Question 1

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. 
E)  None of the given answers. 
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. 
E)  None of the given answers.

Question 2

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. 
E)  None of the given answers. 
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. 
E)  None of the given answers.

Question 3

The present obligation component of a liability must be based on:

Accepted Answer

A)  A legal obligation only. 
B)  A construction obligation, meaning there is an obligation to build something. 
C)  A social obligation. 
D)  A contractual obligation. 
E)  None of the given answers. 
A)  A legal obligation only. 
B)  A construction obligation, meaning there is an obligation to build something. 
C)  A social obligation. 
D)  A contractual obligation. 
E)  None of the given answers.

Question 4

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. 
E)  None of the given answers. 
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. 
E)  None of the given answers.

Question 5

Spoton Co Ltd issues $5 million in 2-year,8 per cent,semi-annual coupon debentures to the public.The market required rate of return is also 8 per cent.The money is received on application and the debentures are allotted on the same day: 30 June 2003.What are the journal entries to record (a)the receipt of funds and allotment of debentures on 30 June 2003,(b)the payment of interest on 31 December 2003 and (c)the redemption of the debentures on 30 June 2005?

Accepted Answer

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

Question 6

Provisions are established to allow for future sacrifices such as repairs and maintenance of machinery and may be recognised as liabilities:

Accepted Answer

A) True 
 B)False

Question 7

In accordance with AASB 137 "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. 
E)  None of the given answers. 
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. 
E)  None of the given answers.

Question 8

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets" some present obligations are allowed to be disclosed in the notes to the financial statements.

Accepted Answer

A) True 
 B)False

Question 9

Examples of equitable or constructive obligations include:

Accepted Answer

A)  A state government promises economic support to householders and businesses affected by recent bushfires. It has in the past provided at least this level of support. 
B)  Management of a retail store decides to offer compensation to customers as a result of faulty scooters purchased from the store and causing injury. The manufacturers are normally considered liable for this type of fault. 
C)  A company that has published policies regarding support for the environment and has in the past rehabilitated polluted sites has identified contamination it has caused in land surrounding one of its production sites. Not correcting the problem with the site will lead to serious difficulties with the local community. 
D)  A state government promises economic support to householders and businesses affected by recent bushfires. It has in the past provided at least this level of support and a company that has published policies regarding support for the environment and has in the past rehabilitated polluted sites has identified contamination it has caused in land surrounding one of its production sites. Not correcting the problem with the site will lead to serious difficulties with the local community. 
E)  All of the given answers. 
A)  A state government promises economic support to householders and businesses affected by recent bushfires. It has in the past provided at least this level of support. 
B)  Management of a retail store decides to offer compensation to customers as a result of faulty scooters purchased from the store and causing injury. The manufacturers are normally considered liable for this type of fault. 
C)  A company that has published policies regarding support for the environment and has in the past rehabilitated polluted sites has identified contamination it has caused in land surrounding one of its production sites. Not correcting the problem with the site will lead to serious difficulties with the local community. 
D)  A state government promises economic support to householders and businesses affected by recent bushfires. It has in the past provided at least this level of support and a company that has published policies regarding support for the environment and has in the past rehabilitated polluted sites has identified contamination it has caused in land surrounding one of its production sites. Not correcting the problem with the site will lead to serious difficulties with the local community. 
E)  All of the given answers.

Question 10

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 11

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

Accepted Answer

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

Question 12

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",which of the following statements is correct?

Accepted Answer

A)  Contingent liabilities and provisions are required in AASB 137 to be disclosed in the financial statements. 
B)  Contingent assets where realisation of economic benefits is probable should be recognized in the financial statements. 
C)  Constructive obligations are recognised when entities have no realistic alternative to making future sacrifice of economic benefits. 
D)  Provisions for future necessary repairs and maintenance should be recognized in the financial statements. 
E)  None of the given answers. 
A)  Contingent liabilities and provisions are required in AASB 137 to be disclosed in the financial statements. 
B)  Contingent assets where realisation of economic benefits is probable should be recognized in the financial statements. 
C)  Constructive obligations are recognised when entities have no realistic alternative to making future sacrifice of economic benefits. 
D)  Provisions for future necessary repairs and maintenance should be recognized in the financial statements. 
E)  None of the given answers.

Question 13

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)  Add the fair value of the financial liability to the fair value of the compound financial instrument as a whole. 
E)  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)  Add the fair value of the financial liability to the fair value of the compound financial instrument as a whole. 
E)  Deduct the fair value of the financial liability from the fair value of the compound financial instrument as a whole.

Question 14

A debenture will be issued at par value:

Accepted Answer

A)  Because that is the offer price. If the rate offered is too low the offer will be under-subscribed, so those who take it up will receive more interest. 
B)  On most occasions, because management is careful to issue the debentures at an amount close to the market rate. 
C)  On those rare occasions when the coupon rate is the same as the market rate. 
D)  On those occasions when the offer rate is equal to the coupon rate. 
E)  None of the given answers. 
A)  Because that is the offer price. If the rate offered is too low the offer will be under-subscribed, so those who take it up will receive more interest. 
B)  On most occasions, because management is careful to issue the debentures at an amount close to the market rate. 
C)  On those rare occasions when the coupon rate is the same as the market rate. 
D)  On those occasions when the offer rate is equal to the coupon rate. 
E)  None of the given answers.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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. 
E)  The market rate of interest multiplied by the face value 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. 
E)  The market rate of interest multiplied by the face value of the net debenture liability.

Question 17

Melville Ltd received a material claim for damages from a customer for not delivering ordered goods on time.The customer insists that Melville Ltd's late delivery resulted to significant losses to the customer.Melville Ltd 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 AASB 137?

Accepted Answer

A)  Ignore the claim. 
B)  Recognise the minimum amount of the liability. 
C)  Recognise the maximum amount of the liability. 
D)  Recognise the best estimate of the liability. 
E)  None of the given answers. 
A)  Ignore the claim. 
B)  Recognise the minimum amount of the liability. 
C)  Recognise the maximum amount of the liability. 
D)  Recognise the best estimate of the liability. 
E)  None of the given answers.

Question 18

In terms of accounting treatment under AASB 132 debentures and bonds are the same thing:

Accepted Answer

A) True 
 B)False

Question 19

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. 
E)  An obligation to make a donation or gift to another party. 
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. 
E)  An obligation to make a donation or gift to another party.

Question 20

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 
E)  None of the given answers. 
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 
E)  None of the given answers.

Exam 10: An Overview of Accounting for Liabilities

The par or face value of a debenture is:

Convertible notes are:

The present obligation component of a liability must be based on:

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

Provisions are established to allow for future sacrifices such as repairs and maintenance of machinery and may be recognised as liabilities:

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",which of the following is considered a contingent liability?

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets" some present obligations are allowed to be disclosed in the notes to the financial statements.

Examples of equitable or constructive obligations include:

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:

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

In accordance with AASB 137 "Provisions,Contingent Liabilities and Contingent Assets",which of the following statements is correct?

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

A debenture will be issued at par value:

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

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

In terms of accounting treatment under AASB 132 debentures and bonds are the same thing:

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

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

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

Accounting for Lease

Set-Off and Extinguishment of Debt

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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