Question 1

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 2

Tissues and Co has elected to issue preference shares to the value of $220 000.Prior to the share issue the company has assets of $780 000,liabilities of $370 000 and equity recorded at $410 000.The terms of the share issue state that these shares are non-redeemable but a guaranteed cumulative dividend of 8% of share value is payable.Calculate the debt-to-asset ratio immediately before and after the share issue.

Accepted Answer

A)  before-47.4%; after - 47.4% 
B)  before-47.4%; after - 37% 
C)  before-52.6%; after - 63% 
D)  before-47.4%; after - 59% 
A)  before-47.4%; after - 47.4% 
B)  before-47.4%; after - 37% 
C)  before-52.6%; after - 63% 
D)  before-47.4%; after - 59%

Question 3

Dubbin Ltd issues $3 million in 5-year,8%,semi-annual coupon debentures.The rate of return required by the market is 6% per annum.What is the journal entry to record the issue of the debentures (rounded to the nearest dollar)?

Accepted Answer

A) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 3255906 & \
\hline \mathrm { Cr } & \text { Debentures } & & 3255906 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 2744094 & \
\hline \mathrm { Cr } & \text { Debentures } & & 2744094 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 3225466 & \
\hline \mathrm { Cr } & \text { Debentures } & & 3225466 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 2775534 & \
\hline \mathrm { Cr } & \text { Debentures } & & 2775534 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 3255906 & \
\hline \mathrm { Cr } & \text { Debentures } & & 3255906 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 2744094 & \
\hline \mathrm { Cr } & \text { Debentures } & & 2744094 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 3225466 & \
\hline \mathrm { Cr } & \text { Debentures } & & 3225466 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | l | l | } 
\hline \mathrm { Dr } & \text { Cash } & 2775534 & \
\hline \mathrm { Cr } & \text { Debentures } & & 2775534 \
\hline
\end{array}$$

Question 4

Some provisions traditionally recorded by entities may not be considered liabilities under the AASB Framework because:

Accepted Answer

A)  their amounts are not considered probable. 
B)  they do not involve a future sacrifice of economic benefits. 
C)  the identity of the external party to whom the present obligation is owed is unknown. 
D)  there is no entity other than the reporting entity involved in the present obligation as a result of past transactions or other past events. 
A)  their amounts are not considered probable. 
B)  they do not involve a future sacrifice of economic benefits. 
C)  the identity of the external party to whom the present obligation is owed is unknown. 
D)  there is no entity other than the reporting entity involved in the present obligation as a result of past transactions or other past events.

Question 5

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 6

If future cash flows are not discounted the effect in the financial statements is to:

Accepted Answer

A)  report amounts of cash outflows that are the same but occur over different time periods as the same amount. 
B)  report net cash flows at their future value rather than their present value. 
C)  understate the amount of the present obligation. 
D)  report net cash flows at their future value rather than their present value and understate the amount of the present obligation. 
A)  report amounts of cash outflows that are the same but occur over different time periods as the same amount. 
B)  report net cash flows at their future value rather than their present value. 
C)  understate the amount of the present obligation. 
D)  report net cash flows at their future value rather than their present value and understate the amount of the present obligation.

Question 7

Explain,in the context of Positive Accounting Theory,the implications of making professional judgments in respect to recognising and measuring liabilities.

Accepted Answer

Positive Accounting Theory (PAT) is a th

Question 8

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

Accepted Answer

A)  be prepared to pay more than the par value of the debentures, offering a discount. 
B)  be prepared to pay less than the par value of the debentures, offering a discount. 
C)  be prepared to pay more than the par value of the debentures, offering a premium. 
D)  be prepared to pay less than the par value of the debentures, offering a premium. 
A)  be prepared to pay more than the par value of the debentures, offering a discount. 
B)  be prepared to pay less than the par value of the debentures, offering a discount. 
C)  be prepared to pay more than the par value of the debentures, offering a premium. 
D)  be prepared to pay less than the par value of the debentures, offering a premium.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Banshee Ltd issues $12 million in 8-year,8%,semi-annual coupon debentures.The rate of return required by the market is 12%.What is the journal entry to record the first payment of interest assuming that Banshee uses the effective-interest method to amortise any discount or premium (round to the nearest dollar)?

Accepted Answer

A) 
$$\begin{array} { | r | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 574475 & \
\hline \mathrm { Cr } & \text { Debentures } & & 94475 \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 385525 & \
\hline \mathrm { Dr } & \text { Debentures } & 94475 & \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 636597 & \
\hline \mathrm { Cr } & \text { Debentures } & & 156597 \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 323403 & \
\hline \mathrm { Dr } & \text { Debentures } & 156597 & \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$ 
A) 
$$\begin{array} { | r | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 574475 & \
\hline \mathrm { Cr } & \text { Debentures } & & 94475 \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$ 
B) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 385525 & \
\hline \mathrm { Dr } & \text { Debentures } & 94475 & \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$ 
C) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 636597 & \
\hline \mathrm { Cr } & \text { Debentures } & & 156597 \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$ 
D) 
$$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 323403 & \
\hline \mathrm { Dr } & \text { Debentures } & 156597 & \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$

Question 11

Examples of contingent liabilities include:

Accepted Answer

A)  future payments arising under employee entitlements for long service leave. 
B)  past tax deductions claimed that are under review by the Australian Taxation Office, but which the entity intends to dispute if disallowed. 
C)  out of court settlements in the case of liability for damage to health due to products manufactured by the entity. 
D)  past tax deductions claimed that are under review by the Australian Taxation Office, but which the entity intends to dispute if disallowed and out of court settlements in the case of liability for damage to health due to products manufactured by the entity 
A)  future payments arising under employee entitlements for long service leave. 
B)  past tax deductions claimed that are under review by the Australian Taxation Office, but which the entity intends to dispute if disallowed. 
C)  out of court settlements in the case of liability for damage to health due to products manufactured by the entity. 
D)  past tax deductions claimed that are under review by the Australian Taxation Office, but which the entity intends to dispute if disallowed and out of court settlements in the case of liability for damage to health due to products manufactured by the entity

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

All things being equal,firms would typically prefer to disclose low levels of debt because:

Accepted Answer

A)  Any debt is a bad thing in the capital structure of a business. 
B)  Additional debt may lead to a technical breach of a firm's contractual agreements with existing debt-holders and lead to the possible wind-up of the business or the need to renegotiate the contract. 
C)  The level of recognised debt will affect the profitability of the business. 
D)  Recognising debt in the income statement may lead to a decrease in management bonuses that are based on the times-interest-earned and debt-to-assets ratios. 
A)  Any debt is a bad thing in the capital structure of a business. 
B)  Additional debt may lead to a technical breach of a firm's contractual agreements with existing debt-holders and lead to the possible wind-up of the business or the need to renegotiate the contract. 
C)  The level of recognised debt will affect the profitability of the business. 
D)  Recognising debt in the income statement may lead to a decrease in management bonuses that are based on the times-interest-earned and debt-to-assets ratios.

Question 14

Entities are only required to record a liability if there has been a past transaction that has created a present obligation to another entity that is expected to result in an outflow of future economic benefits.

Accepted Answer

A) True 
 B)False

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

An essential characteristic of a liabili

Question 16

Which of the following is not listed in AASB 101 to determine if a liability should be classified as current?

Accepted Answer

A)  If the liability is guaranteed to be settled within 12 months. 
B)  If the liability is held primarily for the purpose of being traded. 
C)  If the entity does not have an unconditional right to defer settlement of the liability for at least 12 months. 
D)  If the liability is expected to be settled in the entity's normal operating cycle. 
A)  If the liability is guaranteed to be settled within 12 months. 
B)  If the liability is held primarily for the purpose of being traded. 
C)  If the entity does not have an unconditional right to defer settlement of the liability for at least 12 months. 
D)  If the liability is expected to be settled in the entity's normal operating cycle.

Question 17

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 AAB 132. 
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 AAB 132.

Question 18

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 its 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?

Accepted Answer

A)  I, II and III 
B)  I and II 
C)  II and III 
D)  III and IV 
A)  I, II and III 
B)  I and II 
C)  II and III 
D)  III and IV

Exam 10: An Overview of Accounting for Liabilities

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

Dubbin Ltd issues $3 million in 5-year,8%,semi-annual coupon debentures.The rate of return required by the market is 6% per annum.What is the journal entry to record the issue of the debentures (rounded to the nearest dollar)?

Some provisions traditionally recorded by entities may not be considered liabilities under the AASB Framework because:

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

If future cash flows are not discounted the effect in the financial statements is to:

Explain,in the context of Positive Accounting Theory,the implications of making professional judgments in respect to recognising and measuring liabilities.

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

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

Examples of contingent liabilities include:

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

All things being equal,firms would typically prefer to disclose low levels of debt because:

Entities are only required to record a liability if there has been a past transaction that has created a present obligation to another entity that is expected to result in an outflow of future economic benefits.

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.

Which of the following is not listed in AASB 101 to determine if a liability should be classified as current?

Convertible notes are:

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

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