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Finance MCQs with Solution

Part 1

Question 1

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

  1. $6 926 387
  2. $8 000 000
  3. $9 177 614
  4. $8 673 978

Question 2

Evaluate whether the following situations will give rise to a present obligation:

  1. Bona Bay Ltd is a large manufacturer of surfboards and provides a two year warranty for all its products from the time of purchase by offering to repair or replace the item.
  2. Sea Eagle Ltd operates its offshore oil rigs near Curlew Beach. During the reporting period, there was a major oil spill and the company had publicly announced to undertake clean-up of all the contamination that it caused. There is no environmental legislation on oil spills.
  3. A customer sued Neck Bay Ltd for damages from a faulty product. The company hired a legal team to dispute this claim.
  4. Whitehaven Ltd had guaranteed a bank loan to an associated company.

In compliance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets, which of the above situations requires recognition in the financial statements?

  1. I, II and III
  2. I and II
  3. II and III
  4. III and IV

Question 3

Which of the following items would not be covered by AASB 141?

  1. dairy cattle
  2. wine
  3. vines
  4. fruit trees

Question 4

Arguments for the use of financial valuations of heritage assets to fulfil the accountability and performance evaluation functions of accounting statement preparation include:

  1. The funds contributed to government departments cannot be effectively tracked unless valuations of heritage assets are included in financial statements.
  2. Managers of heritage assets need to ensure that they maximise the value of the collections and maintain them appropriately. Valuations of all assets provide an accurate performance measure in this regard.
  3. In order to assess whether or not managers of collections have performed well it is necessary to have financial valuations of the heritage assets held at the beginning and end of the period. Decisions to buy and sell heritage assets can then be evaluated in the context of their impact on the quality of the entire collection.
  4. Performance measurement will be more accurate because, for example, rate of return is calculated on total asset base.

Question 5

Spoton Co Ltd 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?

  1. a)Dr.Cash at bank 5,000,000
    Cr.Cash trust 5,000,000
    Dr.Application-debentures 5,000,000
    Cr.Debentures 5,000,000
    b)Dr.Interest expense 400,000
    Cr.Cash at bank 400,000
    c)Dr.Debentures 5,000,000
    Cr.Cash at bank 5,000,000
  2. a)Dr. Cash trust 5,000,000
    Cr. Application-debentures 5,000,000
    Dr. Cash at bank 5,000,000
    Cr. Cash trust 5,000,000
    b)Dr. Cash at bank 200,000
    Cr.Interest 200,000
    c)Dr.Debentures5,000,000
    Cr.Cash at bank 5,000,000
  3. a)Dr. Cash trust 5,000,000
    Cr. Application-debentures 5,000,000
    Dr. Cash at bank 5,000,000
    Cr. Cash trust 5,000,000
    Dr. Application-debentures 5,000,000
    Cr.Debentures 5,000,000
    b)Dr.Interest expense 200,000
    Cr.Cash at bank 200,000
    c)Dr.Debentures 5,000,000
    Cr.Cash at bank 5,000,000
  4. a)Dr. Debentures 5,000,000
    Cr.Cash trust 5,000,000
    b)Dr.Interest receivable 200,000
    Cr.Cash at bank 200,000
    c)Dr. Cash at bank 5,000,000
    Cr. Debentures 5,000,000

Question 6

Measuring the value of heritage assets to be reported in the statement of financial position raises difficulties because:

  1. While reliable valuations may be made, the cost of maintaining and improving the value of the assets is so high that the capitalisation of these amounts often distorts the valuations.
  2. The cost of heritage assets is the most reliable measure, but because heritage assets may be very old their carrying value will often be zero under the requirements of AAS 29.
  3. Obtaining a reliable valuation for heritage assets is problematic because there will generally be no sales or purchases and no valid market comparison to use.
  4. The cost of obtaining detailed valuations by experts in the area of the specific type of heritage asset is prohibitive for most government departments.

Question 7

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

  1. 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.
  2. 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.
  3. Material contingent liabilities only are required to be recognised in the financial statements under AASB 137.
  4. Contingent liabilities are to be disclosed in the notes to the accounts in categories that reflect their nature and possible timing.

Question 8

Providing financial information about heritage assets:

  1. is important as it will benefit all users.
  2. is a requirement of AAS 29 which appears to be based on the assumption that only financial information is relevant to report users.
  3. will result in wasted resources if demand for such information is limited.
  4. should be done only if the cost of providing the information exceeds the benefits.

Question 9

Features common to heritage assets are that they typically:

  1. are unique, are aspects of the natural environment (for example, parks) and cannot be replaced.
  2. have no alternative use, cannot be replaced and generate negative net cash flows.
  3. are self-generating, individually unique and generate negative net cash flows.
  4. have no alternative use, cannot be replaced and generate positive net cash flows.

Question 10

Where a biological asset is not separable from other assets:

  1. the value of the biological asset should be included in the value of the other asset.
  2. the value of the package of assets for which an active market exists should be used to assist in determining the fair value of the biological assets.
  3. the fair values of the non-biological assets should be subtracted from the package value.
  4. the value of the package of assets for which an active market exists should be used to assist in determining the fair value of the biological assets and the fair values of the non-biological assets should be subtracted from the package value.

Question 11

Preference shares, as noted in AASB 132:

  1. should be regarded as debt when redemption is at the option of the holder or on a specified date.
  2. will be classified as debt or equity based on their legal form rather than the substance of the financial instrument.
  3. exhibit the characteristics of equity when they are non-redeemable.
  4. will have their classification as debt or equity affected by the intention to make distributions in the future.

Question 12

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

  1. there must be a legal obligation.
  2. a legally binding contractual arrangement between two parties: the entity and another party.
  3. the involvement of two separate parties—the entity and another party—of which the identity of the latter needs not necessarily to be known.
  4. the involvement of two separate parties—the entity and another party—of which the identity of the latter must be known.

Question 13

Valuations of forestry assets in Australia have been undertaken on:

  1. a historical-cost basis.
  2. a replacement and/or market-value basis.
  3. using net present values.
  4. a historical-cost basis and a replacement and/or market-value basis.

Question 14

All things being equal, firms would typically prefer to disclose low levels of debt because:

  1. Any debt is a bad thing in the capital structure of a business.
  2. Additional debt may lead to a technical breach of a firm's contractual agreements with existing debt-holders and lead to the possible wind-up of the business or the need to renegotiate the contract.
  3. The level of recognised debt will affect the profitability of the business.
  4. Recognising debt in the income statement may lead to a decrease in management bonuses that are based on the times-interest-earned and debt-to-assets ratios.

Question 15

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

  1. Guarantee provided by the parent entity on behalf of a solvent subsidiary.
  2. Settlement of a legal case where the company is likely to be held liable for damages in court.
  3. Best estimate of likely claims for warranty by customers.
  4. Guarantee of an associate's bank overdraft where the associate has declared bankruptcy.

Question 16

AASB 141 requires biological assets to be measured at:

  1. the lower of cost and net realisable value.
  2. recoverable amount.
  3. current replacement cost.
  4. fair value less costs to sell.

Question 17

Grindle Ltd 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?

  1. (a) 67%; (b) 50%
  2. (a) 80%; (b) 60%
  3. (a) 50%; (b) 67%
  4. (a) 60%; (b) 80%

Question 18

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

  1. 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.
  2. 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.
  3. 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.
  4. 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 19

Margaret Ltd has a vineyard and at the end of reporting period 30 June 2012 the following information is available:

What is the change in fair value less estimated point-of-sale costs of the vines for the reporting period 30 June 2012 in accordance with AASB 141 Agriculture?

  1. ($350 000)
  2. ($300 000)
  3. $250 000
  4. $350 000

Question 20

Nerang Orange Farms Ltd has orange trees that on 30 June 2012 had a fair value of $1 600 000. On 30 April 2013 oranges with an estimated market value of $300 000 were picked. The costs of picking, sorting and packing paid in cash amount to $150 000. The oranges were sold on the same day for $310 000. An independent valuation on 30 June 2013 reports that the estimated fair value of the orange trees is $1 500 000.

What is the net profit of Nerang Orange Farms Ltd for the year ending 30 June 2013 to conform with the provisions of AASB 141 Agriculture?

  1. $60 000
  2. $210 000
  3. $300 000
  4. $310 000

Question 21

Methods that have been used to provide a valuation of heritage assets include:

  1. contingent-valuation method and the nominal or notional value.
  2. travel-cost method and adjusting the market values of nearby privately held properties.
  3. the net present value of the adjusted cash-flow method and the arbitrary allocation of cost method.
  4. contingent-valuation method and the nominal or notional value and travel-cost method and adjusting the market values of nearby privately held properties.

Part 2

Question 1

The period covered by AASB 110 Events After the Reporting Period is from:

  1. the date of the report to the date of release to shareholders.
  2. the reporting date to the date when the financial report is authorised for issue.
  3. the balance date to the reporting date.
  4. the balance date to the date when the financial report is presented to the board of directors.

Question 2

AASB 110 requires that adjusting events that meet two broad criteria should be:

  1. reflected in the financial information in the statements if it is material and relates to an item that would normally be reflected in the financial statements.
  2. always disclosed by way of a note to the financial statements.
  3. disclosed as a contingent liability, if it is an unfavourable event.
  4. reflected in the financial statements, if it is an unfavourable event; disclosed by way of note, if it is a favourable event.

Question 3

Birong Ltd. issued a $200 million preference share issue after reporting date. What is the classification of this subsequent event and what is the accounting treatment prescribed in AASB 110?

  1. adjusting event; no disclosure necessary
  2. adjusting event; with appropriate disclosure
  3. non-adjusting event; no disclosure necessary
  4. non-adjusting event; with appropriate disclosure

Question 4

Which of the following is not a related party within the provisions of AASB 124 Related Party Disclosures?

  1. associates
  2. non-executive directors
  3. executive personnel
  4. bankers

Question 5

Which of the following items is not an example of items reportable under other comprehensive income?

  1. changes in revaluation surplus
  2. actuarial gains and losses on defined contribution plans
  3. gains and losses arising from translating the financial statements of a foreign operation
  4. the effective portion of gains and losses on hedging instruments in a cash flow hedge

Question 6

'Comprehensive income' refers to:

  1. the statement of total recognised income and expense.
  2. the statement of changes in equity.
  3. the net profit figure shown at the bottom of the statement of profit or loss.
  4. none of the given answers.

Question 7

Reasons for the requirement to disclose related-party transactions include:

  1. the risk that the performance and position of the reporting entity will be negatively affected by the transactions.
  2. key stakeholders of the entity include related parties who should be kept informed of their transactions.
  3. they may be used to minimise total taxation payable by a group of related entities.
  4. the risk that the performance and position of the reporting entity will be negatively affected by the transactions and related-party transactions may be used to minimise total taxation payable by a group of related entities.

Question 8

Which of the following would not be considered a 'prior period error' according to AASB 108?

  1. mathematical mistakes.
  2. fraud.
  3. misinterpretations of fact.
  4. none of the given answers.

Question 9

Cobourg Ltd has the following transactions during the year:

Which of the following lists all the related-party transactions required to be disclosed in AASB 124 Related Party Disclosures?

  1. I and II
  2. III and IV
  3. II, IV and V
  4. I, II, IV and VI

Question 10

Which of the following material after-reporting-date events is not considered an adjusting event?

  1. determination after the reporting date of the cost of assets purchased before the reporting date
  2. receipt of information after the reporting date indicating that an asset was impaired at the reporting date
  3. determination after the reporting date of the amount of bonus payments payable to senior executives
  4. destruction of assets due to flood after the reporting date

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