Chapter – 8

Bill of Exchange
Important Question

A. Very short answer questions – 1 marks

1. Write ‘True’ or ‘False’ for the following

i. The creditor draws the bill of exchange
ii. A payee must accept the bill of exchange
iii. A time bill is a bill payable on demand
iv. All cash transactions are drawn in a bill of exchange
Answer-
i. True
ii. False
iii. False
iv. False
2. Write the name of the two most used negotiable
instruments.
Answer- The two most commonly used negotiable
instruments are bill of exchange and Promissory Notes

3. What do you mean by maturity of bill?

Answer- Maturity date is a predefined date at which a bill
of exchange will become due for payment.
4. Fill in the blanks:
i. A bill of exchange has _______ parties
ii. A promissory note has exchange has _______ parties
iii. A__________ is a negotiable instrument.
iv. Drawer and payee can be the same party in case of
___________
Answer-
i. Three
ii. Two
iii. Bill of exchange
iv. Bill of exchange

5. Who is a payee in a promissory note?

Answer- A payee is a person on whom the promissory note
is drawn. The party receiving the payment is the payee.

B. Short Answer Questions – 2 marks

1. What do you understand by discounting of bill?

Answer- If the drawer want to encash the bill before its
maturity date, he/she can approach bank for it. The bank
takes some charges in the form interest for encashing the
bill.
2. What do you understand by endorsement of bill.
Answer- If a bill is allowed to be transferred to any other
person it will be considered as endorsement of bill. The bill
of exchange which is restricted from transfer cannot be
endorsed.

3. Explain retiring of bill.

Answer-
If drawee has excess money at his disposal, asks the drawer
to accept the payment before maturity period, if the dwaer
agree on it, it will be considered as retiring of bill

4. Name the types of bill of exchange

Answer- Bill of exchange are of two types such as:
i. Trade bill
ii. Accommodation bill

5. What is Personal loan promissory note?

Answer- A personal loan promissory note allows a person
to take a short term loan on behalf of a promissory note to
pay it in future at a mutually agreed date and interest rate.

C. Short answer questions – 3 marks

1. Who are the parties to bill of exchange?
Answer- A bill of exchange usually has three parties.
i. Drawer: A drawer is the person who has issued the bill
of exchange. They are entitled to receive the money.
ii. Drawee: Is the person upon whom the bill of exchange
is drawn
iii. Payee: A payee is the person to whom the payment is
made by the drawee.

2. What are the accounting treatments of a bill of exchange?

Answer-
A drawer is a person who draws the bill and after a specific
period of time receives it, it will be a bill receivable. The
person, who accepts the bill and after certain time period
pays it, is called bill payable.

3. What do you means by renewal of bill.

Answer- If the drawee is unable to pay the bill at the time
of maturity; he/she may approach the drawer to increase the
time of maturity of the payment of the bill. The drawer
cancelled old bill and issue new bill with new obligation.
This process is termed as renewal of bill

4. What is rebate of a bill of exchange

 Answer- If a drawee pay the amount of the bill before
the maturity time of the bill of exchange the drawer can
give him a discount on the amount. This discount is
calculated according the rate of interest between the date
of maturity and rate of interest. So the bill retire before
it’s predetermine period of expiry.

5. Name the types of promissory notes

Answer- The different types of promissory \y notes are as:
i. Simple promissory note.
ii. Real estate promissory note.
iii. Personal loan promissory note.
iv. Automobile promissory note.
v. Commercial promissory note.
vi. Investment promissory note.

D. Long Answer Questions- 5 marks

1. Elaborate the features of bill of exchange.

Answer- The features of bill of exchange are as follows:
i. A bill of exchange should be in written format
ii. Payment made through a bill of exchange should be
unconditional
iii. It should be dully signed by the issuer of the bill.
iv. The amount of payment must be certain
 v. The date of the maturity of the bill should me
mentioned
vi. It should be payable to any particular person
vii. The amount prescribed in the bill of exchange should
be payable either on demand or on expiry of specific
period.
viii. The bill of exchange should be stamped to legalize.

2. Differentiate between bill of exchange and promissory note.

Answer-
S. Bill of exchange Promissory
no.
i. The creditor draws the bill The debtor draw the
of exchange promissory note
ii. There are three parties in There are two parties in
bill of exchange as drawer, promissory note as drawer
drawee and payee and payee
iii. Acceptance by the drawer No acceptance is necessary
is necessary
iv. Drawer and payee can be a Dawer and payee cannot be
same party the same party
v. Notice at the time of Notice is not needed in
dishonour is given to the promissory note.
drawer be the holder

3. What are the advantages of a promissory note?

Answer- The various advantages of a promissory note:
i. A promissory note can be used to borrow money even
if the borrower don not have good credit rating
 ii. It can be used as a repayment assurance in case of a
borrowing.
iii. A promissory note can be secured and unsecured.
iv. It also allows payment in monthly, quarterly half
yearly or yearly instalment.
v. A promissory note provides higher interest rate than a
bank deposit.
vi. A secured promissory note will have low risk.

4. What are the advantages of a bill of exchange?

Answer- The various advantages of bill of exchange are:
i. It provide a structural framework for credit
transactions between two parties such as a buyer and a
seller, on mutually agreed terms and condition
ii. The predetermine terms and condition allows the
parties to know the time and amount of the transaction
in advance so that that they can prepare for it before its
maturity.
iii. It allows the buyer to purchase any tangible of
intangible product on credit and pay at the time
mentioned in the bill

5. Ramesh holds a note of $6,500 that has an interest rate of

11% annually. The note was issued on March 19, 2019 and
is due November 14, 2019. He sells the note to a Rajesh on
June 12 at a discount rate of 10% annually. Calculate the
proceeds on the third-party discount note.
Answer-
Amount of Note is $6,500
Interest rate 11%
Discount rate = 10%
152
Time 
360
Proceed on the note=
= Note - (Note  Discount rate  time)
 152 
= 6500 -  6500  0.1   6,225.55
 360 

The proceeds on the third-party discount note will be

6,225.55.