Dr.
  To % Debentures A/c

Hint:

Cancellation is the reverse of the issue entry. At issue: Debenture Suspense A/c Dr. To % Debentures A/c.

Answer 1

The Correct Option is C

Step 1: Understand collateral security
When a company takes a loan and gives its own debentures as an extra guarantee, the debentures are called collateral security. The lender only holds them as a pledge. No cash comes in from the debentures themselves.
So the debentures are not a real liability unless the loan is not repaid.

Step 2: Recall the entry made at the time of issue
At the time of issue, the company records the debentures only as a memorandum entry:
\[ \text{Debenture Suspense A/c Dr.} \quad \text{To \% Debentures A/c} \]
The Debenture Suspense account is a temporary account. It is shown as a deduction from the debentures on the balance sheet.

Step 3: Work out the entry on repayment
When the bank loan is repaid, the collateral security is no longer needed, so the issue entry has to be reversed.
Reversing means the account credited earlier is now debited, and the account debited earlier is now credited.
\[ \text{\% Debentures A/c Dr.} \quad \text{To Debenture Suspense A/c} \]

Step 4: Check option 1
It credits Bank A/c. No cash is paid to cancel a collateral security, because the debentures never brought in cash. So option 1 is wrong.

Step 5: Check option 2
It debits Debenture Suspense and credits % Debentures. This is the issue entry, not the cancellation entry. So option 2 is wrong.

Step 6: Check option 4
It debits Bank and credits % Debentures. This would record a fresh cash issue of debentures, which is not what happens here. So option 4 is wrong.

Step 7: Check option 3
It debits % Debentures and credits Debenture Suspense. This is exactly the reverse of the issue entry, so option 3 is correct.

Final Answer:
The cancellation entry reverses the issue entry. This is option 3. \[ \boxed{\text{Option 3}} \]