Exam 10: An Overview of Accounting for Liabilities

Convertible notes are:

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

The present obligation component of a liability must be based on:

When determining whether a liability exists, the intentions or actions of management need to be taken into account:

If the entity is offering a higher interest rate on debentures than the market believes is appropriate, the market will:

From the following extract of an amortisation schedule pertaining to a compound financial instrument, what is the effective-interest rate embodied in the instrument?

In disclosing liabilities, a reporting entity:

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

Provisions are established to allow for future sacrifices such as repairs and maintenance of machinery and may be recognised as liabilities:

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.

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?

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

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:

From the following extract of an amortisation schedule pertaining to a compound financial instrument, what is the net liability (assuming the debenture has not yet been repaid), at the end of Period 10?

In accordance with AASB 137 "Provisions, Contingent Liabilities and Contingent Assets", which of the following is considered a contingent liability?

Preference shares, as noted in AASB 132:

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.

Melville Ltd received a material claim for damages from a customer for not delivering ordered goods on time. The customer insists that Melville Ltd's late delivery resulted to significant losses to the customer. Melville Ltd admits to the delay but disputes the material damages being claimed. What is the appropriate accounting treatment for the claim that is in accordance with AASB 137?

The fact that a preference share is redeemable:

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?