Question 1

The treatment recommended under AASB 2,for share options granted as remuneration to employees is:

Accepted Answer

Under AASB 2, share options granted as remuneration to employees must be recognized as an expense and measured at fair value on the grant date. Therefore, choices B and C are both correct. Option A is incorrect because the entity is still sacrificing something of value (the opportunity cost of selling the shares at a higher price in the future) by granting share options to employees, even though it may not involve an immediate cash outflow.

Question 2

Which approach to accounting for convertible notes is required in AASB 132 'Presentation and Disclosure of Financial Instruments'?

Accepted Answer

AASB 132 requires that convertible notes be separated into their equity and debt components based on the fair value and recognised as a liability and equity in accordance with their legal form. This approach is known as the 'if-converted method' and is designed to provide a more accurate representation of the financial position of an entity. This is in line with the principles of AASB 132, which requires financial instruments to be presented and disclosed in a way that reflects their economic substance.

Question 3

Which of the statements is incorrect? Under a compensatory compared to a non-compensatory plan to allow employees to acquire shares in their company:

Accepted Answer

The statement "the offer will be required to be taken up immediately" is incorrect. Under a compensatory plan, employees are usually able to acquire shares over a period of time and may have the option to delay their acquisition.

Question 4

Asset revaluation reserves arise from:

Accepted Answer

Asset revaluation reserves arise from the revaluation of assets as per the requirements of the Corporations Act and accounting standards, which mandate that certain assets be revalued to reflect their fair value.

Question 5

Notia Ltd,under an equity-based remuneration plan,grants 5 senior executives the option of buying shares at $4 per share.At the date of granting the option the shares have a market value of $5.00 each.One executive exercises the right to buy 2000 shares on l January 2010.In principle,the basic accounting entry for this transaction would be:

Accepted Answer

The correct answer is B because the company incurs a remuneration expense equal to the difference between the market value and the exercise price of the options.

Question 6

Under AASB 132,preference shares that must be redeemed by the issuer for a fixed or determinable amount at a fixed or determinable future date will be classified as:

Accepted Answer

Preference shares that must be redeemed by the issuer for a fixed or determinable amount at a fixed or determinable future date are classified as a liability under AASB 132 because they represent an obligation to transfer financial assets.

Question 7

Which of these items,under AASB 101,need not be disclosed on the face of the balance sheet?

Accepted Answer

Under AASB 101, the number of shares issued and the extent to which they are fully paid need not be disclosed on the face of the balance sheet. Minority interest and retained earnings attributable to equity holders of the parent must be disclosed on the face of the balance sheet.

Question 8

The three broad components of equity for a company are:

Accepted Answer

The three broad components of equity for a company are share capital, retained earnings, and reserves. Share capital consists of ordinary and preference shares, which represent the initial investment made by shareholders in the company. Retained earnings are the profits that are kept by the company instead of being distributed as dividends to shareholders. Finally, reserves are funds set aside by the company for specific purposes, such as to cover future contingencies or to finance capital expenditures.

Question 9

Which of the following is not an implication of the framework's definition of equity?

Accepted Answer

The answer of Which of the following is not an...

Question 10

A reason why a company might wish to buy back its own shares is:

Accepted Answer

A company might buy back its own shares to return excess cash to shareholders when there are not enough profitable investment opportunities available.

Question 11

When an entity re-acquires its own shares:

Accepted Answer

When an entity re-acquires its own shares, it shall be removed from equity, no gain or loss shall be recognised in the income statement, and they must not be recognised as a financial asset. Therefore, all of the above statements are correct.

Question 12

Whitely Ltd issues 50 000 shares at $4.60 per share.The accounting effect of the issue is:

Accepted Answer

When a company issues shares, the amount received from shareholders is recorded as a credit to the share capital account. In this case, Whitely Ltd issued 50,000 shares at $4.60 per share, which means that they received $230,000 (50,000 x $4.60) from shareholders. Therefore, the accounting effect of the issue is to debit cash at bank for $230,000 and credit share capital for $230,000. Option A reflects this correctly. Option B is incorrect as applications is not a standard account that is used in this context. Option C is incorrect as the company received $230,000 and not $50,000. Option D is incorrect as there must be an accounting entry for the receipt of funds from shareholders.

Question 13

Debt instruments that include an option to convert them to equity under specified conditions are known as:

Accepted Answer

Convertible notes are debt instruments that have an option to convert them to equity under specified conditions, such as the occurrence of a particular event or at the holder's discretion. Preference shares, options, and rights do not necessarily include a conversion option.

Question 14

A transfer from retained earnings would have created a/an:

Accepted Answer

Transferring money from retained earnings to a general reserve account means setting aside funds for future use, such as investments or expansion plans. This increases the company's financial stability and helps it better weather any economic downturns. The other options - asset revaluation reserve, foreign currency translation reserve, and share premium reserve - are typically created for specific accounting purposes unrelated to the transfer of retained earnings.

Question 15

Management decided to buy-back 1 million shares that had been issued for $1 per share,for $1 per share.At the time of the buy-back total share capital was 20 million shares.The likely accounting entry to record the buy-back is:

Accepted Answer

When a company repurchases its own shares, the share capital account is reduced. In this case, management bought back 1 million shares for $1 per share, which means they will spend $1 million in cash to buy back these shares. Therefore, the accounting entry to record the buy-back would be to debit share capital for $1 million (to reduce the share capital account) and to credit cash at bank for $1 million (to record the payment made for the shares). Choice A is the only option that reflects this accounting treatment.

Question 16

If a preference share dividend cannot be paid in a particular year and will then accrue as a liability until the funds are available,the preference shares are known as:

Accepted Answer

Cumulative preference shares are those in which dividends accrue and accumulate over time if they cannot be paid in a particular year. This means that any unpaid dividends will be carried forward and treated as a liability until such time as the funds are available to pay them. Participating preference shares, on the other hand, allow the shareholders to participate in the profits of the company beyond the fixed dividend rate they are entitled to. Non-participating preference shares do not give the shareholders any right to participate in the profits of the company, beyond the fixed dividend rate. Redeemable preference shares are those that can be redeemed by the company at a future date, usually after a specified period of time has elapsed.

Question 17

Which of these is a way in which a company can raise capital through the issue of shares?

Accepted Answer

All of the options are ways in which a company can raise capital through the issue of shares.

Question 18

AASB 101 requires disclosure relating to:

Accepted Answer

AASB 101 requires disclosure of all of the above information, including par value (if applicable), whether shares have no par value, and the number of shares issued.

Question 19

A scheme where a company provides employees with options to acquire shares in the company where the primary aim of the scheme is to reduce conflict between owners and employees is known as:

Accepted Answer

A non-compensatory plan is designed to align the interests of employees with those of the shareholders, thereby reducing potential conflicts between owners and employees.

Question 20

What approval is required under the Corporations Act 2001 if a company wishes to buy back its own shares?

Accepted Answer

According to Section 257A of the Corporations Act 2001, shareholders' approval is required for a buy-back of more than 10% of a company's shares over a 12 month period. If the buy-back is less than 10%, only board approval is required. However, if the buy-back exceeds the 10% limit, a special resolution is required to be passed by the shareholders. Therefore, option B is the correct answer.

Quiz 15: Equity