Question 1

Discuss the substance-over-firm approach in IAS 32 Financial Instruments.

Accepted Answer

Paragraph 18 of IAS 32 states:
The subst

Question 2

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 3

When an entity's management resolves that the entity will offer to repair a defect it has recently discovered in one of its products,even though the nature of the defect is such that purchasers of the product would not expect the entity to do so:

Accepted Answer

A) it must immediately recognise a liability. 
B) it must immediately recognise a liability, if it can be measured reliably. 
C) it will never recognise a liability as the offer to repair was not part of the contract of sale. 
D) it will only need to recognise a liability when the entity makes the offer public, or commits itself in some other way to make the repairs. 
A) it must immediately recognise a liability. 
B) it must immediately recognise a liability, if it can be measured reliably. 
C) it will never recognise a liability as the offer to repair was not part of the contract of sale. 
D) it will only need to recognise a liability when the entity makes the offer public, or commits itself in some other way to make the repairs.

Question 4

Discuss the necessary conditions prescribed in IAS 37 Provisions,Contingent Liabilities and Contingent Assets to recognise provisions.Illustrate how these conditions are satisfied in a product warranty example.

Accepted Answer

In relation to when provisions are to be

Question 5

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). 
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).

Question 6

Discuss the criteria required to classify a liability as current.

Accepted Answer

For more information refer to

Question 7

The interest that a debenture holder receives at the time of each payment made by the issuer is:

Accepted Answer

A) the coupon rate multiplied by the face value of the net debenture liability. 
B) the market rate of interest multiplied by the present value of the opening balance of the net debenture liability. 
C) the market rate of interest multiplied by the present value of the closing balance of the net debenture liability. 
D) the coupon rate of interest multiplied by the present value of the opening balance of the net debenture liability. 
A) the coupon rate multiplied by the face value of the net debenture liability. 
B) the market rate of interest multiplied by the present value of the opening balance of the net debenture liability. 
C) the market rate of interest multiplied by the present value of the closing balance of the net debenture liability. 
D) the coupon rate of interest multiplied by the present value of the opening balance of the net debenture liability.

Question 8

An entity shall classify a liability as current when it holds the liability primarily for the purpose of trading.

Accepted Answer

A) True 
 B)False

Question 9

Convertible notes may be best described as having characteristics of both liabilities and bonds.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Buderup Plc issues £9 million in 12-year,6%,semi-annual coupon debentures.The rate of return required by the market is 10% per annum.What are the journal entries to record the first and second payments of interest assuming that Buderup uses the effective-interest method to amortise any discount or premium (rounded to the nearest pound)?

Accepted Answer

A)  (a) First interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 233451 & \
\hline \mathrm{Dr} & \text { Debentures } & 36549 & \
\hline \mathrm{Cr} & \text { Cash } & & 270000 \
\hline
\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 211397 & \
\hline \mathrm{Dr} & \text { Debentures } & 58603 & \
\hline \mathrm{Cr} & \text { Cash } & & 270000 \
\hline
\end{array}$ 
B)  (a) First interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \
\hline \mathrm{Dr} & \text { Debentures } & 36549 & \
\hline \mathrm{Cr} & \text { Cash } & & 306549 \
\hline
\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \
\hline \mathrm{Dr} & \text { Debentures } & 249898 & \
\hline \mathrm{Cr} & \text { Cash } & & 519898 \
\hline
\end{array}$ 
C)  (a) First interest payment
$\begin{array}{|r|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 325812 & \
\hline \mathrm{Cr} & \text { Debentures } & & 55812 \
\hline \mathrm{Cr} & \text { Cash } & & 270000 \
\hline & & & \
\hline
\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 328603 & \
\hline \mathrm{Cr} & \text { Debentures } & & 58603 \
\hline \mathrm{Cr} & \text { Cash } & & 270000 \
\hline
\end{array}$ 
D)  (a) First interest payment
$\begin{array}{|r|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \
\hline \mathrm{Cr} & \text { Debentures } & & 27906 \
\hline \mathrm{Cr} & \text { Cash } & & 242094 \
\hline
\end{array}$

(b) Second interest payment
$\begin{array}{|r|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \
\hline \mathrm{Cr} & \text { Debentures } & & 29301 \
\hline \mathrm{Cr} & \text { Cash } & & 240699 \
\hline
\end{array}$ 
A)  (a) First interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 233451 & \
\hline \mathrm{Dr} & \text { Debentures } & 36549 & \
\hline \mathrm{Cr} & \text { Cash } & & 270000 \
\hline
\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 211397 & \
\hline \mathrm{Dr} & \text { Debentures } & 58603 & \
\hline \mathrm{Cr} & \text { Cash } & & 270000 \
\hline
\end{array}$ 
B)  (a) First interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \
\hline \mathrm{Dr} & \text { Debentures } & 36549 & \
\hline \mathrm{Cr} & \text { Cash } & & 306549 \
\hline
\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \
\hline \mathrm{Dr} & \text { Debentures } & 249898 & \
\hline \mathrm{Cr} & \text { Cash } & & 519898 \
\hline
\end{array}$ 
C)  (a) First interest payment
$\begin{array}{|r|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 325812 & \
\hline \mathrm{Cr} & \text { Debentures } & & 55812 \
\hline \mathrm{Cr} & \text { Cash } & & 270000 \
\hline & & & \
\hline
\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 328603 & \
\hline \mathrm{Cr} & \text { Debentures } & & 58603 \
\hline \mathrm{Cr} & \text { Cash } & & 270000 \
\hline
\end{array}$ 
D)  (a) First interest payment
$\begin{array}{|r|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \
\hline \mathrm{Cr} & \text { Debentures } & & 27906 \
\hline \mathrm{Cr} & \text { Cash } & & 242094 \
\hline
\end{array}$

(b) Second interest payment
$\begin{array}{|r|l|r|r|}
\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \
\hline \mathrm{Cr} & \text { Debentures } & & 29301 \
\hline \mathrm{Cr} & \text { Cash } & & 240699 \
\hline
\end{array}$

Question 12

A necessary condition to recognise a present obligation in the financial statements is that the identity of the party to whom the present obligation is owed must be known.

Accepted Answer

A) True 
 B)False

Question 13

In terms of accounting treatment debentures and bonds are the same thing.

Accepted Answer

A) True 
 B)False

Question 14

In accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets,differentiate provisions from accruals and provide one example for each type of liability.

Accepted Answer

In describing provisions,paragraph 11 of

Question 15

An essential characteristic of a liability is the existence of a present obligation.What does this mean?
 Discuss the different types of obligations that may be considered 'present' obligations.

Accepted Answer

IAS 37 Provisions,Contingent Liabilities

Question 16

Convertible notes are:

Accepted Answer

A) essentially the same as debentures and need to be recorded as liabilities. 
B) a form of asset. 
C) are often referred to as hybrid securities and should be recorded as equity as they will eventually be converted into shares. 
D) part debt and part equity and should be disclosed as such according to IAS 32. 
A) essentially the same as debentures and need to be recorded as liabilities. 
B) a form of asset. 
C) are often referred to as hybrid securities and should be recorded as equity as they will eventually be converted into shares. 
D) part debt and part equity and should be disclosed as such according to IAS 32.

Question 17

A present obligation,as one of the criteria for recognising a liability,implies:

Accepted Answer

A) there must be a legal obligation. 
B) a legally binding contractual arrangement between two parties: the entity and another party. 
C) the involvement of two separate parties-the entity and another party-of which the identity of the latter needs not necessarily to be known. 
D) the involvement of two separate parties-the entity and another party-of which the identity of the latter must be known. 
A) there must be a legal obligation. 
B) a legally binding contractual arrangement between two parties: the entity and another party. 
C) the involvement of two separate parties-the entity and another party-of which the identity of the latter needs not necessarily to be known. 
D) the involvement of two separate parties-the entity and another party-of which the identity of the latter must be known.

Question 18

In accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets,which of the following is considered a contingent liability?

Accepted Answer

A) Guarantee provided by the parent entity on behalf of a solvent subsidiary. 
B) Settlement of a legal case where the company is likely to be held liable for damages in court. 
C) Best estimate of likely claims for warranty by customers. 
D) Guarantee of an associate's bank overdraft where the associate has declared bankruptcy. 
A) Guarantee provided by the parent entity on behalf of a solvent subsidiary. 
B) Settlement of a legal case where the company is likely to be held liable for damages in court. 
C) Best estimate of likely claims for warranty by customers. 
D) Guarantee of an associate's bank overdraft where the associate has declared bankruptcy.

Exam 9: An Overview of Accounting for Liabilities

Discuss the substance-over-firm approach in IAS 32 Financial Instruments.

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.

When an entity's management resolves that the entity will offer to repair a defect it has recently discovered in one of its products,even though the nature of the defect is such that purchasers of the product would not expect the entity to do so:

Discuss the necessary conditions prescribed in IAS 37 Provisions,Contingent Liabilities and Contingent Assets to recognise provisions.Illustrate how these conditions are satisfied in a product warranty example.

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

Discuss the criteria required to classify a liability as current.

The interest that a debenture holder receives at the time of each payment made by the issuer is:

An entity shall classify a liability as current when it holds the liability primarily for the purpose of trading.

Convertible notes may be best described as having characteristics of both liabilities and bonds.

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

A necessary condition to recognise a present obligation in the financial statements is that the identity of the party to whom the present obligation is owed must be known.

In terms of accounting treatment debentures and bonds are the same thing.

In accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets,differentiate provisions from accruals and provide one example for each type of liability.

An essential characteristic of a liability is the existence of a present obligation.What does this mean? Discuss the different types of obligations that may be considered 'present' obligations.

Convertible notes are:

A present obligation,as one of the criteria for recognising a liability,implies:

In accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets,which of the following is considered a contingent liability?

An Overview of the International External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

Accounting for Leases

Share Capital, Reserves and Share Options Employee Bonus Schemes

Accounting for Financial Instruments

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Income Taxes

The Statement of Cash Flows

Events Occurring After the Reporting Date

Related-Party Disclosures

Earnings Per Share

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues III: Accounting for Indirect Ownership Interest

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

Filters