Credit Instrument: Bills of Exchange, Hundi, Promissory Note and Cheque Objective Type Questions (1 Mark)

Question 1.
A cheque cannot be crossed by (UP 2014)
(a) Drawer
(b) Payee
(c) Endorser
(d) Bank
Answer:
(b) Payee

Question 2.
Which kind of cheque is complete in all respects except the amount payable?
(a) Post Dated Cheque
(b) Bearer Cheque
(c) Blank Cheque
(d) Order Cheque
Answer:
(c) Blank Cheque

Question 3.
Bill of Exchange is accepted by (UP 2013)
(a) Drawer
(b) Drawee
(c) Payee
(d) Banker
Answer:
(b) Drawee

Question 4.
Bearer cheque received by the payee ………. crossed. (UP 2013)
(a) Can be
(b) Cannot be
(c) Not known
(d) All of these are incorrect
Answer:
(a) Can be

Question 5.
Signature of the drawer on cheque is: (UP 2012, 16)
(a) Not necessary
(b) Desirable
(c) Necessary
(d) All of these are incorrect
Answer:
(c) Necessary

Question 6.
In ……… type of crossing of cheque the name of the bank is mentional between two parallel lines: (UP 2015, 17)
(a) General
(b) Special
(c) Restrictive
(d) None of these
Answer:
(b) Special

Question 7.
Days of Grace in paying bills of exchange are: (UP 2019)
(a) 2
(b) 3
(c) 7
(d) 30
Answer:
(b) 3

Question 8.
‘Liability on Bills discounted’ is: (UP 2019)
(a) Fixed liability
(b) Current liability
(c) Contingent liability
(d) None of these.
Answer:
(c) Contingent liability

Credit Instrument: Bills of Exchange, Hundi, Promissory Note and Cheque Definite Answer Type Questions (1 Mark)

Question 1.
Name the cheque which can be cashed at the window of the bank by any person.
Answer:
Bearer.

Question 2.
Under which endorsement endorser puts the name of endorsee on back of the cheque?
Answer:
Special or full.

Question 3.
In which year does the Negotiable Instrument Act enact?
Answer:
1881.

Question 4.
How many parties are there to a Bill of Exchange?
Answer:
Three.

Question 5.
Who draws a Bill of Exchange?
Answer:
Seller or Debtor.

Credit Instrument: Bills of Exchange, Hundi, Promissory Note and Cheque Very Short Answer Type Questions (2 Marks)

Question 1.
What is cheque? Write the names of three parties of cheque. (UP 2013)
Answer:
Cheque: Cheque is a Bill of Exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
Parties of Cheque:

1. Drawer: The person who has written the cheque and sign it.
2. Bank: The place which gives payment to the payee in order to cheque’s drawer.
3. Payee: The person who receives the payment.

Question 2.
Define a promissory note. (UP 2013, 18)
Answer:
A Promissory Note is legally defined as, “an unconditional promise in writing made by one person to another, signed by the maker engaging to pay on demand or at a fixed or determinable future time a sum certain money to or to the order of a specified person.”

Question 3.
What is Bill of Exchange? Write the names of the two parties of Bill of Exchange. (UP 2012, 14, 15)
Answer:
Bill of Exchange: When goods are sold on a credit basis, the businessman does not get cash immediately, but he gets it after a stipulated time. In the mean-time, he is supplied with a written acknowledgement of debt, which known as Bills of Exchange.
Parties of Bills of Exchange:

1. Drawer: He is the person who writes or draws the Bills of Exchange.
2. Drawee: Drawee is a person on whom Bill of Exchange has been drawn.
3. Payee: Payee is the person to whom the amount mentioned in the Bill is paid.

Question 4.
Define a Promissory note and write the names of its parties. (UP 2019)
Answer:
A promissory note is legally defined as “an unconditional promise in writing made by one person to another. Signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain money to or to the order of a specified person.”
Parties of Promissory note:

1. Maker
2. Payee.

Question 5.
Define Hundi. (UP 2012)
Answer:
Hundis were in circulation even when the banks did not exist. Hundis are private credit instruments of the Government has no control over them. Hundi may be written in any of the regional languages of India. Hundis are written for a fixed period or are payable on demand.

Question 6.
When is Bill of Exchange is dishonoured? (UP 2013)
Answer:
The bill is dishonoured when the drawee is unable to make the payment on the maturity of the bill. When a bill is dishonoured, immediate notice should be given to the drawee and to the endorser. If this is not done, the holder of the bill cannot for the due amount.

Credit Instrument: Bills of Exchange, Hundi, Promissory Note and Cheque Short Answer Type Questions (4 Marks)

Question 1.
Distinguish between Bills of Exchange and Hundi.
Answer:
Difference Between Bill of Exchange and Hundi

Bill of Exchange	Hundi
1. Bill of Exchange is governed by Indian Negotiable Instrument Act, 1881.	1. Hundi is not governed by any Act i.e., the government has no control and interference over it.
2. Bill of Exchange is generally written in the English Language.	2. Hundi is written in Hindi or may be written in any regional language.
3. Bill of Exchange is always unconditional.	3. Hundi may be conditional as well as unconditional also.
4. Acceptance is required in case of a Bill of Exchange.	4. Acceptance is not required in case of a Hundi.
5. Bill of Exchange is universally accepted i.e., it can be used all over the world.	5. The use of Hundi in limited within India.

Question 2.
How is a cheque crossed? Point out its two advantages. (UP 2019)
Answer:
Crossing a cheque means drawing two oblique lines on the face of the cheque on the upper left corner. The crossing of a cheque is of following two types:

1. General crossing
2. Special crossing

Two advantages:

1. Crossing a cheque makes it difficult for a wrong person to get payment of the cheque.
2. Payment of money only through an account with the bank and not in cash.

Question 3.
On 1st March 2018, Dev sold goods worth Rs. 4,000 to Aryan and received a bill for the period of three months against its payment. Dev discounted the bill at 9% with the bank on the same day. The bill was dishonoured on the date of maturity and the bank paid Rs. 50 as Noting charges.
Pass necessary journal entries in the books of Dev. (UP 2019)
Answer:
Journal entries in the books of Dev:

Credit Instrument: Bills of Exchange, Hundi, Promissory Note and Cheque Long Answer Type Questions (8 Marks)

Question 1.
What do you understand by Bill of Exchange? Differentiate between Cheque and Bill of Exchange and also draft their specimen. (UP 2003, 10, 11)
Or
Define Bill of Exchange. Distinguish between Bill of Exchange and Promissory Note. (UP 2005)
Or
Differentiate between cheque and Bill of Exchange. (UP 2014)
Or
What is Bill of Exchange? Write the names of the two parties of Bill of Exchange. (UP 2012, 16)
Or
What is Cheque? Write the name of three particles of a cheque. (UP 2013)
Answer:
Meaning of Bill of Exchange: When goods are sold on a credit basis, the businessman does not get cash immediately, but he gets it after a stipulated time. In the meantime, he is supplied with a written acknowledgement of debt, which is known as Bills of Exchange.
Difference between Bill of Exchange and Cheque:

Bill of Exchange	Cheque
1. It may be written on both individual or firm.	1. It is written only on any specific bank.
2. It may be for a fixed term or payable at sight.	2. It is always payable on demand.
3. Acceptance is a must in case of it.	3. Acceptance is not just in case of a cheque.
4. It may be payable both in-country as well as outside the country.	4. Cheque is payable only within the country.
5. It cannot be crossed.	5. It may be crossed.
6. It is compulsory to stamp it.	6. It is not necessary to stamp it.
7. Three days of grace are allowed.	7. No day of grace is allowed.
8. Noting is a must in case of dishonour.	8. Noting is not just in case of dishonour.

Difference between Bill of Exchange and Promissory Note:

Bill of Exchange	Promissory Note
1. Bill of Exchange is defined under Section 5 of the Negotiable Instrument Act, 1881.	1. Promissory Note is defined under Section 4 of the Negotiable Instrument Act, 1881.
2. Acceptance is necessary in case of Bill of Exchange.	2. No such question of acceptance arises in case of Promissory Note.
3. Bill of Exchange contains an order for payment.	3. Promissory Note contains promise for payment.
4. The drawer of Bill of Exchange is the creditor.	4. The drawer of Promissory Note is the debtor.
5. The dishonour of Bill of Exchange may be noted to the Notary.	5. No such Noting is required in case of a Promissory Note.
6. There may be three pen-ties to the Bill of Exchange: Drawer, Drawee and Payee.	6. There are two parties to the Promissory Note: Drawer and the Receiver.
7. The drawer of Bill may become the payee for Bill of Exchange.	7. The drawer of the Bill cannot be the receiver for Promissory Note.
8. Bill of Exchange payable on presentation does not require a stamp.	8. Stamp is required in all kinds of Promissory Notes.

Question 2.
Under what conditions an Accommodation Bill is written and how is it different from a Trade Bill?
Answer:
Accommodation Bills are written under the following conditions:
1. A trader draws a bill on the other trader and gets his acceptance. He then discounts it with the bank and uses the money. He sends the money to the acceptor before the due date and the acceptor meets the bill on the due date.

2. A trader draws a bill on the other trader and gets his acceptance. He then discounts the bill with the bank. Then both the traders divide the amount and discount among themselves in a pre-determined ratio. Before the date of maturity, the drawer sends his share of money to the acceptor and the acceptor meets the bill on the maturity date.

3. Sometimes both the traders draw a bill on each other. Both the bills may be of the same amount or maybe of different amounts. The traders discount the bills with the respective bank and on the due date, each of them pays off his respective bill.

Differences between Accommodation Bill and Trade Bill:

Basis of Difference	Accommodation Bill	Trade Bill
1. Basis	It is not on the basis of the business transaction.	Its basis is the business transaction.
2. Return	It is not written for any valuable return.	It is drawn for getting a valuable return.
3. Objective	These bills are drawn to remove temporary financial difficulties.	These bills are drawn by one party on another to realise the amount.
4. Payment by Bank	Bank hesitates to make the payments of such bills.	Bank does not hesitate for making the payments of such bills.
5. The relation between Debtor and Creditor	Relationship of Debtor and Creditor does not exist between the writer and acceptor of the bill.	Debtor and Creditor relationship exists between the writer and acceptor of the bill.

Question 3.
What do you understand by ‘Dishonour of a Bill’? Give journal entries of Dishonour of Bill in the books of drawer and drawee.
Answer:
Meaning of Dishonour of Bill. The bill is dishonoured when the drawee is unable to make the payment on the maturity of the bill. When a bill is dishonoured, immediate notice should be given to the drawee and to the endorser. If this is not done, the holder of the bill cannot claim for the due amount.

All the expenses incurred, relating to the dishonour of the bill should be debited to the person from whom the bill was received.
The acceptor of the bill is primarily liable for payment, but the holder has a right to take actions against the drawer and other endorsers of the bill. Usually, the drawer takes up the bill dishonour and then exercises his right against the drawee.
Journal Entries in the books of a drawer under the five possibilities are as follows:

1. When the bill is retained with him, till the date of maturity
Acceptor’s A/c Dr.
To Bills Receivable A/c
To Cash A/c
(Being Bill dishonoured and noting charges paid in cash)
Note: If noting charges are not paid then Cash A/c is not credited, the amount of bill is mentioned in the entry.

2. When the drawer gets the Bill discounted with a bank:
Acceptor’s A/c Dr.
To Bank A/c
(Being Bill dishonoured and noting charges paid by the bank)

3. When the Bill is endorsed by the drawer:
Acceptor’s A/c Dr.
To Creditor’s A/c
(Being Bill dishonoured and noting charges added)

4. When the drawer deposits the Bill with bank for collection.
Acceptor’s A/c Dr.
To Bill for collection A/c
To Bank A/c
(Being Bill dishonoured and noting charges paid by the bank)

5. In the book of drawee journal entries when Bill is dishonoured.
B/P a/c Dr.
(If given )Noting charges a/c Dr.
To Drawer
(Being Bill dishonoured and Noting charged paid)

Question 4.
What do you understand by a Hundi and Promissory Note? Give the specimen of a promissory note. (UP 2008, 10)
Or
Define Hundi. (UP 2012)
Or
What do you mean by promissory note? UP 2012)
Or
Define the promissory note. (UP 2013)
Answer:
Hundi: Hundi is also a very popular credit instrument among the Indian businessmen from times immemorial. Even in today’s world, Hundi is used by most of the Indian businessmen. Hundreds were in circulation even when the banks did not exist. Hundies are of different nature from Bills of Exchange. Since Hundies are private credit instruments, the Government has no control over them. Hundi may be written in any of the regional languages of India. Hundies are written for a fixed period or are payable on demand.

Promissory Note: There is another method by which the promise made by the purchaser to pay for goods bought by him can be made which is definite and absolutely binding upon him. Such a promise is signed by the debtor and is handed over to the creditor, is called a ‘Promissory Note’.

A Promissory Note is legally defined as, “an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum of certain money to or to the order of a specified person.”

There are only two parties of Promissory Note. The person who has written the Promissory Note and signs it, is known as the ‘maker’. In the given specimen S.K. & Co. is the maker. The person who receives the payment is known as ‘Payee’. In the given specimen, R. S. & Sons are the payees.

Question 5.
Sanjeev sold goods worth Rs. 2,000 to Amit on 1st March 2011 and received a bill of exchange for three months and on the same date, Sanjeev endorsed it in favour of his creditor Mr Prakash. Bill was dishonoured on the due date and Prakash got it noted paying Rs. 50 for noting charges. Pass Journal Entries in the books of Sanjeev, Amit and Prakash.
Solution:

Question 6.
On 1st March 2007, Mohan sold goods of Rs. 5,000 to Ashutosh on credit. On the same date, Ashutosh accepted a bill for a period of three months of the same amount. Mohan discounted this bill from the Bank @ 5% p.a. The bill was dishonoured on the due date. The bank paid Rs. 20 as noting charges.
On June 4, 2007, Ashutosh accepted a new bill for two months. The new bill was written with the amount of old bill noting charges and interest @ 10% p.a. Give the journal entries in the books of Mohan. (UP 2008)
Solution:

Question 7.
Sunil drew a bill of ₹ 20,000 for 3 months on 1st January 2011 which was accepted by Anand; Sunil discounted the accepted bill from his Bank on the same day and allowed @ 5% p.a. discount. Sunil paid the full amount to Anand before a day from the due date. On due date, Anand duly paid the bills of exchange.
Make journal entries to record these transactions in the books of Sunil and Anand. (UP 2010)
Solution:

Question 8.
Mukesh Bhutani sold goods worth Rs. 20,000 to Harish Jain on 1st July 2008. Mukesh Bhutani drew a bill of the same amount payable after three months which was returned by Harish Jain after accepting it. On the same date, Mukesh Bhutani discounted the bill @ 12% per annum. Bill was dishonoured on the due date and Rs. 50 was paid by the bank as noting charges. Harish Jain paid the whole amount due On 10th October 2008.
Pass Journal Entries in the Books of Mukesh Bhutani. (UP 2009)
Solution:

Question 9.
On January 1, 2011, Sukesh sold goods of Rs. 25,000 to Neelesh. Sukesh drew a bill for a period of two months. Bill was accepted by Neelesh. On January 16, 2011, bill was discounted by Sukesh with his bank @ 15% p.a. On the due date, bill was paid by Neelesh.
Pass Journal entries in the books of Sukesh and Neelesh. (UP 2011)
Solution:

Question 10.
Write the answer to the following questions:

1. Define Bill of Exchange. (UP 2014)
2. What are the two kinds of a Bills of Exchange?
3. What is meant by Promissory Note?
4. Write the model of crossing a cheque? (UP 2014)
5. What is meant by Rebate and Retired?
6. What is Accommodation Bill?

Answer:

1. “A Bill of Exchange is an instrument in writing, containing an unconditional order signed by the maker, directing to pay a certain sum of money after a certain period to him or to the order of a certain person or to the bearer of the instrument”.
2. Two kinds of Bills of Exchange are very much popular:
   • Bill of Exchange payable on-demand or on presentation, and
   • Bill of Exchange payable after a specific period.
3. It is another method by which the promise made by the purchaser to pay for goods bought by him can be made which is definite and absolutely binding upon him. Such a promise signed by the debtor and handed over to the creditor is called a ‘Promissory Note’.
4. There are two modes of crossing a cheque:
   • General Crossing: It is only drawing two oblique parallel lines on the face of the cheque same times with the words ‘& Co.’ Not Negotiable.
   • Special Crossing: This is a special type of crossing of cheque in which the name of certain bank is mentioned between two parallel lines.
5. When the financial position of the drawee is sound, he pays the bill before the due date, it is said to have been ‘retired under discount’ as the party making the payment receives some discount. This discount is known as ‘Rabate’ and payment of bill before the due date is called ‘Retired’.
6. An Accommodation bill is a Bill of Exchange for which no consideration is given by the drawer to the acceptor, but which has been drawn and accepted by the parties concerned for their mutual accommodation with a view to raise money by negotiating it.