Deck 9: An Overview of Accounting for Liabilities

Question 1

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

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.

Answer 1

A

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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.

Question 6

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.

Question 7

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

Question 8

An equitable or constructive obligation arises when:

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 9

Executory contracts are within the scope of IAS 37 Provisions,Contingent Liabilities and Contingent Assets.

Question 10

An entity shall classify a liability as current when it holds the liability primarily for the purpose of trading.

Question 11

Which of the following is not listed in IAS 1 to determine if a liability should be classified as current?

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 12

Outside the situation where specific types of provisions are covered in standards,a provision exists when and only when:

A)The entity has a present legal, equitable or constructive obligation to make a future sacrifice of economic benefits to other entities as a result of past transactions or other past events; and the amount or timing of the future sacrifice of economic benefits that will be made to satisfy the present obligation is uncertain.
B)There is a legal or constructive obligation to make a future sacrifice of economic benefits within the entity as a result of past transactions or other past events, the amount or timing of which is uncertain.
C)The entity has a present legal obligation to make a future sacrifice of economic benefits to other entities as a result of past transactions or other past events; and the amount or timing of the future sacrifice of economic benefits that will be made to satisfy the present obligation is uncertain.
D)The amount, timing and entity to whom the obligation to sacrifice future economic benefits as a result of a past legal or constructive obligation are unknown.

Question 13

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

A)a legal obligation only.
B)a social obligation.
C)a contractual obligation.
D)none of the given answers.

Question 14

A guarantee provided to a financier for a loan taken out by another entity,where default on that loan is uncertain as at the reporting date,is an example of a contingent liability.

Question 15

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

Question 16

Examples of equitable or constructive obligations include:

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.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.

Question 17

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.

Question 18

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

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.

Question 19

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

Question 20

In IAS 37 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.

Question 21

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

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.

Question 22

Dubbin Plc 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 pound)?

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) $$\begin{array} { | l | l | l | l | } \hline \text { Dr } & \text { Cash } & 2775534 & \\\hline \mathrm { Cr } & \text { Debentures } & & 2775534 \\\hline\end{array}$$

Question 23

A debenture will be issued at par value:

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.

Question 24

In accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets,which of the following is considered a contingent liability?

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.

Question 25

Grindle Plc 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?

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

Question 26

What is the appropriate treatment for convertible notes in accordance with IAS 32 Financial Instruments: Presentation?

A)as a financial liability
B)as equity
C)as part debt and part equity
D)as a financial liability and disclosure of conversion option

Question 27

Buderup Plc issues £9 million in 12-year,6%,semi-annual coupon debentures.The rate of return required by the market is 10% per annum.What are the journal entries to record the first and second payments of interest assuming that Buderup uses the effective-interest method to amortise any discount or premium (rounded to the nearest pound)?

A) (a) First interest payment
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 233451 & \\\hline \mathrm{Dr} & \text { Debentures } & 36549 & \\\hline \mathrm{Cr} & \text { Cash } & & 270000 \\\hline\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 211397 & \\\hline \mathrm{Dr} & \text { Debentures } & 58603 & \\\hline \mathrm{Cr} & \text { Cash } & & 270000 \\\hline\end{array}$

B) (a) First interest payment
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \\\hline \mathrm{Dr} & \text { Debentures } & 36549 & \\\hline \mathrm{Cr} & \text { Cash } & & 306549 \\\hline\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \\\hline \mathrm{Dr} & \text { Debentures } & 249898 & \\\hline \mathrm{Cr} & \text { Cash } & & 519898 \\\hline\end{array}$

C) (a) First interest payment
$\begin{array}{|r|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 325812 & \\\hline \mathrm{Cr} & \text { Debentures } & & 55812 \\\hline \mathrm{Cr} & \text { Cash } & & 270000 \\\hline & & & \\\hline\end{array}$

(b) Second interest payment
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 328603 & \\\hline \mathrm{Cr} & \text { Debentures } & & 58603 \\\hline \mathrm{Cr} & \text { Cash } & & 270000 \\\hline\end{array}$

D) (a) First interest payment
$\begin{array}{|r|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \\\hline \mathrm{Cr} & \text { Debentures } & & 27906 \\\hline \mathrm{Cr} & \text { Cash } & & 242094 \\\hline\end{array}$

(b) Second interest payment
$\begin{array}{|r|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 270000 & \\\hline \mathrm{Cr} & \text { Debentures } & & 29301 \\\hline \mathrm{Cr} & \text { Cash } & & 240699 \\\hline\end{array}$

Question 28

Edgar Plc issues £7 million in 6-year,10%,semi-annual coupon debentures.The rate of return required by the market is 8% per annum.What is the journal entry to record the first payment of interest assuming using the effective-interest method to amortise any discount or premium (rounded to the nearest pound)?

A) $$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Interest expense } & 287306 & \\\hline \mathrm { Dr } & \text { Debenture } & 62694 & \\\hline \mathrm { Cr } & \text { Cash } & & 350000 \\\hline\end{array}$$
B) $$\begin{array} { | r | l | r | r | } \hline \mathrm { Dr } & \text { Interest expense } & 412694 & \\\hline \mathrm { Cr } & \text { Debenture } & & 62694 \\\hline \mathrm { Cr } & \text { Cash } & & 350000 \\\hline\end{array}$$
C) $$\begin{array} { | r | l | r | r | } \hline \mathrm { Dr } & \text { Interest expense } & 350000 & \\\hline \mathrm { Cr } & \text { Debenture } & & 43722 \\\hline \mathrm { Cr } & \text { Cash } & & 306278 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | r | r | } \hline \mathrm { Dr } & \text { Interest expense } & 306278 & \\\hline \mathrm { Dr } & \text { Debenture } & 43722 & \\\hline \mathrm { Cr } & \text { Cash } & & 350000 \\\hline\end{array}$$

Question 29

Banshee Plc 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 pound)?

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) $$\begin{array} { | c | l | l | l | } \hline \mathrm { Dr } & \text { Interest expense } & 636597 & \\\hline \mathrm { Cr } & \text { Debentures } & & 156597 \\\hline \mathrm { Cr } & \text { Cash } & & 480000 \\\hline\end{array}$$
D) $$\begin{array} { | c | l | r | r | } \hline \mathrm { Dr } & \text { Interest expense } & 323403 & \\\hline \mathrm { Dr } & \text { Debentures } & 156597 & \\\hline \mathrm { Cr } & \text { Cash } & & 480000 \\\hline\end{array}$$

Question 30

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

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 31

Convertible notes are:

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 IAS 32.

Question 32

Risky Plc 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 pound)?

A) $$\begin{array} { | l | l | l | l | } \hline \mathrm { Dr } & \text { Cash } & 8000000 & \\\hline \mathrm { Cr } & \text { Debentures } & & 8000000 \\\hline\end{array}$$
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) $$\begin{array} { | l | l | l | l | } \hline \mathrm { Dr } & \text { Cash } & 8648872 & \\\hline \mathrm { Cr } & \text { Debentures } & & 8648872 \\\hline\end{array}$$

Question 33

In disclosing liabilities,a reporting entity:

A)discloses on the basis of the current/non-current liability dichotomy.
B)has a choice, based on the notions of relevance and reliability to disclose liabilities either on the basis of the current/non-current liability dichotomy or on the basis of order of liquidity.
C)has a choice, based on the principle of conservatism to disclose liabilities either on the basis of the current/non-current liability dichotomy or on the basis of order of liquidity.
D)discloses on the basis of order of liquidity.

Question 34

Spoton Co Plc issues €5 million in 2-year,8%,semi-annual coupon debentures to the public.The market required rate of return is also 8%.The money is received on application and the debentures are allotted on the same day: 30 June 2013.What are the journal entries to record (a)the receipt of funds and allotment of debentures on 30 June 2013,(b)the payment of interest on 31 December 2013 and (c)the redemption of the debentures on 30 June 2015?

A) (a) Application and allotment 30 June 2013
$\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Cash at bank } & 5000000 & \\\hline \mathrm{Cr} & \text { Cash trust } & & 5000000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Application-debentures } & 5000000 & \\\hline \mathrm{Cr} & \text { Debentures } & & 5000000 \\\hline\end{array}$

(b) Payment of interest 31 December 2013
$\begin{array}{|l|l|r|r|}\hline \mathrm{Dr} & \text { Interest expense } & 400000 & \\\hline \mathrm{Cr} & \text { Cash at bank } & & 400000 \\\hline\end{array}$

(c) Redemption of debentures 30 June 2015
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Debentures } & 5000000 & \\\hline \mathrm{Cr} & \text { Cash at bank } & & 5000000 \\\hline\end{array}$
B) (a) Application and allotment 30 June 2013
$\begin{array}{|c|l|c|c|}\hline \mathrm{Dr} & \text { Cash trust } & 5000000 & \\\hline \mathrm{Cr} & \text { Application-debentures } & & 5000000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cash at bank } & 5000000 & \\\hline \mathrm{Cr} & \text { Cash trust } & & 5000000 \\\hline\end{array}$

(b) Payment of interest 31 December 2013
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash at bank } & 200000 & \\\hline \mathrm{Cr} & \text { Interest } & & 200000 \\\hline\end{array}$

(c) Redemption of debentures 30 June 2015
$\begin{array}{|l|l|l|l|}\hline \text { Dr } & \text { Debentures } & 5000000 & \\\hline \mathrm{Cr} & \text { Cash at bank } & & 5000000\\\hline\end{array}$
C) (a) Application and allotment 30 June 2013
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Cash trust } & 5000000 & \\\hline \mathrm{Cr} & \text { Application-debentures } & & 5000000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Cash at bank } & 5000000 & \\\hline \mathrm{Cr} & \text { Cash trust } & & 5000000 \\\hline & & & \\\hline \mathrm{Dr} & \text { Application-debentures } & 5000000 & \\\hline \mathrm{Cr} & \text { Debentures } & & 5000000 \\\hline\end{array}$

(b) Payment of interest 31 December 2013
$\begin{array}{|l|l|l|l|}\hline \text { Dr } & \text { Interest expense } & 200000 & \\\hline \mathrm{Cr} & \text { Cash at bank } & & 200000\\\hline\end{array}$

(c) Redemption of debentures 30 June 2015
$\begin{array}{|l|l|r|r|}\hline \text { Dr } & \text { Debentures } & 5000000 & \\\hline \mathrm{Cr} & \text { Cash at bank } & & 5000000\\\hline\end{array}$
D) (a) Application and allotment 30 June 2013
$\begin{array}{|l|l|l|l|}\hline \text { Dr } & \text { Debentures } & 5000000 & \\\hline \mathrm{Cr} & \text { Cash trust } & & 5000000 \\\hline\end{array}$

(b) Payment of interest 31 December 2013
$\begin{array}{|l|l|l|l|}\hline \mathrm{Dr} & \text { Interest receivable } & 200000 & \\\hline \mathrm{Cr} & \text { Cash at bank } & & 200000 \\\hline\end{array}$

(c) Redemption of debentures 30 June 2015
$\begin{array}{|l|l|r|l|}\hline \mathrm{Dr} & \text { Cash at bank } & 5000000 & \\\hline \mathrm{Cr} & \text { Debentures } & & 5000000 \\\hline\end{array}$

Question 35

When an entity's management resolves that the entity will offer to repair a defect it has recently discovered in one of its products,even though the nature of the defect is such that purchasers of the product would not expect the entity to do so:

A)it must immediately recognise a liability.
B)it must immediately recognise a liability, if it can be measured reliably.
C)it will never recognise a liability as the offer to repair was not part of the contract of sale.
D)it will only need to recognise a liability when the entity makes the offer public, or commits itself in some other way to make the repairs.

Question 36

When debentures are issued at a discount:

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.

Question 37

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.

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 38

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

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 39

Melville Plc received a material claim for damages from a customer for not delivering ordered goods on time.The customer insists that Melville Plc's late delivery resulted in significant losses to the customer.Melville Plc 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 IAS 37?

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.

Question 40

Preference shares,as noted in IAS 32:

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 41

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

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.

Question 42

Discuss the substance-over-firm approach in IAS 32 Financial Instruments.

Question 43

Adopting the effective-interest method means that the balance of the debenture liability represents:

A)the par value of the debenture.
B)the present value of the liability throughout the debenture term.
C)the adjustment to the debenture par value.
D)the borrowing cost.

Question 44

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.

Question 45

In accordance with IAS 37 Provisions,Contingent Liabilities and Contingent Assets,differentiate provisions from accruals and provide one example for each type of liability.

Question 46

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

Question 47

Discuss the necessary conditions prescribed in IAS 37 Provisions,Contingent Liabilities and Contingent Assets to recognise provisions.Illustrate how these conditions are satisfied in a product warranty example.

Question 48

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)gain on sale of liability.
B)revaluation reserve adjustment.
C)adjustment to opening retained earnings.
D)borrowing cost.

Question 49

Discuss the criteria required to classify a liability as current.

Question 50

When measuring a liability at present values,the discount rate to be used,according to paragraph 47 of IAS 37,is:

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 51

Explain in what situations,and why,some provisions should be measured at present values.

Question 52

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?

Question 53

Unless the probability of any outflow in a settlement is remote,an entity needs to disclose for each class of contingent liability:

A)the possibility of any reimbursement.
B)an indication of the timing and amount uncertainties.
C)an estimate of its financial effect.
D)All of the given answers must be disclosed.

Question 54

From the following extract of an amortisation schedule pertaining to a compound financial instrument,what is the effective-interest rate embodied in the instrument? $\begin{array}{|l|l|l|l|l|l|l|}\hline\text { Period } & \text { Opening } &\text { Effective } & \text { Coupon rate } &\text { Discount } &\text { Balance of } & \text { Net liability }\\&\text { liability }&\text { interest }&&\text { amortisation }&\text { discount }&\\\hline 0 & & & & & 736055 & 9263945 \\\hline 1 & 9263945 & 555837 & 500000 & 55837 & 680218 & 9319782 \\\hline 2 & 9319782 & 559187 & 500000 & 59187 & 621031 & 9378969 \\\hline 3 & 9378969 & 562738 & 500000 & 62738 & 558293 & 9441707\\\hline\end{array}$

A)6%
B)5%
C)Variable, as shown in the table it has increased from 5.5837% in Period 1 to 6.2738% in Period 3.
D)4%.

Question 55

From the following extract of an amortisation schedule pertaining to a compound financial instrument,what is the net liability (assuming the debenture has not yet been repaid),at the end of Period 10? $\begin{array}{|l|l|l|l|l|l|l|}\hline\text { Period } & \text { Opening } &\text { Effective } & \text { Coupon rate } &\text { Discount } &\text { Balance of } & \text { Net liability }\\&\text { liability }&\text { interest }&&\text { amortisation }&\text { discount }&\\\hline 0 & & & & & 736055 & 9263945 \\\hline 1 & 9263945 & 555837 & 500000 & 55837 & 680218 & 9319782 \\\hline 2 & 9319782 & 559187 & 500000 & 59187 & 621031 & 9378969 \\\hline 3 & 9378969 & 562738 & 500000 & 62738 & 558293 & 9441707\\\hline\end{array}$

A)Nil
B)£9 500 000
C)£9 905 582
D)£10 000 000

Question 56

IFRS 13 defines fair value measurement as:

A)the price that would be received to buy an asset or received to transfer a liability in an orderly transaction between market participants at the due date.
B)the price that would be paid to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the due date.
C)the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
D)the price that would be estimated to sell an asset or to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 57

Explain,in the context of the latest IAS 37,why 'provisions' for items such as future repairs and maintenance are no longer permitted to be recognised.

Question 58

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

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).