When debentures are issued as collateral security, they serve only as a backup guarantee to the lender. The company does not receive any funds against these debentures, and therefore, no interest is paid on them unless there is a default on the primary loan.
In this case:
- Primary borrowing: Bank Loan of Rs. 6,00,000 at 12%
- Collateral Security: 10% Debentures of Rs. 5,00,000 (no interest paid on these)
Calculation of Total Interest:
Interest on Bank Loan = Rs. 6,00,000 × 10012 = Rs. 72,000
Interest on Collateral Debentures = Nil (not an active liability)
Total Interest for the year = Rs. 72,000
The company only pays interest on the actual bank loan taken, not on the debentures kept as security. The 10% debentures will only become active if the company defaults on the bank loan and the bank invokes the collateral security.
Correct Option: 3 (Rs. 72,000)