Question 1

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

Question 2

Which of the following provisions satisfy the requirements to be recognised as a liability under AASB 137?

Accepted Answer

A)   Provisions for repairs and overhauls.
B)   Provisions for warranties.
C)   Provisions for maintenance.
D)   Provisions for refurbishment costs.
E)   All of the given answers. B

Question 3

Pearl Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 12 per cent per annum. The required market rate of return is 16 per cent per annum. What is the issue price of the debentures (rounded to the nearest dollar)?

Accepted Answer

A)   $6,926,387
B)   $8,000,000
C)   $9,177,614
D)   $8,673,978
E)   None of the given answers. A

Question 4

Executory contracts are within the scope of AASB 137 "Provisions, Contingent Liabilities and Contingent Assets".

Accepted Answer

A) True 
 B)False

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.

Question 6

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 per cent of share value is payable. Calculate the debt-to-asset ratio immediately before and after the share issue:

Accepted Answer

A)   Before - 47.4 per cent; after - 47.4 per cent
B)   Before - 47.4 per cent; after - 37 per cent
C)   Before - 52.6 per cent; after - 63 per cent
D)   Before - 52.6 per cent; after - 59 per cent
E)   Before - 47.4 per cent; after - 59 per cent

Question 7

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.

Question 8

One recognised approach to reducing the level of debt that has been adopted in the past was to:

Accepted Answer

A)   Attempt to report the debt as equity, often in the form of preference shares.
B)   Create reserves and draw on them later as a source of funding.
C)   Treat as many liabilities as possible as provisions.
D)   Record liabilities as an increase in cash and a decrease in revenues.
E)   None of the given answers.

Question 9

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 10

The defining characteristic of a "provision" as opposed to other liabilities is that the existence of an obligation is uncertain:

Accepted Answer

A) True 
 B)False

Question 11

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.

Question 12

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.

Question 13

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.

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

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.

Question 16

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 17

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.
E)   All of the given answers

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Where the change in the carrying amount of a liability is due to the impacts of using present values, the change shall be recognised as a(n):

Accepted Answer

A)   Gain on Sale of Liability.
B)   Revaluation Reserve Adjustment.
C)   Adjustment to opening retained Earnings.
D)   Borrowing Cost.
E)   Extraordinary Item.

Question 20

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.

Exam 10: An Overview of Accounting for Liabilities

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) ?

Which of the following provisions satisfy the requirements to be recognised as a liability under AASB 137?

Pearl Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 12 per cent per annum. The required market rate of return is 16 per cent per annum. What is the issue price of the debentures (rounded to the nearest dollar) ?

Executory contracts are within the scope of AASB 137 "Provisions, Contingent Liabilities and Contingent Assets".

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

One recognised approach to reducing the level of debt that has been adopted in the past was to:

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

The defining characteristic of a "provision" as opposed to other liabilities is that the existence of an obligation is uncertain:

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

Examples of equitable or constructive obligations include:

The par or face value of a debenture is:

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:

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

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.

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:

Where the change in the carrying amount of a liability is due to the impacts of using present values, the change shall be recognised as a(n) :

A debenture will be issued at par value: