Chat with AIExam 9: An Overview of Accounting for Liabilities
Edgar Plc issues £7 million in 6-year,10%,semi-annual coupon debentures.The rate of return required by the market is 8% per annum.What is the journal entry to record the first payment of interest assuming using the effective-interest method to amortise any discount or premium (rounded to the nearest pound)?
(48) 
VerifiedD
Explain,in the context of the latest IAS 37,why 'provisions' for items such as future repairs and maintenance are no longer permitted to be recognised.
(45) VerifiedWhile 'provisions' for such items as future repairs and maintenance had traditionally been created and recognised,and while such provisions had traditionally been considered liabilities in the statement of financial position,this practice is no longer permitted.Amounts that are 'provided' for future expenditure,but that do not constitute an obligation to an external party-such as provisions for repairs and maintenance-are not liabilities.
Explain in what situations,and why,some provisions should be measured at present values.
(45) VerifiedIn relation to measuring the amount of a provision,if materially different to its undiscounted amount,a provision shall be recognised at its present value.Specifically,paragraph 45 of IAS 37 states:
Where the effect of the time value of money is material,the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation.
As paragraph 46 of IAS 37 explains,provisions are discounted to reflect the fact that provisions relating to cash flows that arise soon after the reporting date are more onerous than when the same cash flows arise later,because of the time value of money.If cash flows are not discounted,two provisions giving rise to the same cash flows but with different timing would be recorded at the same value,although rational economic appraisal would regard them as different.
If an entity is discounting its provisions to present value,even if the absolute amount of a provision does not change,the present value of the provision can be expected to change across time.Where the change in the carrying amount of a provision is due to the impacts of using present values,IAS 37 requires that the change be recognised as a borrowing cost.Specifically,paragraph 60 of IAS 37 stipulates that 'Where discounting is used,the carrying amount of a provision increases in each period to reflect the passing of time.This increase is recognised as a borrowing cost'.
Outside the situation where specific types of provisions are covered in standards,a provision exists when and only when:
(37) In determining the amount to be assigned to the equity component of a compound financial instrument,you must:
(34) Grindle Plc 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% and (a)are redeemable at the discretion of the issuer and (b)have a scheduled date for mandatory redemption?
(28) 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):
(30) Explain,providing an example,the 'effective-interest method' used to amortise debenture discount and debenture premium accounts.What is the implication of using this method for the balance of the net liability throughout the debenture term?
(39) When determining whether a liability exists,the intentions or actions of management need to be taken into account.
(38) Some researchers have found that firms can benefit from being in financial distress.
(44) If future cash flows are not discounted the effect in the financial statements is to:
(35) In IAS 37 Provisions,Contingent Liabilities and Contingent Assets,there is symmetry in the treatment of contingent liabilities and contingent assets where both are required to be disclosed when the contingent event is probable to occur.
(37) Unless the probability of any outflow in a settlement is remote,an entity needs to disclose for each class of contingent liability:
(31) Risky Plc issues £8 million in 5-year,6%,semi-annual coupon debentures in a private placement.The rate of return required by the debenture holder is 8%.What is the journal entry to record the issue of the debentures (round to the nearest pound)?
(36) Melville Plc received a material claim for damages from a customer for not delivering ordered goods on time.The customer insists that Melville Plc's late delivery resulted in significant losses to the customer.Melville Plc 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 IAS 37?
(30) Executory contracts are within the scope of IAS 37 Provisions,Contingent Liabilities and Contingent Assets.
(38) 
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