Accounting for Liabilities | Test Bank - 9th

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Chapter 10 Testbank

1. Under AASB 101, something may be classified as a current liability even when it is expected to be settled for a period in excess of 12 months.

True   False

2. When determining whether a liability exists, the intentions or actions of management do not need to be taken into account.

True   False

3. A dividend is distribution of the profits of an entity to the owners of that entity, typically in the form of cash.

True   False

4. The present obligation component of a liability can be based on:

A. company’s legal obligations

B. obligations arising out of customary practices

C. obligations arising out of published policies

D. All of the given answers are correct.

5. What is the treatment of contingent liabilities in the financial statements?

A. Contingent liabilities are to be recognised as a separate category in the statement of financial position, with a clear note disclosure of the factors that constitute the contingent event for each material contingent liability.

B. Contingent liabilities are required to be disclosed in the notes to the financial statement when the amount of the obligation cannot be measured with sufficient reliability.

C. Material contingent liabilities only are required to be recognised in the financial statements under AASB 137.

D. Contingent liabilities are to be disclosed in the notes to the accounts in categories that reflect their nature and possible timing.

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

A. report same amounts of cash outflows that occur over different time periods recorded at the same amount

B. report cash flows at their future value rather than their present value

C. understate the amount of the present obligation

D. report cash flows at their future value rather than their present value and understate the amount of the present obligation

7. A debenture will be issued at par value:

A. on all occasions

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 market rate is higher than the coupon rate

8. 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

9. 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

10. 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

11. 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

12. 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 needs not necessarily to be known

D. the involvement of two separate parties—the entity and another party—of which the identity must be known

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

A. 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. a guarantee of an associate's bank overdraft where the associate has declared bankruptcy

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

A. Contingent liabilities and provisions are required by AASB 137 to be disclosed in the financial statements.

B. Contingent assets where realisation of economic benefits is probable should be recognised 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 recognised in the financial statements.

15. 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.

16. When measuring a liability at present values, the discount rate to be used, according to paragraph 47 of AASB 137, 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

17. 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. contingent liability

B. present obligation

C. adjustment to opening retained earnings

D. borrowing cost

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

A. adds the face value of the financial liability to the fair value of the compound financial instrument as a whole

B. deducts the face value of the financial liability from the fair value of the compound financial instrument as a whole

C. deducts the face value of the financial liability from the face value of the compound financial instrument as a whole

D. deducts the fair value of the financial liability from the fair value of the compound financial instrument as a whole

19. For a liability to be recognised within the financial statements, it needs to be reasonably apparent that an obligation to an ____________exists.

A. external party

B. another party

C. counter party

D. legal obligation

20. The ___________ reports information about assets, liabilities and equity.

A. balance sheet

B. research

C. legal

D. profit or loss

21. In the presence of an ‘onerous contract’, a(n) _________ and a related provision need to be recognised.

A. income

B. expense

C. asset

D. land

22. AASB 137 notes that the ‘________’ under a contract represent the least net cost of exiting from a contract, which is deemed to be the lower of the cost of fulfilling the contract, and any compensation or penalties arising from the failure to fulfil it.

A. unavoidable costs

B. expense

C. avoidable costs

D. coupon rate

23. There are many examples of a situation where an onerous contract might exist EXCEPT which of the following?

A. When the managers of an organisation enter a contract to supply particular products at an agreed price only to find that the cost to manufacture the products is likely to exceed the contracted sales price

B. When the managers of an organisation enter a contract to supply services for a given period and for an agreed price—for example, gardening services for the next year—only to find that the costs to be incurred are likely to exceed the contracted service revenues

C. When an organisation has entered a non-cancellable lease of property, but the lessee has moved out of the site and is unable to sublet the property. In this case the organisation (the lessee) would expect to receive no further economic benefits from the property pursuant to the lease contract, but still has an obligation to pay future rentals

D. When a manager cancels a contract at little or no cost to either party

24. According to paragraph 34 of AASB 137, a _________________ should be disclosed within the notes to the financial statements when an associated inflow of economic benefits is deemed to be probable.

A. contingent asset

B. financial asset

C. contingent liability

D. financial liability

25. When a risky investment fails, the costs of failure are shared by shareholders with lenders and creditors (the shareholders do not bear the full cost), but any high gains (profits) are of benefit to shareholders and ____________________________.

A. not shared with lenders and creditors

B. shared with lenders and creditors

C. shared with lenders

D. shared with creditors

26. Researchers working within the __________________ paradigm typically hypothesise that managers in organisations close to breaching particular accounting-based debt covenants will choose, where there is a choice, accounting methods that increase income, and thereby assets and equity, or decrease debt, thereby reducing the probability of debt covenant violation.

A. Positive Accounting Theory

B. Negative Accounting Theory

C. research

D. legal

27. To the extent that potential violation of debt covenants drives the selection of one accounting method in preference to another, such practices could be considered to represent ‘__________________’.

A. creative accounting

B. potential accounting

C. practical accounting

D. practice accounting

28. An entity shall classify a liability as ‘_______’ when it holds the liability primarily for the purpose of trading.

A. current

B. non-current

C. contingent

D. financial

29. Any liability that does not pass the test provided within AASB 101 for a current liability is called a _________.

A. financial liability

B. non-current liability

C. contingent liability

D. non-contingent liability

30. Where an inflow of economic benefits is probable, an entity shall disclose a brief description of the nature of the _____________ at the end of the reporting period, and, where practicable, an estimate of their financial effect (AASB 137).

A. current assets

B. contingent liabilities

C. contingent assets

D. current liabilities

31. What is an ‘onerous contract’, and how is such a contract to be represented within the financial statements?

______________________________________________________________________________

32. What is a ‘contingent liability’, and how shall a contingent liability be disclosed within the financial reports?

______________________________________________________________________________

33. Define a ‘contingent asset‘.

______________________________________________________________________________

34. Discuss briefly the disclosure requirements of contingent assets as per AASB 137.

______________________________________________________________________________

35. Discuss briefly the recognition criteria for liabilities based on the Conceptual Framework.

______________________________________________________________________________

36. What are two important factors to consider when assessing the relevance of liability disclosure?

______________________________________________________________________________

37. What is a dividend?

______________________________________________________________________________

38. What are preference shares?

______________________________________________________________________________

39. What is the characteristic of hybrid securities?

______________________________________________________________________________

40. Define ‘liability’ as defined in the Conceptual Framework.

______________________________________________________________________________

Chapter 10 Testbank