Question 1

AASB 132 "Financial Instruments: Presentation" supports a substance over from approach in the accounting treatment for Insubstance Debt Defeasance (ISDD).

Accepted Answer

A) True 
 B)False  False

Question 2

A legal defeasance may occur as a result of:

Accepted Answer

A)  Legal judgement, assumption of the debt by a third party or forgiveness of the debt. 
B)  The issuance of a guarantee by the debtor, the assumption of the debt by the lender, legal judgement or the repayment of the debt. 
C)  The issuance of an indemnity by a related company, or the forgiveness of the debt by the borrower. 
D)  The assumption of the debt by a related company, legal judgement, or the forgiveness of the debt by the borrower. 
E)  None of the given answers. 
A)  Legal judgement, assumption of the debt by a third party or forgiveness of the debt. 
B)  The issuance of a guarantee by the debtor, the assumption of the debt by the lender, legal judgement or the repayment of the debt. 
C)  The issuance of an indemnity by a related company, or the forgiveness of the debt by the borrower. 
D)  The assumption of the debt by a related company, legal judgement, or the forgiveness of the debt by the borrower. 
E)  None of the given answers. A

Question 3

Release from the primary obligation of a debt may theoretically be achieved by:

Accepted Answer

A)  Settlement of the debt. 
B)  Forgiveness of the debt. 
C)  Insubstance defeasance. 
D)  Assumption by a third party. 
E)  All of the given answers. 
A)  Settlement of the debt. 
B)  Forgiveness of the debt. 
C)  Insubstance defeasance. 
D)  Assumption by a third party. 
E)  All of the given answers. E

Question 4

Businesses may be prepared to incur a loss on the defeasance of debt because:

Accepted Answer

A)  It increases the certainty that the debt will be paid. 
B)  It is a means of eliminating the restrictive effects of any associated debt covenants. 
C)  It provides future reserves of assets that may be drawn upon when needed. 
D)  It increases the certainty that the debt will be paid and it provides future reserves of assets that may be drawn upon when needed. 
E)  None of the given answers. 
A)  It increases the certainty that the debt will be paid. 
B)  It is a means of eliminating the restrictive effects of any associated debt covenants. 
C)  It provides future reserves of assets that may be drawn upon when needed. 
D)  It increases the certainty that the debt will be paid and it provides future reserves of assets that may be drawn upon when needed. 
E)  None of the given answers.

Question 5

In AASB 132, the ability to set off makes reference to:

Accepted Answer

A)  All assets and liabilities. 
B)  Financial assets and financial liabilities. 
C)  Current assets and current liabilities. 
D)  Preference shares and convertible notes. 
E)  Assets and liabilities of an amount above the materiality threshold. 
A)  All assets and liabilities. 
B)  Financial assets and financial liabilities. 
C)  Current assets and current liabilities. 
D)  Preference shares and convertible notes. 
E)  Assets and liabilities of an amount above the materiality threshold.

Question 6

On 1 July 2008, Roos Limited issues $3 million in ten year, 8 per cent annual debentures to Hall Limited. The market required rate of return on the debentures at the time is 12 per cent. On 1 July 2010, Hall Limited decided to forgive the debt owed by Roos Limited, and so cancels the debt. Assuming Roos Limited uses the straight-line method to amortise the debenture discount, what is the journal entry passed in the books of Roos Limited at 1 July 2010?:

Accepted Answer

A)    
B)    
C)    
D)    
E)  None of the given answers. 
A)    
B)    
C)    
D)    
E)  None of the given answers.

Question 7

The definition of a set-off is that an asset is reduced by the amount of a liability and a net liability remains:

Accepted Answer

A) True 
 B)False

Question 8

Pete Ltd's statement of financial position is shown below.
 
The above balances include a receivable from Patricia Ltd for an amount of $100,000 and a payable to Patricia Ltd for $50,000. A debt contract with ABC Bank signed by Pete Ltd requires a debt equity ratio of no more than 50%.
Based on the above information, which course of action will be consistent with positive accounting theory?

Accepted Answer

A)  Pete Ltd will re-negotiate the debt contract with ABC Bank to increase the required debt equity ratio. 
B)  Pete Ltd will offset the receivable from Patricia Ltd with the payable to Patricia Ltd. 
C)  Pete Ltd will offset the payable to Patricia Ltd with the receivable from Patricia Ltd. 
D)  Pete Ltd need not do anything as the entity is not in violation of a debt covenant. 
E)  All of the given answers. 
A)  Pete Ltd will re-negotiate the debt contract with ABC Bank to increase the required debt equity ratio. 
B)  Pete Ltd will offset the receivable from Patricia Ltd with the payable to Patricia Ltd. 
C)  Pete Ltd will offset the payable to Patricia Ltd with the receivable from Patricia Ltd. 
D)  Pete Ltd need not do anything as the entity is not in violation of a debt covenant. 
E)  All of the given answers.

Question 9

Debt extinguishment occurs when a liability can no longer be considered a primary obligation for an entity:

Accepted Answer

A) True 
 B)False

Question 10

A financial asset is:

Accepted Answer

A)  Cash. 
B)  A contractual right to exchange financial assets and financial liabilities with another entity under conditions that are potentially favourable to the entity. 
C)  A contractual right to exchange financial assets and financial liabilities with another entity under conditions that are potentially unfavourable to the entity. 
D)  Cash and a contractual right to exchange financial assets and financial liabilities with another entity under conditions that are potentially favourable to the entity. 
E)  Cash and a contractual right to exchange financial assets and financial liabilities with another entity under conditions that are potentially unfavourable to the entity. 
A)  Cash. 
B)  A contractual right to exchange financial assets and financial liabilities with another entity under conditions that are potentially favourable to the entity. 
C)  A contractual right to exchange financial assets and financial liabilities with another entity under conditions that are potentially unfavourable to the entity. 
D)  Cash and a contractual right to exchange financial assets and financial liabilities with another entity under conditions that are potentially favourable to the entity. 
E)  Cash and a contractual right to exchange financial assets and financial liabilities with another entity under conditions that are potentially unfavourable to the entity.

Question 11

A right of set-off is a debtor's legal right, by contract or otherwise, to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor.

Accepted Answer

A) True 
 B)False

Question 12

The effect of setting off on the gearing ratio of the reporting entity is to:

Accepted Answer

A)  Increase it if the net amount is a liability. 
B)  Increase it if the net amount is an asset. 
C)  Decrease it. 
D)  Leave it unchanged. 
E)  None of the given answers. 
A)  Increase it if the net amount is a liability. 
B)  Increase it if the net amount is an asset. 
C)  Decrease it. 
D)  Leave it unchanged. 
E)  None of the given answers.

Question 13

When a debt is forgiven the accounting treatment is to:

Accepted Answer

A)  Debit the liability; credit a deferred benefit account. 
B)  Credit a gain on release account; debit the liability. 
C)  Debit the gain on release account; credit the liability. 
D)  Debit a deferred benefit account; credit a debt defeasance account. 
E)  None of the given answers. 
A)  Debit the liability; credit a deferred benefit account. 
B)  Credit a gain on release account; debit the liability. 
C)  Debit the gain on release account; credit the liability. 
D)  Debit a deferred benefit account; credit a debt defeasance account. 
E)  None of the given answers.

Question 14

The existence of a right to set off:

Accepted Answer

A)  Is sufficient to allow set off of a financial asset and financial liability. 
B)  Does not have to be enforceable at law to allow set off of a financial asset and financial liability. 
C)  Is not sufficient to allow set off of a financial asset and financial liability, without the intention to set off and legal enforceability of the right to set off. 
D)  Is not discussed in AASB 132. 
E)  None of the given answers. 
A)  Is sufficient to allow set off of a financial asset and financial liability. 
B)  Does not have to be enforceable at law to allow set off of a financial asset and financial liability. 
C)  Is not sufficient to allow set off of a financial asset and financial liability, without the intention to set off and legal enforceability of the right to set off. 
D)  Is not discussed in AASB 132. 
E)  None of the given answers.

Question 15

AASB 132 allows for all types of assets and liabilities to be offset as long as the entity intends to settle on a net basis:

Accepted Answer

A) True 
 B)False

Question 16

Under the old AASB 1014 the debt-holder(s) may not be aware that a debt defeasance scheme is in place:

Accepted Answer

A) True 
 B)False

Question 17

Which of the following instruments satisfy the conditions to offset a financial asset and a financial liability?

Accepted Answer

A)  Several financial instruments that are passed as a single financial instrument, for example, a synthetic instrument 
B)  Futures contract 
C)  Financial assets that are pledged as collateral for a non-recourse liability 
D)  Financial assets that are set aside in trust by a debtor for the purpose of discharging an obligation without these assets being accepted by the creditor in settlement of the obligation. 
E)  None of the given answers 
A)  Several financial instruments that are passed as a single financial instrument, for example, a synthetic instrument 
B)  Futures contract 
C)  Financial assets that are pledged as collateral for a non-recourse liability 
D)  Financial assets that are set aside in trust by a debtor for the purpose of discharging an obligation without these assets being accepted by the creditor in settlement of the obligation. 
E)  None of the given answers

Question 18

What is the AASB 132 requirement in relation to debt set-off?

Accepted Answer

A)  That assets and liabilities may only be set-off against each other for balance sheet purposes if the asset and liability are classified as current and there is agreement with the other party to the liability, either legal or constructive, that the asset and liability are to be set-off. 
B)  That assets and liabilities be set-off against each other for balance sheet purposes when a legally recognised right of set-off for these items exists and the reporting entity intends to settle on that basis, or to realise the asset and settle the liability simultaneously. 
C)  That assets and liabilities be set-off against each other for balance sheet purposes when the reporting entity intends to realise an asset and settle a related liability simultaneously. 
D)  That assets and liabilities may only be set-off against each other for balance sheet purposes when there is a legal arrangement to set-off a financial asset and a financial liability and the other party to the liability agrees to the right to set-off. 
E)  None of the given answers. 
A)  That assets and liabilities may only be set-off against each other for balance sheet purposes if the asset and liability are classified as current and there is agreement with the other party to the liability, either legal or constructive, that the asset and liability are to be set-off. 
B)  That assets and liabilities be set-off against each other for balance sheet purposes when a legally recognised right of set-off for these items exists and the reporting entity intends to settle on that basis, or to realise the asset and settle the liability simultaneously. 
C)  That assets and liabilities be set-off against each other for balance sheet purposes when the reporting entity intends to realise an asset and settle a related liability simultaneously. 
D)  That assets and liabilities may only be set-off against each other for balance sheet purposes when there is a legal arrangement to set-off a financial asset and a financial liability and the other party to the liability agrees to the right to set-off. 
E)  None of the given answers.

Question 19

Reasons provided in AASB 132 for the required treatment of the set-off of assets and liabilities include:

Accepted Answer

A)  The gross basis is generally preferred, except in the situation outlined because the parties to the arrangement have a legal obligation that takes precedence over reporting form. 
B)  Setting off an obligation against an asset in the circumstances described allows the entity to manage its risk exposure and should be encouraged by reporting requirements. 
C)  While the gross basis shows more accurately the detailed transaction, the effect on ratios that may be used to analyse the financial statements of the reporting entity means that they will no longer reflect the economic substance of the arrangement. 
D)  The presentation of the asset and the liability on a net basis reflects more appropriately the amounts and timing of future cash flows. 
E)  None of the given answers. 
A)  The gross basis is generally preferred, except in the situation outlined because the parties to the arrangement have a legal obligation that takes precedence over reporting form. 
B)  Setting off an obligation against an asset in the circumstances described allows the entity to manage its risk exposure and should be encouraged by reporting requirements. 
C)  While the gross basis shows more accurately the detailed transaction, the effect on ratios that may be used to analyse the financial statements of the reporting entity means that they will no longer reflect the economic substance of the arrangement. 
D)  The presentation of the asset and the liability on a net basis reflects more appropriately the amounts and timing of future cash flows. 
E)  None of the given answers.

Question 20

There were two methods of achieving an insubstance debt defeasance in accordance with the former AASB 1014's requirements:

Accepted Answer

A)  Having a risk-free entity assume responsibility for the debt or placing in trust assets adequate to meet the principal and interest servicing requirements of the debt. 
B)  Obtaining forgiveness of the debt or having a related entity assume the responsibility for the debt. 
C)  Having a related entity assume the debt or obtaining a legal judgement to extinguish the debt. 
D)  Placing sufficient assets in a secure offshore entity such that it is virtually certain that the responsibility for the debt will not revert to the reporting entity, or having a suitable entity assume responsibility for the debt. 
E)  None of the given answers. 
A)  Having a risk-free entity assume responsibility for the debt or placing in trust assets adequate to meet the principal and interest servicing requirements of the debt. 
B)  Obtaining forgiveness of the debt or having a related entity assume the responsibility for the debt. 
C)  Having a related entity assume the debt or obtaining a legal judgement to extinguish the debt. 
D)  Placing sufficient assets in a secure offshore entity such that it is virtually certain that the responsibility for the debt will not revert to the reporting entity, or having a suitable entity assume responsibility for the debt. 
E)  None of the given answers.

Exam 12: Set-Off and Extinguishment of Debt

AASB 132 "Financial Instruments: Presentation" supports a substance over from approach in the accounting treatment for Insubstance Debt Defeasance (ISDD).

A legal defeasance may occur as a result of:

Release from the primary obligation of a debt may theoretically be achieved by:

Businesses may be prepared to incur a loss on the defeasance of debt because:

In AASB 132, the ability to set off makes reference to:

The definition of a set-off is that an asset is reduced by the amount of a liability and a net liability remains:

Debt extinguishment occurs when a liability can no longer be considered a primary obligation for an entity:

A financial asset is:

A right of set-off is a debtor's legal right, by contract or otherwise, to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor.

The effect of setting off on the gearing ratio of the reporting entity is to:

When a debt is forgiven the accounting treatment is to:

The existence of a right to set off:

AASB 132 allows for all types of assets and liabilities to be offset as long as the entity intends to settle on a net basis:

Under the old AASB 1014 the debt-holder(s) may not be aware that a debt defeasance scheme is in place:

Which of the following instruments satisfy the conditions to offset a financial asset and a financial liability?

What is the AASB 132 requirement in relation to debt set-off?

Reasons provided in AASB 132 for the required treatment of the set-off of assets and liabilities include:

There were two methods of achieving an insubstance debt defeasance in accordance with the former AASB 1014's requirements:

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financ

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluation and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Lease

Accounting for Employee Benefits

Share Capital and Reserves

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in E

Accounting for Share-Based Payments

Accounting for Income Taxes

Cash-Flow Statements

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After Balance Sheet Date

Segment Reporting

Related-Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transact

Further Consolidation Issues Ii: Accounting for Minority Interests

Further Consolidation Issues Iii: Accounting for Indirect Ownershi

Further Consolidation Issues Iv: Accounting for Changes in the Deg

Accounting for Equity Investments

Accounting for Equity Investments

Accounting for Foreign Currency Transactions

Translation of the Accounts of Foreign Operations

Accounting for Corporate Social Responsibility

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