Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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. 
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. D

Question 3

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)  the effect interest method is used to calculate the amortised cost of the financial liability. 
D)  the discount amount can be used to offset any gains shown when debentures have been issued at a premium. 
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)  the effect interest method is used to calculate the amortised cost of the financial liability. 
D)  the discount amount can be used to offset any gains shown when debentures have been issued at a premium. C

Question 4

Under AASB 101 something may be classified as a current liability even when it is not expected to be settled for a period in excess of 12 months.

Accepted Answer

A) True 
 B)False

Question 5

An equitable or constructive obligation arises when:

Accepted Answer

A)  Social or moral sanctions or custom leaves the entity no realistic alternative other than to make a sacrifice of future benefits. 
B)  Management makes a discretionary decision to make a future sacrifice of economic benefits. 
C)  Management communicates its decision to commit to the future sacrifice of economic benefits to the parties concerned. 
D)  Social or moral sanctions or custom leaves the entity no realistic alternative other than to make a sacrifice of future benefits and management communicates its decision to commit to the future sacrifice of economic benefits to the parties concerned. 
A)  Social or moral sanctions or custom leaves the entity no realistic alternative other than to make a sacrifice of future benefits. 
B)  Management makes a discretionary decision to make a future sacrifice of economic benefits. 
C)  Management communicates its decision to commit to the future sacrifice of economic benefits to the parties concerned. 
D)  Social or moral sanctions or custom leaves the entity no realistic alternative other than to make a sacrifice of future benefits and management communicates its decision to commit to the future sacrifice of economic benefits to the parties concerned.

Question 6

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

Question 7

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 8

Some researchers have found that firms can benefit from being in financial distress.

Accepted Answer

A) True 
 B)False

Question 9

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. 
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.

Question 10

The par or face value of a debenture is:

Accepted Answer

A)  the amount that debenture holders will receive on maturity of the debenture. 
B)  the amount that a debenture holder would be prepared to pay for a debenture when the coupon rate is below the interest rate the debenture holder considers appropriate. 
C)  the amount debenture holders will receive annually until the debenture matures. 
D)  the amount that a debenture holder would be prepared to pay for a debenture when the coupon rate is above the interest rate the debenture holder considers appropriate. 
A)  the amount that debenture holders will receive on maturity of the debenture. 
B)  the amount that a debenture holder would be prepared to pay for a debenture when the coupon rate is below the interest rate the debenture holder considers appropriate. 
C)  the amount debenture holders will receive annually until the debenture matures. 
D)  the amount that a debenture holder would be prepared to pay for a debenture when the coupon rate is above the interest rate the debenture holder considers appropriate.

Question 11

Risky Ltd 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 dollar)?

Accepted Answer

A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash } & 8000000 & \
\hline \mathrm { Cr } & \text { Debentures } & & 8000000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 7351128 & \
\hline \mathrm { Cr } & \text { Debentures } & & 7351128 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 9297743 & \
\hline \mathrm { Cr } & \text { Debentures } & & 9297743 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash } & 8648872 & \
\hline \mathrm { Cr } & \text { Debentures } & & 8648872 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash } & 8000000 & \
\hline \mathrm { Cr } & \text { Debentures } & & 8000000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 7351128 & \
\hline \mathrm { Cr } & \text { Debentures } & & 7351128 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 9297743 & \
\hline \mathrm { Cr } & \text { Debentures } & & 9297743 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Cash } & 8648872 & \
\hline \mathrm { Cr } & \text { Debentures } & & 8648872 \
\hline
\end{array}$$

Question 12

Which of the following statements is ­consistent with the positive accounting theory paradigm?

Accepted Answer

A)  Managers avoid future sacrifice of economic benefits debt covenants when the company is close to violation of debt covenants. 
B)  Managers avoid constructive obligations in the presence of accounting based debt covenants even though there is no realistic alternative to making future sacrifice of economic benefits. 
C)  Managers choose accounting methods that will decrease income to reduce the probability of debt covenant violation. 
D)  Managers avoid income increasing accounting methods to reduce the probability of debt covenant violation. 
A)  Managers avoid future sacrifice of economic benefits debt covenants when the company is close to violation of debt covenants. 
B)  Managers avoid constructive obligations in the presence of accounting based debt covenants even though there is no realistic alternative to making future sacrifice of economic benefits. 
C)  Managers choose accounting methods that will decrease income to reduce the probability of debt covenant violation. 
D)  Managers avoid income increasing accounting methods to reduce the probability of debt covenant violation.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

A discount on debentures issued arises when the market required rate of return is less than the coupon rate.

Accepted Answer

A) True 
 B)False

Question 15

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?

Accepted Answer

The effective-interest method is a way o

Question 16

In AASB 137 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.

Accepted Answer

A) True 
 B)False

Question 17

Explain,in the context of the latest AASB 137,why 'provisions' for items such as future repairs and maintenance are no longer permitted to be recognised.

Accepted Answer

The latest AASB 137, which is the Austra

Question 18

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% and (a)are redeemable at the discretion of the issuer and (b)have a scheduled date for mandatory redemption?

Accepted Answer

A)  (a) 60%; (b) 80% 
B)  (a) 50%; (b) 67% 
C)  (a) 80%; (b) 60% 
D)  (a) 67%; (b) 50% 
A)  (a) 60%; (b) 80% 
B)  (a) 50%; (b) 67% 
C)  (a) 80%; (b) 60% 
D)  (a) 67%; (b) 50%

Question 19

Preference shares,as noted in AASB 132:

Accepted Answer

A)  should be regarded as debt when redemption is at the option of the holder or on a specified date. 
B)  will be classified as debt or equity based on their legal form rather than the substance of the financial instrument. 
C)  exhibit the characteristics of equity when they are non-redeemable. 
D)  will have their classification as debt or equity affected by the intention to make distributions in the future. 
A)  should be regarded as debt when redemption is at the option of the holder or on a specified date. 
B)  will be classified as debt or equity based on their legal form rather than the substance of the financial instrument. 
C)  exhibit the characteristics of equity when they are non-redeemable. 
D)  will have their classification as debt or equity affected by the intention to make distributions in the future.

Question 20

In determining the amount to be assigned to the equity component of a compound financial instrument,you must:

Accepted Answer

A)  add the face value of the financial liability to the fair value of the compound financial instrument as a whole. 
B)  deduct the face value of the financial liability from the fair value of the compound financial instrument as a whole. 
C)  deduct the face value of the financial liability from the face value of the compound financial instrument as a whole. 
D)  deduct the fair value of the financial liability from the fair value of the compound financial instrument as a whole. 
A)  add the face value of the financial liability to the fair value of the compound financial instrument as a whole. 
B)  deduct the face value of the financial liability from the fair value of the compound financial instrument as a whole. 
C)  deduct the face value of the financial liability from the face value of the compound financial instrument as a whole. 
D)  deduct the fair value of the financial liability from the fair value of the compound financial instrument as a whole.

Exam 10: An Overview of Accounting for Liabilities

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

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

When debentures are issued at a discount:

Under AASB 101 something may be classified as a current liability even when it is not expected to be settled for a period in excess of 12 months.

An equitable or constructive obligation arises when:

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.

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.

Some researchers have found that firms can benefit from being in financial distress.

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

The par or face value of a debenture is:

Risky Ltd 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 dollar)?

Which of the following statements is ­consistent with the positive accounting theory paradigm?

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

A discount on debentures issued arises when the market required rate of return is less than the coupon rate.

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?

In AASB 137 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.

Explain,in the context of the latest AASB 137,why 'provisions' for items such as future repairs and maintenance are no longer permitted to be recognised.

Preference shares,as noted in AASB 132:

In determining the amount to be assigned to the equity component of a compound financial instrument,you must:

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of 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 Heritage Assets and Biological Assets

Accounting for Leases

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 Equity

Accounting for Share-Based Payments

Accounting for Income Taxes

The Statement of Cash Flows

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

Filters

Which of the following statements is consistent with the positive accounting theory paradigm?