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.

Accepted Answer

Discounting future cash flows is essential for accurately representing their present value. If cash flows are not discounted, it means that cash outflows occurring at different times are treated as if they have the same value, regardless of the timing. This approach ignores the time value of money, which states that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

Question 2

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

Accepted Answer

A discount on debentures arises when the market required rate of return is greater than the coupon rate. In this case, investors are not willing to pay the full face value of the debentures and so they are issued at a discount.

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.

Accepted Answer

The market may pay a premium for debentures if the coupon rate of those debentures is higher than the prevailing market interest rate, not because of their par value.

Question 4

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

Accepted Answer

Both debentures and bonds are long-term debt instruments issued by companies to raise funds from the market. They have many similarities in terms of accounting treatment, such as being recorded as a liability on the balance sheet, and interest payments being recorded as expenses in the income statement. Therefore, in terms of accounting treatment, debentures and bonds are considered to be 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.

Accepted Answer

A constructive obligation is an obligation that arises from past events and it is not a formal or legal obligation. In such cases, if the entity retains discretion to avoid any future sacrifice of economic benefits, no liability should be recognised in the financial statements. This is because there is no certainty that an outflow of resources will occur in the future. Therefore, the answer is A - true.

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.

Accepted Answer

This statement describes the principle of recognizing a liability in financial accounting. A liability represents a current obligation of an entity to transfer economic resources to another entity based on a past event or transaction. The liability should be recognized in the financial statements if it is probable that a future outflow of resources will be required to settle the obligation and the amount of the obligation can be reliably estimated.

Question 7

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

Accepted Answer

Management intentions and actions can impact whether a liability exists, as they may have made promises or taken actions that create an obligation for the company to fulfill.

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.

Accepted Answer

An equitable or constructive obligation arises when 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. Both conditions must be met for an equitable or constructive obligation to arise. Option A and B are partially correct but do not cover all aspects of the definition, while option C only covers one aspect of the definition. Therefore, option D is the best choice.

Question 9

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

Accepted Answer

Executory contracts are not within the scope of IAS 37 unless they are onerous contracts.

Question 10

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

Accepted Answer

According to IAS 1, a liability should be classified as current if the entity holds the liability primarily for the purpose of trading, regardless of the original term of the liability.

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.

Accepted Answer

IAS 1 does not mention a liability being "guaranteed" to be settled within 12 months as a criterion for classifying it as current. Instead, it focuses on expectations and rights related to settlement within 12 months or the 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.

Accepted Answer

The answer of Outside the situation where specific types of...

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.

Accepted Answer

The present obligation component of a liability can be based on legal, contractual, or constructive obligations, not limited to a single type.

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.

Accepted Answer

This statement correctly defines a contingent liability.

Question 15

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

Accepted Answer

Some research has shown that firms in financial distress may have increased incentives to cut costs, change strategies, and explore new opportunities, leading to improved performance in the long run. Additionally, firms in distress may attract attention from investors and potential buyers looking for bargains. However, it is important to note that being in financial distress can also lead to bankruptcy and other negative consequences.

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.

Accepted Answer

The answer of Examples of equitable or constructive obligations include:
A)A...

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.

Accepted Answer

A present obligation can be recognized in the financial statements even if the identity of the party to whom the obligation is owed is not known, as long as there is a present obligation that will likely result in an outflow of resources.

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.

Accepted Answer

Financial distress can serve as a stimulus for entities to rethink their activities and possibly make changes that will lead to improved future performance. This can ultimately benefit the entity in the long run.

Question 19

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

Accepted Answer

Convertible notes are best described as having characteristics of both debt and equity, not liabilities and bonds. They are a form of short-term debt that can convert into equity, typically at the discretion of the holder or upon certain events.

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.

Accepted Answer

IAS 37 requires contingent liabilities to be disclosed when the outflow of resources is not probable, but contingent assets are only disclosed when the inflow of resources is virtually certain.

Quiz 9: An Overview of Accounting for Liabilities

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

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

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

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

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.

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.

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

An equitable or constructive obligation arises when:

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

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

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

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

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

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.

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

Examples of equitable or constructive obligations include:

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.

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

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

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.