Multiple Choice QuestionsMULTIPLE-CHOICE QUESTIONS (Answers on page 11) Select the best answer (ONE ONLY) to each of the following multiple-choice questions. Financing Company Operations – Chapter 2 1. When a company makes a public issue of shares, the offer comes from: a. b. c. d. e. 2. Which of the following statements about share issue is incorrect? a. b. c. d. e. 3. the applicants; the directors of the company; the company issuing the shares; the broker handing the share issue for the company; the shareholders. It is possible for a company to issue different types of preference shares if the rights of each type are specified in it’s constitution. Prior to the allotment of shares, the balance in the application account represents a liability of the company. A company is allowed under the Act to issue partly paid shares. A company offers shares as the directors see fit for the effective management of the company. If a company has not reached a minimum subscription level after 3 months from the date of the disclosure statement, the application money must be refunded by the company within 1 month. According to the Corporation Act 2001, when a company listed on the Australian Stock Exchange issues shares to the public, the issue price, terms and rights associated with the shares are determined by: a. b. c. d. e. the directors of the company; the Australian Stock Exchange and the company secretary of the company; the underwriters to the share issue and the directors of the company; the Australian Stock Exchange and the directors of the company; the Australian Stock Exchange and the financial controller of the company. Page 1 of 11 e. 5. Dr Cash. an increase in asset. Page 2 of 11 . b. Dr Application. e. c. an increase in expense. a decrease in liability. buy or sell a certain number of shares in the company at fair value by a specific date. receive a certain number of shares in a company at no cost. an increase in share capital. 10% of existing capital. c. 25% of existing capital. Cr Share capital. d. b. c. e. c. a decrease in share capital. 20% of existing capital. buy or sell a certain number of shares in the company by a specific date and at a stipulated price. of no more than: a. 15% of existing capital. 7. d. in any one year. preferential allotment of shares under a new share issue by the company. Cr Application. d. not pay the unpaid balance on shares they own when that balance is called in by the company. e. b.Multiple Choice Questions 4. An appropriate journal entry to record the receipts of cash on application of shares will include the following line: a. Without the prior approval of shareholders a company is restricted to private placements of shares. b. d. Underwriting and other share issue costs are classified as: a. 5% of existing capital. Cr Cash trust. A share option is a financial instrument that gives a shareholder the right to: a. 6. Multiple Choice Questions 8. b. Redeemable preference shares. Unlike shares. None of the above. or a combination of both equity and a liability. None of the above. d. long-term liabilities on which interest must be paid. Redeemable preferential shares may be redeemed out of profits or fresh issue of ordinary shares. debentures may be issued at a premium or discount. Debentures usually represent secured. c. Page 3 of 11 . ie all are correct. Which of the following statements about debentures is incorrect? a. Which of the following statements about redeemable preference shares is incorrect? a. c. b. e. e. depending on their terms of issue. A company’s capital cannot be reduced by the redemption of preference shares irrespective of the method of redemption. may be classified as equity or a liability. ie all are correct. The issue of debentures must be preceded by the issue of a disclosure document. 9. d. Any premium paid on the redemption of preference shares is regarded as an additional dividend if the preference shares are treated as equity. Under the Act. debentures exclude unsecured notes and convertible notes. d. To signal to the capital market that the company expects good future profitability levels for cash dividends. b. be declared and paid to shareholders irrespective of whether a company has accumulated losses. dividends may: a. b. e. None of the above. Which of the following items is not a reason given for issuing bonus shares? a. e.Multiple Choice Questions Company Operations – Chapter 3 10. To capitalise the profits of the company under the Corporations Act. only be paid from current year’s profit. d. 11. According to the Corporation Act 2001. Cr Final dividends payable. only be paid out of profits of a company. e. Cr Cash trust. Dr Cash. Dr Final dividend payable. An appropriate journal entry to record the payment of final dividends paid will include the following line: a. To capitalise the long-term reserve of a company by converting reserves such as asset revaluation into share capital. 12. thus protecting the company’s current liquidity. To provide a return to shareholders without any cash outlay. b. c. only be paid if approved by the Australian Securities and Investments Commission. d. Page 4 of 11 . c. only be paid to shareholders once a year. Dr Retained earnings. c. d. d. 14. For a company. Reserves may be established by normal practice. c. e. and after any transfer to and from reserves. profits retained by the company before tax is paid to the government. Which of the following statements about reserves is incorrect? a. b. b. c. The reserves accounts of a company are regarded as equity. ie all are correct. None of the above. net cash retained by the company before any payment for dividends to shareholders. profits retained by after payment and provision for dividends but before any transfer to reserves. retained earnings represent: a.Multiple Choice Questions 13. contributed equity from shareholders. e. Page 5 of 11 . Movements in a revaluation reserve can be reclassified in a later period as part of profit or loss. There is no definition of a reserve in the accounting standard or in Corporations Act. profits retained by the company after payment and provision for dividends. Page 6 of 11 . I and IV. The future tax consequences of accounting transactions result in the recognition of deferred tax liabilities (assets). Income tax expense recognized in the accounting records is a result of movements in current tax liabilities (assets). e. carrying amount – future taxable amount – future deductible amount. carrying amount – future taxable amount + future deductible amount. IV and V I. AASB 112 requires a company to account for both the current and the future tax consequences of its economic events. Which of the following items are classified as permanent difference? (Note: Permanent difference arises where expense or revenue is included in the determination of taxable income (or tax loss) which will never recognize in the profit or loss or vice versa. d. c. carrying amount – revenue received in advance which will not be taxable in the future periods. The tax-effect method focuses on the differences between an entity’s balance sheet prepared under accounting standards and its tax-based balance sheet prepared in accordance with income tax legislation. which of the following statements about accounting for income taxes is incorrect? a. carrying amount + future taxable amount – future deductible amount. Accounting entries for current tax liabilities and assets are based on an assessment of an entity’s current taxable income or tax loss. c. In accordance with AASB 112 Income Taxes.Multiple Choice Questions Accounting for company income tax – Chapter 6 15. 16. d. 17. b. III and IV The tax base for an asset equals: a. d. b. carrying amount + future taxable amount + future deductible amount. b. II and III. e. e. II and III I. c. I II III IV V Impairment of goodwill Insurance expense Rental revenue Additional tax deduction for R & D Government grant a. I. c. b. e.Multiple Choice Questions 18. Current and deferred tax assets lead to the recognition of: a. losses. an accounting balance sheet and a tax balance sheet are the same. I. income. III. I. I. assets. and VI. Which of the following items give rise to a taxable temporary difference? I II III IV V VI Prepayments Rent received in advance Provision for employee benefits Research & development Goodwill Provision for warranty a. II and VI. IV and V. expenses. II. II and II. income tax expense is a function of the accounting profits adjusted for permanent differences. I. e. e. income tax expense is not equal merely to current tax liability (asset) but is also a function of the company’s deferred tax liabilities and assets. 20.. income tax expense is equal to income tax payable. and IV. The tax effect method of accounting for a company’s income tax is based on an assumption that: a. b. a tax balance sheet is prepared according to the income tax legislation and accounting standards. d. b. 19. Page 7 of 11 . c. d. reserves. d. c. c. IV and VI. current tax asset. I and VI. e. V and VI. b. Which of the following items are excluded from the explanation of the relationship between income tax expense and prima facie tax on profit (ie accounting profit multiplied by the applicable rate)? I II III IV V VI Building depreciation Bad debts expense Exempt income Loss from change in tax rate Annual leave expense Entertainment expense a. 23. AASB 112 Income Taxes: a. current tax liability. b. 22. deferred tax liability. deferred tax asset. Deductible temporary differences arise from tax losses can lead to the recognition of: a. Where the impairment of goodwill is not tax deductible. e. I. II and V. income tax expense. c. allows the recognition of a deferred tax item in relation to goodwill.Multiple Choice Questions 21. III. c. b. III. d. requires that any deferred tax items in relation to goodwill be recognized directly in equity. requires that the temporary difference be recognized as a deferred tax asset. d. e. requires that any deferred tax items for goodwill be capitalized in the carrying amount of goodwill. II and VI. Page 8 of 11 . does not permit the application of deferred tax accounting to goodwill. d. I. Multiple Choice Questions Property. An acquirer to be identified. b. Plant and Equipment apply to: a. Goodwill acquired to be recognized. c. d. The measurement of the cost of a business combination. b. e. Which of the following relationships reflect the effect of the revaluation on the prospective depreciation of the asset? a. Higher depreciation rate – higher annual depreciation expense. the fair value method. the purchase method. Same depreciation rate – higher annual depreciation expense. e. the accrual method. c. Same depreciation rate – lower annual depreciation expense. Which of the following statements about the requirements of AASB 3 Business Combinations is incorrect? a. d. e. Same depreciation rate – same annual depreciation expense. Higher depreciation rate – same annual depreciation expense. all assets on an individual basis. d. liabilities and contingent liabilities to be measured initially at cost at acquisition date. The asset was revalued upwards after four years of use. 27. The assets. There is no change in the remaining useful life of six years or to the residual value. Disclosure of information that enables users to evaluate changes in the carrying amount of goodwill. the cost method. b. plant and equipment asset is depreciated using the straight-line method. d. c. The accepted method of accounting for a business combination under AASB 3 Business Combinations is: a. Page 9 of 11 . assets on a class-by-class basis. b. A non-current property. 25. c. Plant and Equipment – Chapter 7 24. Business Combinations – Chapter 10 26. none of the above. individual non-current assets only. e. The revaluation under AASB 116 Property. the acquisition method. individual current assets only. cash. d. b. correct because goodwill contains future economic benefits and is classified as an asset. Page 10 of 11 . e. retained earnings. This statement is: a. correct because goodwill can be individually identified and separately recognized. c. gives up control over all of its issued shares. c. Consider the following quotation and answer the question below. 29. obtains control of the net assets of the other entity. the acquiree is the part that: a. 30. e. b. c. gives up control over the net assets acquired. correct because this is the definition given by the accounting standard. incorrect because it is the future economic benefits arising from other assets acquired that are not capable of being individually identified and separately recognized. pays the acquisition consideration. goodwill. incorrect because this is the definition of an internally generated goodwill.Multiple Choice Questions 28. finances the business combination. The appropriate account to debit in the records of the acquiring company for costs directly attributable to a business combination is: a. d. e. expense. b. In a business combination. goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. d. In accordance with AASB 3 Business Combinations. net assets acquired. Multiple Choice Questions Answers: 1 2 3 4 5 6 7 8 9 10 a e a d d b c e b b 11 12 13 14 15 16 17 18 19 20 b e c d d d a b c b 21 22 23 24 25 26 27 28 29 30 Page 11 of 11 e a c d a c c e b a .