Question 1

Tissues and Co has elected to issue preference shares to the value of $220,000.Prior to the share issue the company has assets of $780,000,liabilities of $370,000 and equity recorded at $410,000.The terms of the share issue state that these shares are non-redeemable but a guaranteed cumulative dividend of 8 per cent of share value is payable.Calculate the debt-to-asset ratio immediately before and after the share issue:

Accepted Answer

A)   Before - 47.4 per cent; after - 47.4 per cent
B)   Before - 47.4 per cent; after - 37 per cent
C)   Before - 52.6 per cent; after - 63 per cent
D)   Before - 52.6 per cent; after - 59 per cent
E)   Before - 47.4 per cent; after - 59 per cent

Question 2

The fact that a preference share is redeemable:

Accepted Answer

A)   Makes it a financial liability.
B)   Makes it an equity instrument.
C)   Makes it a compound financial instrument.
D)   Does not automatically mean that it is a financial liability. The length of time until redemption is critical, because if it is greater than two years, it must be classified as an equity instrument.
E)   Does not automatically mean that it is a financial liability. Conditions and rights attaching to the share need to be considered before it can be classified as either a financial liability or equity instrument.

Question 3

Where the change in the carrying amount of a liability is due to the impacts of using present values,the change shall be recognised as a(n) :

Accepted Answer

A)   Gain on Sale of Liability.
B)   Revaluation Reserve Adjustment.
C)   Adjustment to opening retained Earnings.
D)   Borrowing Cost.
E)   Extraordinary Item.

Question 4

The market will only pay a premium for debentures if the par value of those debentures is lower than the market interest rate:

Accepted Answer

A) True 
 B)False

Question 5

What is the appropriate treatment for convertible notes in accordance with AASB 132 "Financial Instruments: Presentation"?

Accepted Answer

A)   as a financial liability;
B)   as equity;
C)   as part debt and part equity;
D)   as a financial liability and disclosure of conversion option;
E)   None of the given answers.

Question 6

Executory contracts are within the scope of AASB 137 "Provisions,Contingent Liabilities and Contingent Assets".

Accepted Answer

A) True 
 B)False

Question 7

Grindle Ltd has total assets of $1.5 million and liabilities of $0.9 million before it issues $300,000 in preference shares.What is the debt to asset ratio assuming that the preference shares have no voting rights and offer a fixed dividend rate of 10 per cent and (a) are redeemable at the discretion of the issuer and (b) have a scheduled date for mandatory redemption?

Accepted Answer

A)   (a)  60 per cent (b)  80 per cent
B)   (a)  50 per cent (b)  67 per cent
C)   (a)  80 per cent (b)  60 per cent
D)   (a)  67 per cent (b)  50 per cent
E)   None of the given answers.

Question 8

Evaluate whether the following situations will give rise to a present obligation: I -Bona Bay Ltd is a large manufacturer of surfboards and provides a two year warranty for all it products from the time of purchase by offering to repair or replace the item.
II - Sea Eagle Ltd operates its offshore oil rigs near Curlew Beach.During the reporting period,there was a major oil spill and the company had publicly announced to undertake clean-up of all the contamination that it caused.There is no environmental legislation on oil spills.
III-A customer sued Neck Bay Ltd for damages from a faulty product.The company hired a legal team to dispute this claim.
IV - Whitehaven Ltd had guaranteed a bank loan to an associated company.
In compliance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",which of the above situations requires recognition in the financial statements?

Accepted Answer

A)   I, II and III;
B)   I and II
C)   II and III
D)   III and IV
E)   None of the given answers

Question 9

A guarantee provided to a financier for a loan taken out by another entity,where default on that loan is uncertain as at the reporting date,is an example of a contingent liability:

Accepted Answer

A) True 
 B)False

Question 10

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",a contingent liability must be disclosed in the financial statement even when the likelihood of a present obligation occurring in future is remote.

Accepted Answer

A) True 
 B)False

Question 11

In disclosing liabilities,a reporting entity:

Accepted Answer

A)   Discloses on the basis of the current/non-current liability dichotomy.
B)   Has a choice, based on the notions of relevance and reliability to disclose liabilities either on the basis of the current/non-current liability dichotomy or on the basis of order of liquidity.
C)   Has a choice, based on the principle of conservatism to disclose liabilities either on the basis of the current/non-current liability dichotomy or on the basis of order of liquidity.
D)   Discloses on the basis of order of liquidity.
E)   Discloses on the basis of directions from its auditor.

Question 12

Which of the following is not listed in AASB 101 to determine if a liability should be classified as current?

Accepted Answer

A)   If the liability is guaranteed to be settled within 12 months.
B)   If the liability is held primarily for the purpose of being traded.
C)   If the entity does not have an unconditional right to defer settlement of the liability for at least 12 months.
D)   If the liability is expected to be settled in the entity's normal operating cycle.
E)   None of the given answers.

Question 13

When debentures are issued at a discount:

Accepted Answer

A)   The discount represents the cost of attracting the funds and should be recognised as an expense.
B)   No further entries are required because the discount is calculated prior to receipt of the funds and therefore will not be recorded.
C)   A decision needs to be made as to whether to use the straight-line or effective-interest rate methods if the discount is to be amortised.
D)   The discount amount can be used to offset any gains shown when debentures have been issued at a premium.
E)   None of the given answers.

Question 14

Some research has shown that being in financial distress may not be all bad news for an entity because:

Accepted Answer

A)   Investors will see this as an opportunity to buy into a company that can really only improve.
B)   Existing managers will want to be released from their contracts allowing new ideas to be employed.
C)   There will be no requirement to consider the social costs of retrenching employees because the accounting numbers show it is necessary.
D)   It will provide the stimulus to rethink activities that may in turn lead to improved future performance.
E)   All of the given answers.

Question 15

One recognised approach to reducing the level of debt that has been adopted in the past was to:

Accepted Answer

A)   Attempt to report the debt as equity, often in the form of preference shares.
B)   Create reserves and draw on them later as a source of funding.
C)   Treat as many liabilities as possible as provisions.
D)   Record liabilities as an increase in cash and a decrease in revenues.
E)   None of the given answers. A

Question 16

In a constructive obligation where the entity retains discretion to avoid any future sacrifice of economic benefits,no liability should be recognised in the financial statements.

Accepted Answer

A) True 
 B)False  True

Question 17

A necessary condition for a provision to be recognised is that there is a legal obligation to make a future sacrifice of economic benefits:

Accepted Answer

A) True 
 B)False

Question 18

When measuring a liability at present values,the discount rate to be used,according to paragraph 47 of AASB 137,is:

Accepted Answer

A)   The pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
B)   The after-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability.
C)   The pre-tax rate that reflects the current market assessments of the time value of money and the risks specific to the liability, and shall also reflect risks for which future cash flows have already been adjusted.
D)   The pre-tax risk free rate.
E)   The pre-tax rate for a government bond of the equivalent duration. A

Question 19

A compound instrument,such as a convertible note,comprises two components.They are:

Accepted Answer

A)   A financial liability (contractual arrangement to deliver cash or another financial liability)  and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity) .
B)   A financial liability (contractual arrangement to deliver cash or another financial asset)  and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity) .
C)   A financial liability (contractual arrangement to deliver cash or another financial asset)  and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a variable number of ordinary shares of the entity) .
D)   A financial liability (contractual arrangement to deliver cash or another financial asset)  and an equity instrument (a put option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity) .
E)   A financial liability (contractual arrangement to deliver cash or another financial asset)  and an equity instrument (a put option granting the holder the right, for a specified period of time, to sell a fixed number of ordinary shares of the entity) .

Question 20

Pearl Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 12 per cent per annum.The required market rate of return is 16 per cent per annum.What is the issue price of the debentures (rounded to the nearest dollar) ?

Accepted Answer

A)   $6,926,387
B)   $8,000,000
C)   $9,177,614
D)   $8,673,978
E)   None of the given answers.

Exam 10: An Overview of Accounting for Liabilities

Correct Answer
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The fact that a preference share is redeemable:

Correct Answer
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Where the change in the carrying amount of a liability is due to the impacts of using present values,the change shall be recognised as a(n) :

Correct Answer
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The market will only pay a premium for debentures if the par value of those debentures is lower than the market interest rate:

Correct Answer
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What is the appropriate treatment for convertible notes in accordance with AASB 132 "Financial Instruments: Presentation"?

Correct Answer
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Executory contracts are within the scope of AASB 137 "Provisions,Contingent Liabilities and Contingent Assets".

Correct Answer
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Correct Answer
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Correct Answer
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A guarantee provided to a financier for a loan taken out by another entity,where default on that loan is uncertain as at the reporting date,is an example of a contingent liability:

Correct Answer
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In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",a contingent liability must be disclosed in the financial statement even when the likelihood of a present obligation occurring in future is remote.

Correct Answer
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In disclosing liabilities,a reporting entity:

Correct Answer
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Which of the following is not listed in AASB 101 to determine if a liability should be classified as current?

Correct Answer
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When debentures are issued at a discount:

Correct Answer
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Some research has shown that being in financial distress may not be all bad news for an entity because:

Correct Answer
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One recognised approach to reducing the level of debt that has been adopted in the past was to:

Correct Answer
verified
A

In a constructive obligation where the entity retains discretion to avoid any future sacrifice of economic benefits,no liability should be recognised in the financial statements.

Correct Answer
verified
True

A necessary condition for a provision to be recognised is that there is a legal obligation to make a future sacrifice of economic benefits:

Correct Answer
verified

When measuring a liability at present values,the discount rate to be used,according to paragraph 47 of AASB 137,is:

Correct Answer
verified
A

A compound instrument,such as a convertible note,comprises two components.They are:

Correct Answer
verified

Pearl Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 12 per cent per annum.The required market rate of return is 16 per cent per annum.What is the issue price of the debentures (rounded to the nearest dollar) ?

Correct Answer
verified

Exam 10: An Overview of Accounting for Liabilities

Correct AnswerverifiedShow Answer

The fact that a preference share is redeemable:

Correct AnswerverifiedShow Answer

Where the change in the carrying amount of a liability is due to the impacts of using present values,the change shall be recognised as a(n) :

Correct AnswerverifiedShow Answer

The market will only pay a premium for debentures if the par value of those debentures is lower than the market interest rate:

Correct AnswerverifiedShow Answer

What is the appropriate treatment for convertible notes in accordance with AASB 132 "Financial Instruments: Presentation"?

Correct AnswerverifiedShow Answer

Executory contracts are within the scope of AASB 137 "Provisions,Contingent Liabilities and Contingent Assets".

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A guarantee provided to a financier for a loan taken out by another entity,where default on that loan is uncertain as at the reporting date,is an example of a contingent liability:

Correct AnswerverifiedShow Answer

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",a contingent liability must be disclosed in the financial statement even when the likelihood of a present obligation occurring in future is remote.

Correct AnswerverifiedShow Answer

In disclosing liabilities,a reporting entity:

Correct AnswerverifiedShow Answer

Which of the following is not listed in AASB 101 to determine if a liability should be classified as current?

Correct AnswerverifiedShow Answer

When debentures are issued at a discount:

Correct AnswerverifiedShow Answer

Some research has shown that being in financial distress may not be all bad news for an entity because:

Correct AnswerverifiedShow Answer

One recognised approach to reducing the level of debt that has been adopted in the past was to:

Correct AnswerverifiedA

In a constructive obligation where the entity retains discretion to avoid any future sacrifice of economic benefits,no liability should be recognised in the financial statements.

Correct AnswerverifiedTrue

A necessary condition for a provision to be recognised is that there is a legal obligation to make a future sacrifice of economic benefits:

Correct AnswerverifiedShow Answer

When measuring a liability at present values,the discount rate to be used,according to paragraph 47 of AASB 137,is:

Correct AnswerverifiedA

A compound instrument,such as a convertible note,comprises two components.They are:

Correct AnswerverifiedShow Answer

Pearl Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 12 per cent per annum.The required market rate of return is 16 per cent per annum.What is the issue price of the debentures (rounded to the nearest dollar) ?

Correct AnswerverifiedShow Answer

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