Lecture 6

Question 1

What is the definition of a provision?

Answer 1

A liability of uncertain timing or amount
In the future, might have expenses so set aside money/note it down just in case
- doubtful debts

Question 2

What are some examples of provisions?

Answer 2

Losses on contracts
Obsolescence of stock
Costs related to closure of a division of the company

Question 3

How do you calculate provision?

Answer 3

Sales of manufactured goods x % of provision of sales (will probs say in question)

Question 4

What effect does provision have on the accounting equation?

Answer 4

When provision established:
Liabilities increase, oi decrease (expense)

As repairs under warranty are carried out (or whatever):
Assets decrease (cash), liabilities decrease

Question 5

What is a non-current liability?

Answer 5

Any liability that does not meet the criteria of a current liability
Also described as long-term liabilities

Question 6

What are some examples of non-current liabilities?

Answer 6

Loan stock
Debentures
Bonds
Bank borrowing and commercial paper

Question 7

What are the characteristics of non-current liabilities?

Answer 7

The amount borrowed (the capital sum)
How much is to be repaid
When is it to be repaid
What interest payments must be made
Whether the lender required security for the loan

Question 8

What is the measurement of non-current liabilities?

Answer 8

General principle - valued at fair value (price that would be paid to transfer a liability in an orderly transaction between market participants)

Question 9

Tell me about unsecured borrowing

Answer 9

Lender has no first claim to any particular assets of the reporting company
In the event of default by the company, the lender must wait for payment with other unsecured creditors

Question 10

Tell me about secured borrowing

Answer 10

The lender has first claim to named assets of the reporting company in the case of default

Question 11

Change in the nature of finance source - tell me about convertible debentures or loan stock

Answer 11

Allows a change in the nature of the source of finance
Issued as a long-term liability
Some time in the future it may be converted into ordinary shares on specified terms

Question 12

What is the general principle for interest payment on loans?

Answer 12

The amount shown as the expense of interest payable in the income statement (profit/loss account) should be based on the compound rate of interest applying over the entire period of the loan

Question 13

What is the spreading of interest charges over the period of the loan?

Answer 13

An application of the accruals or matching concept

Question 14

The issue of shares at the date of incorporation (when the company first comes into existence)

Answer 14

Company issues shares to the owners who become shareholders
Each share has a named value which is called nominal value (par value)

Question 15

What is accrual?

Answer 15

Matching revenue to expense

Question 16

What is the share capital?

Answer 16

The nominal value of the share

Question 17

What is the share premium?

Answer 17

Market value - nominal value

Question 18

How would you calculate the total share premium?

Answer 18

Share premium x number of shared issued

Question 19

How would you calculate the total nominal value?

Answer 19

Nominal value x number of shares issued

Question 20

What are the options available to a company if asset is worth more than expected?

Answer 20

1. Keep balance sheet value the same (historical cost) and include a note to balance sheet explaining market value has increased
2. Recognise in financial statements the increase in value but not a realised profit (asset increase in increase in value of current/non-current asset, OI increase in revaluation reserve)

Question 21

Effect on accounting equation - issue of shares at nominal value

Answer 21

Assets increase cash
OI increase share capital

Question 22

How would you record an issue of further shares at an increased price in statement?

Answer 22

Number of shares sold x (increased) price (put this number into increased assets, cash)
Nominal value x number of shares sold (put this into OI, share capital)
Share premium x number of shares sold (put this into OI, share premium)

Question 23

How would you calculate the ownership interest at the end of a period?

Answer 23

Ownership interest at the start of a period + movements in ownership interest during the period (business activities during the year, addition/withdrawal of capital)