Question 1

Under the old AASB 1014 the debt-holder(s)may not be aware that a debt defeasance scheme is in place:

Accepted Answer

A) True 
 B)False

Question 2

Insubstance debt defeasance is no longer allowed under AASB 132:

Accepted Answer

A)  Because this form of defeasance is no longer used in Australia. 
B)  Because the new standard takes a form over substance approach. 
C)  Because it is inappropriate to extinguish a debt where the discharge of the obligation has been accepted by the creditor. 
D)  Because this type of action requires the offsetting of financial assets and liabilities in circumstances not allowed under AASB 1014. 
E)  None of the given answers. 
A)  Because this form of defeasance is no longer used in Australia. 
B)  Because the new standard takes a form over substance approach. 
C)  Because it is inappropriate to extinguish a debt where the discharge of the obligation has been accepted by the creditor. 
D)  Because this type of action requires the offsetting of financial assets and liabilities in circumstances not allowed under AASB 1014. 
E)  None of the given answers.

Question 3

A right of set-off is a debtor's legal right,by contract or otherwise,to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor.

Accepted Answer

A) True 
 B)False

Question 4

On 1 July 2008,Roos Limited issues $3 million in ten year,8 per cent annual debentures to Hall Limited.The market required rate of return on the debentures at the time is 12 per cent.On 1 July 2010,Hall Limited decided to forgive the debt owed by Roos Limited,and so cancels the debt.Assuming Roos Limited uses the straight-line method to amortise the debenture discount,what is the journal entry passed in the books of Roos Limited at 1 July 2010?:

Accepted Answer

A)    
B)    
C)    
D)    
E)  None of the given answers. 
A)    
B)    
C)    
D)    
E)  None of the given answers.

Question 5

The conditions that were required by the former AASB 1014 to be satisfied in order to achieve an insubstance debt defeasance using a trust include:

Accepted Answer

A)  Irrevocably transfer risk-free assets to a trust, the trustees of which are independent, and remain independent, of the entity, and which is solely used for administering those assets so as to meet the servicing requirements (both interest and principal) of the debt. 
B)  The assets transferred to the trust must be of an amount and type suited to the amount and timing of both the principal and interest servicing requirements. 
C)  Irrevocably transfer risk-free assets to a trust, the trustees of which are controlled by the entity, and which is mainly used for administering those assets so as to meet the servicing requirements (both interest and principal) of the debt. 
D)  Irrevocably transfer risk-free assets to a trust, the trustees of which are independent, and remain independent, of the entity, and which is solely used for administering those assets so as to meet the servicing requirements (both interest and principal) of the debt and the assets transferred to the trust must be of an amount and type suited to the amount and timing of both the principal and interest servicing requirements. 
E)  The assets transferred to the trust must be of an amount and type suited to the amount and timing of both the principal and interest servicing requirements and irrevocably transfer risk-free assets to a trust, the trustees of which are controlled by the entity, and which is mainly used for administering those assets so as to meet the servicing requirements (both interest and principal) of the debt. 
A)  Irrevocably transfer risk-free assets to a trust, the trustees of which are independent, and remain independent, of the entity, and which is solely used for administering those assets so as to meet the servicing requirements (both interest and principal) of the debt. 
B)  The assets transferred to the trust must be of an amount and type suited to the amount and timing of both the principal and interest servicing requirements. 
C)  Irrevocably transfer risk-free assets to a trust, the trustees of which are controlled by the entity, and which is mainly used for administering those assets so as to meet the servicing requirements (both interest and principal) of the debt. 
D)  Irrevocably transfer risk-free assets to a trust, the trustees of which are independent, and remain independent, of the entity, and which is solely used for administering those assets so as to meet the servicing requirements (both interest and principal) of the debt and the assets transferred to the trust must be of an amount and type suited to the amount and timing of both the principal and interest servicing requirements. 
E)  The assets transferred to the trust must be of an amount and type suited to the amount and timing of both the principal and interest servicing requirements and irrevocably transfer risk-free assets to a trust, the trustees of which are controlled by the entity, and which is mainly used for administering those assets so as to meet the servicing requirements (both interest and principal) of the debt.

Question 6

Debt extinguishment occurs when a liability can no longer be considered a primary obligation for an entity:

Accepted Answer

A) True 
 B)False

Question 7

In a set-off,the gearing ratio of the entity is usually increased.

Accepted Answer

A) True 
 B)False

Question 8

Insubstance debt defeasance was defined in the former AASB 1014 as:

Accepted Answer

A)  A type of legal defeasance in which a designated third entity assumes responsibility for the debt or a suitable legal arrangement is created to ensure that the debt is serviced and this is guaranteed by the debtor entity. 
B)  A defeasance, other than a legal defeasance, in which the debtor effectively achieves release from the primary obligation for a debt by placing in trust assets that are adequate to meet the servicing requirements (both interest and principal) of the debt or by having a suitable entity assume responsibility for those servicing requirements. 
C)  A defeasance, including a legal defeasance, in which the debtor effectively achieves release from the requirement to meet the interest and principal repayments on a debt by arranging for a suitable entity to assume the debt. 
D)  A defeasance where the substance of the arrangement is equivalent to a legal defeasance in that the primary obligation for the debt is assumed by a designated third party with the knowledge and permission of the lender. 
E)  None of the given answers. 
A)  A type of legal defeasance in which a designated third entity assumes responsibility for the debt or a suitable legal arrangement is created to ensure that the debt is serviced and this is guaranteed by the debtor entity. 
B)  A defeasance, other than a legal defeasance, in which the debtor effectively achieves release from the primary obligation for a debt by placing in trust assets that are adequate to meet the servicing requirements (both interest and principal) of the debt or by having a suitable entity assume responsibility for those servicing requirements. 
C)  A defeasance, including a legal defeasance, in which the debtor effectively achieves release from the requirement to meet the interest and principal repayments on a debt by arranging for a suitable entity to assume the debt. 
D)  A defeasance where the substance of the arrangement is equivalent to a legal defeasance in that the primary obligation for the debt is assumed by a designated third party with the knowledge and permission of the lender. 
E)  None of the given answers.

Question 9

Which of the following is not one of the advantages that were previously available when the insubstance defeasance of debt was allowable?

Accepted Answer

A)  It provided a tool to 'manage' company earnings. 
B)  Restrictive limitations imposed by the trustee for debenture holders can be relaxed by reducing the amount of debt. 
C)  It allowed debt to be retired with reference to specific individual debt-holders. 
D)  It allowed strategic rethinking of business policies. 
E)  The effect of forcing up the market price of desired securities, when a company attempts to buy back debt, can be reduced. 
A)  It provided a tool to 'manage' company earnings. 
B)  Restrictive limitations imposed by the trustee for debenture holders can be relaxed by reducing the amount of debt. 
C)  It allowed debt to be retired with reference to specific individual debt-holders. 
D)  It allowed strategic rethinking of business policies. 
E)  The effect of forcing up the market price of desired securities, when a company attempts to buy back debt, can be reduced.

Question 10

Practical Ltd issued $100,000 in 4-year,6 per cent annual debentures for Theoretical Ltd on 1 July 2002.The market required rate of return on the debentures at the time of issue was 8 per cent.Theoretical Ltd decides to forgive the debt on 1 July 2004.Any premium or discount is amortised straight-line.What is the entry in the books of Theoretical Ltd to record the forgiveness of the debt?

Accepted Answer

A)    
B)    
C)    
D)    
E)  None of the given answers. 
A)    
B)    
C)    
D)    
E)  None of the given answers.

Question 11

A debt cannot be considered extinguished,and therefore removed from the balance sheet,unless:

Accepted Answer

A)  It is not likely that the reporting entity will be required to assume the debt-servicing requirements of the loan and it has not otherwise guaranteed the servicing of the debt. 
B)  The probability that the reporting entity will be required to repay the principal and interest remaining under the conditions of the debt is so low as to be considered virtually impossible. 
C)  It is highly improbable that the reporting entity will be required to assume again the primary obligation for the debt-servicing requirements or to satisfy any guarantee, indemnity or similar relating to such requirements. 
D)  The possibility of the reporting entity being required to assume responsibility for the debt is considered remote. 
E)  None of the given answers. 
A)  It is not likely that the reporting entity will be required to assume the debt-servicing requirements of the loan and it has not otherwise guaranteed the servicing of the debt. 
B)  The probability that the reporting entity will be required to repay the principal and interest remaining under the conditions of the debt is so low as to be considered virtually impossible. 
C)  It is highly improbable that the reporting entity will be required to assume again the primary obligation for the debt-servicing requirements or to satisfy any guarantee, indemnity or similar relating to such requirements. 
D)  The possibility of the reporting entity being required to assume responsibility for the debt is considered remote. 
E)  None of the given answers.

Question 12

Which of the following statements is correct with respect to set-off of assets and liabilities?

Accepted Answer

A)  An entity will apply set-off to reduce the number of elements reported in the financial statements. 
B)  An entity will apply set-off to avoid violation of debt covenants in debt contracts. 
C)  Positive accounting theory predicts the likelihood that managers will apply set-off to increase profits. 
D)  Positive accounting theory predicts the likelihood that managers will apply set-off to reduce political costs. 
E)  None of the given answers. 
A)  An entity will apply set-off to reduce the number of elements reported in the financial statements. 
B)  An entity will apply set-off to avoid violation of debt covenants in debt contracts. 
C)  Positive accounting theory predicts the likelihood that managers will apply set-off to increase profits. 
D)  Positive accounting theory predicts the likelihood that managers will apply set-off to reduce political costs. 
E)  None of the given answers.

Question 13

AASB 132 allows for all types of assets and liabilities to be offset as long as the entity intends to settle on a net basis:

Accepted Answer

A) True 
 B)False

Question 14

A legal defeasance may occur as a result of:

Accepted Answer

A)  Legal judgement, assumption of the debt by a third party or forgiveness of the debt. 
B)  The issuance of a guarantee by the debtor, the assumption of the debt by the lender, legal judgement or the repayment of the debt. 
C)  The issuance of an indemnity by a related company, or the forgiveness of the debt by the borrower. 
D)  The assumption of the debt by a related company, legal judgement, or the forgiveness of the debt by the borrower. 
E)  None of the given answers. 
A)  Legal judgement, assumption of the debt by a third party or forgiveness of the debt. 
B)  The issuance of a guarantee by the debtor, the assumption of the debt by the lender, legal judgement or the repayment of the debt. 
C)  The issuance of an indemnity by a related company, or the forgiveness of the debt by the borrower. 
D)  The assumption of the debt by a related company, legal judgement, or the forgiveness of the debt by the borrower. 
E)  None of the given answers.

Question 15

The existence of a right to set off:

Accepted Answer

A)  Is sufficient to allow set off of a financial asset and financial liability. 
B)  Does not have to be enforceable at law to allow set off of a financial asset and financial liability. 
C)  Is not sufficient to allow set off of a financial asset and financial liability, without the intention to set off and legal enforceability of the right to set off. 
D)  Is not discussed in AASB 132. 
E)  None of the given answers. 
A)  Is sufficient to allow set off of a financial asset and financial liability. 
B)  Does not have to be enforceable at law to allow set off of a financial asset and financial liability. 
C)  Is not sufficient to allow set off of a financial asset and financial liability, without the intention to set off and legal enforceability of the right to set off. 
D)  Is not discussed in AASB 132. 
E)  None of the given answers.

Question 16

One of the requirements for setting off in AASB 132 is the intention to offset.Which of the following statements about the "intention to set off" is correct?

Accepted Answer

A)  The intention to offset is only required where the legal right to set-off is disputed. 
B)  Without the intention to offset the past cash flows of the entity will not be affected. 
C)  The intention of both parties to settle is insufficient unless a legal right exists. 
D)  Must be stipulated in writing for it to apply under ASB 132. 
E)  None of the given answers. 
A)  The intention to offset is only required where the legal right to set-off is disputed. 
B)  Without the intention to offset the past cash flows of the entity will not be affected. 
C)  The intention of both parties to settle is insufficient unless a legal right exists. 
D)  Must be stipulated in writing for it to apply under ASB 132. 
E)  None of the given answers.

Question 17

Which of the following statements is correct with respect to set-off of assets and liabilities?

Accepted Answer

A)  If a right of set-off exists, an entity shall disclose the net amount of the financial assets and the financial liability in the notes to the accounts. 
B)  If a right of set-off exists, an entity shall disclose the net amount of the financial assets and the financial liability in income statement. 
C)  If a right of set-off exists, an entity shall present the net amount of the financial assets and the financial liability in the statement of financial position. 
D)  If a right of set-off exists, an entity shall present the net amount of the financial assets and the financial liability in income statement. 
E)  None of the given answers. 
A)  If a right of set-off exists, an entity shall disclose the net amount of the financial assets and the financial liability in the notes to the accounts. 
B)  If a right of set-off exists, an entity shall disclose the net amount of the financial assets and the financial liability in income statement. 
C)  If a right of set-off exists, an entity shall present the net amount of the financial assets and the financial liability in the statement of financial position. 
D)  If a right of set-off exists, an entity shall present the net amount of the financial assets and the financial liability in income statement. 
E)  None of the given answers.

Question 18

Which of the following instruments satisfy the conditions to offset a financial asset and a financial liability?

Accepted Answer

A)  Several financial instruments that are passed as a single financial instrument, for example, a synthetic instrument 
B)  Futures contract 
C)  Financial assets that are pledged as collateral for a non-recourse liability 
D)  Financial assets that are set aside in trust by a debtor for the purpose of discharging an obligation without these assets being accepted by the creditor in settlement of the obligation. 
E)  None of the given answers 
A)  Several financial instruments that are passed as a single financial instrument, for example, a synthetic instrument 
B)  Futures contract 
C)  Financial assets that are pledged as collateral for a non-recourse liability 
D)  Financial assets that are set aside in trust by a debtor for the purpose of discharging an obligation without these assets being accepted by the creditor in settlement of the obligation. 
E)  None of the given answers

Question 19

The "Offsetting" in AASB 132 "Financial Instruments: Presentation" is similar to "derecognition" in AASB 139.

Accepted Answer

A) True 
 B)False

Question 20

Reasons provided in AASB 132 for the required treatment of the set-off of assets and liabilities include:

Accepted Answer

A)  The gross basis is generally preferred, except in the situation outlined because the parties to the arrangement have a legal obligation that takes precedence over reporting form. 
B)  Setting off an obligation against an asset in the circumstances described allows the entity to manage its risk exposure and should be encouraged by reporting requirements. 
C)  While the gross basis shows more accurately the detailed transaction, the effect on ratios that may be used to analyse the financial statements of the reporting entity means that they will no longer reflect the economic substance of the arrangement. 
D)  The presentation of the asset and the liability on a net basis reflects more appropriately the amounts and timing of future cash flows. 
E)  None of the given answers. 
A)  The gross basis is generally preferred, except in the situation outlined because the parties to the arrangement have a legal obligation that takes precedence over reporting form. 
B)  Setting off an obligation against an asset in the circumstances described allows the entity to manage its risk exposure and should be encouraged by reporting requirements. 
C)  While the gross basis shows more accurately the detailed transaction, the effect on ratios that may be used to analyse the financial statements of the reporting entity means that they will no longer reflect the economic substance of the arrangement. 
D)  The presentation of the asset and the liability on a net basis reflects more appropriately the amounts and timing of future cash flows. 
E)  None of the given answers.

Exam 12: Set-Off and Extinguishment of Debt

Under the old AASB 1014 the debt-holder(s)may not be aware that a debt defeasance scheme is in place:

Insubstance debt defeasance is no longer allowed under AASB 132:

A right of set-off is a debtor's legal right,by contract or otherwise,to settle or otherwise eliminate all or a portion of an amount due to a creditor by applying against that amount an amount due from the creditor.

The conditions that were required by the former AASB 1014 to be satisfied in order to achieve an insubstance debt defeasance using a trust include:

Debt extinguishment occurs when a liability can no longer be considered a primary obligation for an entity:

In a set-off,the gearing ratio of the entity is usually increased.

Insubstance debt defeasance was defined in the former AASB 1014 as:

Which of the following is not one of the advantages that were previously available when the insubstance defeasance of debt was allowable?

A debt cannot be considered extinguished,and therefore removed from the balance sheet,unless:

Which of the following statements is correct with respect to set-off of assets and liabilities?

AASB 132 allows for all types of assets and liabilities to be offset as long as the entity intends to settle on a net basis:

A legal defeasance may occur as a result of:

The existence of a right to set off:

One of the requirements for setting off in AASB 132 is the intention to offset.Which of the following statements about the "intention to set off" is correct?

Which of the following statements is correct with respect to set-off of assets and liabilities?

Which of the following instruments satisfy the conditions to offset a financial asset and a financial liability?

The "Offsetting" in AASB 132 "Financial Instruments: Presentation" is similar to "derecognition" in AASB 139.

Reasons provided in AASB 132 for the required treatment of the set-off of assets and liabilities include:

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financ

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, plant and Equipment

Revaluation and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Lease

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 E

Accounting for Share-Based Payments

Accounting for Income Taxes

Cash-Flow Statements

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After Balance Sheet Date

Segment Reporting

Related-Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transact

Further Consolidation Issues II: Accounting for Minority Interests

Further Consolidation Issues III: Accounting for Indirect Ownershi

Further Consolidation Issues Iv: Accounting for Changes in the Deg

Accounting for Equity Investments

Accounting for Equity Investments

Accounting for Foreign Currency Transactions

Translation of the Accounts of Foreign Operations

Accounting for Corporate Social Responsibility

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