chapter 11
TRANSCRIPT
EXAMPLE TEST QUESTIONS
Chapter 11
Multiple Choice
1. A loss from early extinguishment of debt, if material, should be reported as a component of income a. After cumulative effect f accounting changes and after discontinued operations of a segment
of a businessb. After cumulative effect of accounting changes and before discontinued operations of a
segment of a business c. Income from continuing operationsd. Before cumulative effect of accounting changes and before discontinued operation s of a
segment of a businessAnswer c
2. Unamortized debt discount should be reported on the balance sheet of the issuer asa. A direct deduction from the face amount of the debtb. A direct deduction from the present value of the debtc. A deferred charged. Part of the issue costs
Answer c
3. An example of an item that is not a liability is a. Dividends payable in stockb. Advances from customers on contractsc. Accrued estimated warranty costsd. The portion of long-term debt due within one year
Answer a
4. If bonds are issued initially at a discount and the straight-line method of amortization is used for the discount, interest expense in the earlier years will be a. Greater than if the compound interest method were usedb. The same as if the compound interest method were usedc. Less than if the compound interest method were usedd. Less than the amount of the interest payments
Answer a
5. Cole Manufacturing Corporation issued bonds with a maturity amount of $200,000 and a maturity 10 years from date of issue. If the bonds were issued at a premium, this indicates that a. The yield (effective or market) rate of interest exceeded the nominal (coupon) rateb. The nominal rate of interest exceeded the yield ratec. The yield and nominal rates coincidedd. No necessary relationship exists between the two rates
Answer b
6. “Trading on the equity” (financial leverage) is likely to be a good financial strategy for stockholders of companies havinga. Cyclical high and low amounts of reported earningsb. Steady amounts of reported earningsc. Volatile fluctuation in reported earnings over short periods of timed. Steadily declining amounts of reported earnings
Answer b
7. Theoretically, a bond payable should be reported at the present value of the interest discounted at a. Stated interest rate for both principal and interestb. Effective interest rate for both principal and interestc. Stated interest rate for principal and effective interest rate for interestd. Effective interest rate for principal and stated interest rate for interest
Answer b
8. A threat of expropriation of assets that is reasonably possible, and for which the amount of loss can be reasonably estimated, is an example of a (an)a. Loss contingency that should be disclosed, but not accruedb. Loss contingency that should be accrued and disclosedc. Appropriation of retained earnings against which losses should be chargedd. General business risk which should not be accrued and need not be disclosed
Answer a
9. When it is necessary to impute an interest rate in connection with a note payable, the rate should bea. Two-thirds of the prime rate effective at the time the obligation is incurredb. The same as that used in the GNP Implicit Price Deflatorc. At least equal to the rate at which the debtor can obtain financing of a similar nature from
other sources at the date of the transactiond. As near zero as can be justified
Answer c
10. Taft Company sells Lee Company a machine, the usual cash price of which is $10,000, in exchange for an $11,800 non-interest-bearing note due three years from date. If Taft records the note at $10,000, the overall effect will bea. A correct sales price and correct interest revenueb. A correct sales price and understated interest revenuec. An understated sales price and understated interest revenued. An overstated interest price and understated interest revenue
Answer a
11. In the situation described in problem 10, if Lee records the asset and note at $11,800, the overall effect will bea. A correct acquisition cost and correct interest expenseb. A correct acquisition cost and understated interest expensec. An understated acquisition cost and understated interest expensed. An overstated acquisition cost and understated interest expense
Answer d
12. How would the amortization of premium bonds payable affect each of the following?Carrying value of
Bond Net Incomea. Increase Decreaseb. Increase Increasec. Decrease Decreased. Decrease Increase
Answer d
13. For a trouble debt restructuring involving only modification of terms, it is appropriate for a debtor to recognize a gain when the carrying amount of the debta. Exceeds the total future cash payments specified by the new termsb. Is less than the total future cash payments specified by the new termsc. Exceeds the present value specified by the new termsd. Is less than the present value specified by the new terms
Answer b
14. How should the value of warrants attached to a debt security be account for?a. No value assignedb. A separate portion of paid-in capitalc. An appropriation of retained earnings
d. A liability
Answer b
15. For the issuer of a 10-year term bond, the amount of amortization using the interest method would increase each year if the bond was sold at a
Discount Premiuma. No Nob. Yes Yesc. No Yesd. Yes No
Answer d
16. Gain contingencies are usually recognized in the income statement whena. Realizedb. Occurrence is reasonably possible and the amount can be reasonably estimatedc. Occurrence is probable and the amount can be reasonably estimatedd. The amount can be reasonably estimated
Answer a
17. An estimated loss from a loss contingency should be accrued whena. It is probable at the date of the financial statements that a loss has been incurred and the
amount of the loss can be reasonably estimatedb. The loss has been incurred by the date of the financial statements and the amount of the loss
may be materialc. It is probable at the date of the financial statements that a loss has been incurred and the
amount of the loss may be materiald. It is probable that a loss will be incurred in a future period and the amount of the loss can be
reasonably estimated
Answer a
18. When the issuer of bonds exercises the call provision to retire the bonds, the excess of the cash paid over the carrying amount of the bonds should be recognized separately as a (an)a. Extraordinary lossb. Extraordinary gainc. Loss from continuing operationsd. Loss from discontinued operations
Answer c
19. A two-year note was issued in an arm’s-length transaction at face value solely for cash at the beginning of the year. There were no other rights or privileges exchanged. The interest rate is specified at 10 percent per year. Principal and interest are payable at maturity. The prevailing rate of interest for a loan of this type is 15 percent per year. What annual interest rate should be used to record interest expense for this year and next year?
This year Next Yeara. 10 percent 15 percentb. 10 percent 10 percentc. 15 percent 10 percentd. 15 percent 15 percent
Answer b
20. The interest rate used to calculate the cash interest payments by the issuer of bonds is
a. The market rate of interest
b. The effective interest rate
c. The stated interest rate
d. Equal to the actual interest expense rate
Answer c
21. Ace Corporation has a debt to total assets ratio of 65%. This tells the user of Ace’s financial statementsa. Ace is getting a 35% return on its assetsb. There is a risk Ace cannot pay its debts as they come duec. 65% of the assets are financed by the stockholdersd. Ace should issue more debt to reduce its risk
Answer b
22. Trading on the equity (leverage) refers to the
a. Amount of working capital
b. Amount of capital provided by owners
c. Use of borrowed money to increase the return to owners
d. Number of times interest is earned
Answer c
23. The current accounting treatment for convertible debt is to treat it as straight debt. This treatment can be defended on what basis?
a. Convertible debt is a complex financial instrument.b. Convertible debt comprises two financial instruments – a debt instrument and the option to
convert.c. The debt instrument and the option to convert are not separable.d. The option to convert is equity.
Answer c
24. XYZ Company’s yearend is December 31, 20x1 and its financial statements are issued in the following March. On January 24, 20x2. A 10 year note payable came due and was paid by issuing XYZ common stock to the creditor. In its December 31, 20x1 balance sheet, XYZ shoulda. Report the note as a current liability because it was due on January 24, 20x2 – only 24 days
after the year end.b. Report the note as a long-term liability because it was not paid off with a current asset or
replaced by another current liability.c. Report the note as a long-term liability because it was extinguished (paid off) on January 24,
20x2 – only 24 days after the year end.d. Report the note as a long-term liability because it was a 10 year note.
Answer b
25. A zero coupon bond is different from a typical bond issue becausea. The investor can clip the coupons and get paid for the periodic interest on the bond while a
typical bond does not have coupons.b. It is reported in the balance sheet net of the discount on the bond.c. The zero coupon bond’s deep discount is reported as an asset and a typical bond that is issued
at a discount is reported net of the discount. d. It does not pay any periodic interest while the typical bond does.
Answer d
26. An unearned revenue is an example of a(an)a. Deferred credit.b. Accrued liability.c. Customer billing that takes place before a job is finished.d. Accounts receivable.
Answer a
27. A deferred credit meets the definition of a liability becausea. It is a probable future sacrifice of assets as the result of a past transaction or event.b. It is a present obligation to transfer assets to another entity.c. It is an accrual representing an obligation to pay money in the future.d. It is a present obligation to provide services to another entity.
Answer d
28. The physical capital maintenance concept of income would require that a company’s bonds payable be
a. Reported in the balance sheet at their amortized issue price and that changes in their market values be reported in earnings.
b. Reported in the balance sheet at their amortized issue price and that changes in their market values not be reported in earnings.
c. Reported in the balance sheet at their fair market values and that changes in their market values be reported in earnings.
d. Reported in the balance sheet at their fair market values and that changes in their market values be reported in other comprehensive income.
Answer d
29. ABC Company has a note payable that is due six months after its year end. Under which of the following conditions will ABC be able to classify the note as a long term debt.a. ABC cannot classify the note as long term because it is due within the current operating cycle
or one year, whichever is longer.b. ABC can classify the note as long term because it is due next year.c. ABC can classify the note as long term because management intends to refinance it with long
term debt and has an agreement to do so with a qualified creditor.d. ABC can classify the note as long term because it is a 10 year note and management intends
to pay the maturity value at the end of the 10 year period.
Answer c
30. Current accounting treatment for gain contingencies is different from the accounting treatment for loss contingencies. Which accounting concept is this differential concept consistent with?a. Conservatismb. Materialityc. Full disclosured. Revenue recognition
Answer a
31. In general, derivative instruments are a. Not reported in a company’s balance sheet because their impact on the company is not yet
known..b. Reported in the balance sheet at fair value and changes in their fair value are reported in
earnings.c. Reported in the balance sheet at historical cost and changes in their fair value are reported in
earnings.d. Reported in the balance sheet at fair value and changes in their fair value are reported in other
comprehensive income.
Answer b
32. Under a troubled debt restructuring that results in a modification of terms the debtor will report interest expense when
a. The debtor reports a gain on restructuring.b. The future cash flows under the restructuring agreement are less than the company’s
obligation at the date the restructuring takes place.c. Always because the troubled debtor has a new agreement that obligates the company to make
payments in the future.d. The debtor reports no gain on restructuring.
Answer d
Essay
1. List and discuss five factors that may be employed to determine if a particular financial instrument is a debt or equity security.
There are 13 possible factors the students might select. These factors are:
Maturity DateDebt instruments typically have a fixed maturity date, whereas equity instruments do not mature. Because they do mature, debt instruments set forth the redemption requirements. One of the requirements may be the establishment of a sinking fund in order to ensure that funds will be available for the redemption.
Claim on AssetsIn the event the business is liquidated, creditors' claims take precedence over those of the owners. There are two possible interpretations of this factor. The first is that all claims other than the first priority are equity claims. The second is that all claims other than the last are creditor claims. The problem area includes all claims between these two interpretations: those claims that are subordinated to the first claim but take precedence over the last claim.
Claim on IncomeA fixed dividend or interest rate has a preference over other dividend or interest payments. That it is cumulative in the event it is not paid for a particular period is said to indicate a debt security. On the other hand, a security that does not provide for a fixed rate, one that gives the holder the right to participate with common stockholders in any income distribution, or one whose claim is subordinate to other claims, may indicate an ownership interest.
Market ValuationsAs long as a company is solvent, market valuations of its liabilities are unaffected by company performance. Conversely, the market price of equity securities is affected by the earnings of the company as well as by investor expectations regarding future dividend payments.
Voice in ManagementA voting right is the most frequent evidence of a voice in the management of a corporation. This right is normally limited to common stockholders, but it may be extended to other investors if the company defaults on some predetermined conditions. For example, if interest is not paid when due or profits fall below a certain level, voting rights may be granted to other security holders, thus suggesting that the security in question has ownership characteristics.
Maturity ValueA liability has a fixed maturity value that does not change throughout its life. An ownership interest does not mature, except in the event of liquidation; consequently, it has no maturity value.
Intent of PartiesThe courts have determined that the intent of the parties is one factor to be evaluated in ruling on the debt or equity nature of a particular security. Investor attitude and investment character are two subfactors that help in making this determination. Investors may be divided into those who want safety and those who want capital growth, and the investments may be divided into those that provide either safety or an opportunity for capital gains or losses. If the investor was motivated to make a particular investment on the basis of safety and if the corporation included in the issue those features normally equated with safety, then the security may be debt rather than equity. However, if the investor was motivated to acquire the security by the possibility of capital growth and if the security offered the opportunity of capital growth, the security would be viewed as equity rather than debt.
Preemptive RightBy law, common stockholders have a preemptive right (the right to purchase common shares in a new stock offering by the corporation). If a security offers its holder a preemptive
right, it may be considered to have an equity characteristic. Securities not carrying this right may be considered debt.
Conversion FeaturesA security that may be converted into common stock has at least the potential to become equity if it is not currently considered equity. Thus, the security, or perhaps its conversion feature, may be considered equity. A historical study of eventual conversion or liquidation may be useful in evaluating this particular factor.
Potential Dilution of Earnings per ShareThis factor might be considered as a subfactor of conversion because the conversion feature of a security is the most likely cause of dilution of earnings per share, other than a new issue of common stock. In any event, a security that has the potential to dilute earnings per share is assumed to have equity characteristics.
Right to Enforce PaymentsFrom a legal point of view, creditors have the right to receive periodic interest at the agreed-upon date and to have the maturity value paid at the maturity date. The enforcement of this right may result in the corporation being placed in receivership. Owners have no such legal right; therefore, the existence of the right to enforce payment is an indication of a debt instrument.
Good Business Reasons for IssuingDetermining what constitutes good business reasons for issuing a security with certain features rather than one with different features presents a difficult problem. Two relevant subfactors are the alternatives available and the amount of capitalization. Securities issued by a company in financial difficulty or with a low level of capitalization may be considered equity on the grounds that only those with an ownership interest would be willing to accept the risk, whereas securities issued by a company with a high level of capitalization may be viewed as debt.
Identity of Interest between Creditors and OwnersWhen the individuals who invest in debt securities are the same individuals, or family members, who hold the common stock, an ownership interest is implied.
2. Discuss the definition and the proper accounting for mandatorily redeemable preferred stock.
Mandatorily redeemable preferred stock is preferred stock which contains an unconditional obligations for the issuer to redeem it by transferring assets at a specified or determinable date or dates or upon an event that is certain to occur.Mandatorily redeemable preferred stock is required to be classified as a liability.
3. Discuss the four basic reasons why a corporation may wish to issue debt rather than equity securities
There are four basic reasons why a corporation may wish to issue debt rather than equity securities:
Bonds may be the only available source of funds. Many small and medium-size companies may appear too risky for investors to make a permanent investment.
Debt financing has a lower cost. Since bonds have lower investment risk than stock, they traditionally have paid relatively low rates of interest. Investors acquiring equity securities generally expect a greater return to compensate for higher investment risk.
Debt financing offers a tax advantage. Interest payments to debt holders are deductible for income tax purposes, whereas dividends paid on equity securities are not.
The voting privilege is not shared. Stockholders wishing to maintain their present percentage of ownership in a corporation must purchase the current ownership proportion of each new common stock issue. Debt issues do not carry ownership or voting rights; consequently, they do not dilute voting power. Where the proportion of ownership is small and holdings are widespread, this consideration is probably not very important.
4. Define the following terms:a. Mortgage bonds
Bonds that are secured by a lien against specific assets of the corporation are known as mortgage bonds.
b. Debenture bonds
Debenture bonds are not secured by any property or assets, and their marketability is based on the corporation's general credit.
5. Explain how the selling price of a bond is determined.
The issue price of the bond is equal to the sum of the present values of the principal and interest payments, discounted at the yield rate. If investors are willing to accept the interest rate stated on the bonds, they will be sold at their face value, or par, and the yield rate will equal the stated interest rate. When the market rate of interest exceeds the stated interest rate, the bonds will sell below face value (at a discount), thereby increasing the effective interest rate. Alternatively, when the market rate of interest is less than the stated interest rate, the bonds will sell above face value (at a premium), thereby lowering the effective interest rate.
6. What is a zero coupon bond? Discuss accounting for zero-coupon bonds.
A zero coupon or deep discount bond is a bond that does not carry a stated rate of interest and thus, the borrower makes no interest payments to the investor. As a result, zero coupon bonds are sold at considerably less than face value (i.e., at a deep discount). Because there are no interest payments, the interest cost to the issuer is equal to the difference between the maturity value and the issue price of the bond. The resulting periodic interest expense is equal to the amount of the discount amortized for the accounting period. For example, if a $100,000 zero coupon bond with a life of ten years is issued to yield 12 percent, the issue price will be $32,197 and the unamortized discount will be $67,803. Interest expense should be calculated using the effective interest method. For the first year interest expense will be $3,864 (12% × $32,197). The bond's carrying value will then increase by the amount of the discount amortized ($3,864), resulting in an increase in interest expense incurred for year two. This pattern is repeated until the carrying value of the bond has increased to its face value.
7. Discuss the difference between the straight-line and the effective interest methods of bond premium or discount amortizations.
There are two methods of allocating interest expense and the associated premium or discount over the life of the bond issue: (1) the straight-line method and (2) the effective interest method. Under the straight-line method, the total discount or premium is divided by the total number of interest periods to arrive at the amount to be amortized each period. This method gives an equal allocation per period and results in a stable interest cost per period.
The assumption of a stable interest cost per interest period is not realistic, however, when a premium or discount is involved. The original selling price of the bonds was set to yield the market rate of interest. Therefore, the more valid assumption is that the yield rate should be reflected over the life of the bond issue. The effective interest method satisfies this objective by applying the yield rate to the beginning carrying value of the bonds in each successive period to determine the amount of interest expense to record. When using the effective interest method, the premium or discount amortization is determined by finding the difference between the stated interest payment and the amount of interest expense for the period.
8. List the three methods of accounting for bonds refunding. Under current GAAP, how are bond refundings recorded?
In ARB No. 43, three methods of accounting for the gain or loss from a refunding transaction were discussed.
Make a direct write-off of the gain or loss in the year of the transaction. Amortize the gain or loss over the remaining life of the original issue.
Amortize the gain or loss over the life of the new issue.
After a subsequent reexamination of the topic, the APB issued Opinion No. 26, “Early Extinguishment of Debt” (See FASB ASC 470-50) In this release the Board maintained that all early extinguishments were fundamentally alike (whether retirements or refundings) and that they should be accounted for in the same manner. Since the accounting treatment of retirements was to reflect any gain or loss in the period of recall, it was concluded that any gains or losses from refunding should also be reflected currently in income. Thus, options two and three are no longer considered acceptable under GAAP.
9. Discuss the factors that might motivate corporate management to decide to issue convertible debt.
Senior securities (bonds or preferred stock) that are convertible into common stock at the election of the bondholder play a frequent role in corporate financing. There is rather widespread agreement that firms sell convertible securities for one of two primary reasons. Either the firm wants to increase equity capital and decides that convertible securities are the most advantageous way, or the firm wants to increase its debt or preferred stock and discovers that the conversion feature is necessary to make the security sufficiently marketable at a reasonable interest or dividend rate. In addition, there are several other factors that, at one time or another, may motivate corporate management to decide to issue convertible debt. Among these are:
1. Avoid the downward price pressures on the firm's stock that placing a large new issue of common stock on the market would cause.
2. Avoid dilution of earnings and increased dividend requirements while an expansion program is getting under way.
3. Avoid the direct sale of common stock when the corporation believes that its stock is currently undervalued in the market.
4. Penetrate that segment of the capital market that is unwilling or unable to participate in a direct common stock issue.
5. Minimize the flotation cost (costs associated with selling securities).
10. Discuss accounting for long-term notes payable as originally described in APB Opinion No. 21.
The provisions of APB Opinion No. 21 are summarized as follows (See FASB ASC 835-30-25):
1. Notes exchanged solely for cash are assumed to have a present value equal to the cash exchanged.
2. Notes exchanged for property, goods, and services are presumed to have an appropriate rate of interest.
3. If no interest is stated or the amount of interest is clearly inappropriate on notes exchanged for property, goods, and services, the present value of the note should be determined by (whichever is more clearly determinable):
4. Determining the fair market value of the property, goods, and services exchanged.
1. Determining the market value of the note at the time of the transaction.
5. If neither 3a nor 3b is determinable, the present value of the note should be determined by discounting all future payments to the present at an imputed rate of interest. The imputed rate should approximate the rate of similar independent borrowers and lenders in arm's-length transactions. In this case, the imputed rate should approximate the rate that the borrower would have to pay to obtain additional funds. So, it is often referred to as the incremental borrowing rate.
11. Discuss accounting for contingencies
A contingency is a possible future event that will have some impact on the firm. Among the most frequently encountered contingencies are
a. pending lawsuits
b. income tax disputes
c. notes receivable discounted
d. accommodation endorsementsThe decision to report contingencies should be based on the principle of disclosure. That is, when the disclosure of an event adds to the information content of financial statements, it should be reported. Some authors have argued for basing this decision on expected value criteria. If a potential obligation has a high probability of occurrence, it should be recorded as a liability, whereas potential obligations with low probabilities are reported in the footnotes to the financial statements.
The FASB reviewed the nature of contingencies in SFAS No. 5, “Accounting for Contingencies.” (See FASB ASC 450). This release defines two types of contingencies—gain contingencies (expected future gains) and loss contingencies (expected future losses).
With respect to gain contingencies, the Board held that they should not usually be reflected currently in the financial statement because to do so might result in revenue recognition before realization. Adequate disclosure should be made of all gain contingencies while exercising due care to avoid misleading implications as to the likelihood of realization.
The criteria established for reporting loss contingencies require that the likelihood of loss be determined as follows:
a. Probable. The future event is likely to occur.
b. Reasonably possible. The chance of occurrence is more than remote but less than likely.
c. Remote. The chance of occurrence is slight.
Once the likelihood of a loss is determined, contingencies are charged against income and a liability is recorded if both of the following conditions are met:
a. Information available prior to the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements.
b. The amount of the loss can be reasonably estimated.If a loss is not accrued because one or both of these conditions has not been met, footnote disclosure of the contingency should be made when there is at least a reasonable possibility that a loss may have been incurred.
12. What is a derivative? Describe the accounting treatment for fair value and cash flow hedges required by SFAS No. 133.
A derivative is a transaction, or contract, whose value depends on the value of an underlying asset or index. (That is, its value is derived from an underlying asset or index.) In such a transaction, a party with exposure to unwanted risk can pass some or all of that risk onto a second party. When derivatives are employed, the first party can (1) assume a different risk from the second party, (2) pay the second party to assume the risk, or (3) use some combination of 1 and 2.
For a derivative designated as a hedge of the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item. The effect of this accounting treatment is to adjust the basis of the hedged item by the amount of the gain or loss on the hedging derivative to the extent that the gain or loss offsets the loss or gain experienced on the hedged item.
For a derivative designated as a hedge of the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge), the gain or loss is reported as a component of other comprehensive income (outside of earnings) and recognized in earnings on the projected date of the forecasted transaction.
13. Define the following terms:a. Forward
A forward transaction obligates one party to buy and another to sell a specified item, such as 10,000 Euros, at a specified price on a specified future date. On the other hand, an option gives its holder the right, but not the obligation, to buy or sell the specific item, such as the 10,000 Euros, at a specified price on a specified date in the future.
b. Future
Obligates the holder to buy or sell specified amount of currency at a specified price on a specified date in the future.
c. Option
Grants the purchaser the right, but not the obligation, to buy or sell a specific amount of currency at a specified price within a specified period.
d. Swap
Agreement between the parities to make periodic payments to each other during the swap period
e. Hybrid
Incorporates various provisions of any or all of the above types.
14. What is a troubled debt restructuring? How is a troubled debt restructuring accomplished?
According to, FASB ASC 470-60-20 a troubled debt restructuring occurs when “the creditor for economic or legal reasons related to the debtor's financial difficulties grants a concession to the debtor that it would not otherwise consider.” A troubled debt restructuring may include, but is not limited to, one or any combination of the following:
1. Modification of terms of a debt such as one or a combination of:
a. Reduction of the stated interest rate for the remaining original life of the debt.
b. Extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk.
c. Reduction of the face amount or maturity amount of the debt as stated in the instrument or other agreement.
d. Reduction of accrued interest.
2. Issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting the debt into an equity interest.
3. A transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt.
15. Obtain the financial statements of a company and ask the students to compute the:a. Long-term debt to assets ratiob. Interest coverage ratio
c. Debt service coverage ratio
The answer to this question is dependent on the company selected.
16. How are compound financial instruments accounted for under IAS No. 32?
IAS No. 32 indicates that some financial instruments have both a liability and an equity component. In such case, IAS No. 32 requires that the component parts be accounted for and presented separately according to their substance based on the definitions of liability and equity. The split is made at issuance and not revised for subsequent changes in market interest rates, share prices, or other event that changes the likelihood that the conversion option will be exercised.
17. According to IAS No. 39, when are financial liabilities recognized?
IAS No. 39 requires recognition of a financial liability when, and only when, the entity becomes a party to the contractual provisions of the instrument.