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: Idea behind the question
A collateral security is a pledge, so the debentures are recorded only to show the lender's claim. On repayment of the loan, the books must go back to the position before the pledge.

Step 2: Reasoning with the accounts
At issue the two accounts moved as follows: Debenture Suspense went up on the debit side and % Debentures went up on the credit side.
To undo this, % Debentures must come down, so it is debited. Debenture Suspense must come down too, so it is credited.

Step 3: Test each option against this rule
Option 1 has a Bank credit, but no money is paid, so it is out.
Option 2 repeats the issue entry, so it is out.
Option 4 shows a cash receipt from debenture holders, which never happened, so it is out.
Only option 3 debits % Debentures and credits Debenture Suspense.

Step 4: Conclusion
Option 3 is the reversal of the issue entry and is the correct cancellation entry.

Final Answer:
The correct entry is % Debentures A/c Dr. To Debenture Suspense A/c. \[ \boxed{\text{Option 3}} \]