Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Textbook Question
Chapter 6, Problem 5QE
Assume that a corporation needs to enter the private debt market to raise funds for plant expansion. The corporation expects debt covenants to place restrictions on the levels of its current ratio and total-liabilities-to-assets ratio. Considering the accounts that comprise these ratios, give examples of accounting estimates, accounting judgments, and structured transactions that the lender should examine closely.
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You are required to identify and give reasons for the appropriate classification of the debt instruments A and B below:
Part A.Macaroon holds certain debt investments to collect their contractual cash flows of interest and principle. The funding needs of the company are predictable and the maturity of such financial assets is matched to Macaroon’s estimated funding needs. Macaroon performs credit risk management activities with the objective of minimising credit losses.In the past, Macaroon has sold some of its debt investments when the credit risk of the financial assets increased beyond the acceptable levels of risk as documented in the company’s investment policy. In addition, infrequent sales have occurred as a result of unanticipated funding needs. The managers reports to key management personnel focus on the credit quality of the financial assets and the contractual return.
Part B.Macaroon holds certain debt investments with specified contractual cash flows of interest and…
Which of the following is correct regarding the classification of investment in debt instruments as financial asset at fair value through OCI?
This classification is not allowed for investment in debt instruments.
In order to be classified as such, a debt instrument needs to both have simple principal and interest cash flows and be held in a business model in which both holding and selling financial assets are integral to meeting management's objectives.
An entity may make an irrevocable election to classify investment in a debt instrument that is not held for trading as such.
All of these.
Discuss the factors that a Company should consider when choosing a source of debt finance and the factors that may be considered by providers of finance in deciding how much to lend to the company.
Chapter 6 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
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- Not-for-profit organizations should report investments in debt securities at which of the following amounts? a. potential proceeds from liquidation sale. b. present value of expected future cash flows. c. historical cost. d. market price.arrow_forwardWhich of the following liabilities should always be included in the debt calculations for a firm? a. accounts payableb. commercial paperc. deferred revenued. deferred tax liabilitiesarrow_forwardWhen bonds and other debt securities are issued, payments such as legal costs, printing costs, and underwriting fees, are referred to as debt issuance costs (called transaction costs under IFRS). If Rushing International prepares its financial statements using IFRS: a. the recorded amount of the debt is increased by the transaction costs. b. the decrease in the effective interest rate caused by the transaction costs is reflected in the interest expense. c. the transaction costs are recorded separately as an asset. d. the increase in the effective interest rate caused by the transaction costs is reflected in the interest expense.arrow_forward
- Entities desiring to issue equity or debt must provide a set of financial statements to any prospective purchaser. This set of financial statements and other information for prospective purchasers is known as aa. Prospectus.b. Review.c. Patron’s acquisition statement.d. Projected audited financial information.arrow_forwardWhich of the following statements about the characteristics of debt and equity is true? a. All of the statements are true b. They can both be long-term financial instruments. c. They both involve a claim on the issuer's income. d. They both enable a corporation to raise funds.arrow_forwardIFRS requires companies to measure their financial assets at fair value except when based on: a. whether the equity method of accounting is used. b. whether the financial asset is a debt investment. c. whether the financial asset is an equity investment. d. whether an investment is classified as trading.arrow_forward
- The following is attached to the company's financial statements, pay attention to the noncurrent liabilities and shareholders’ equity sections. Questions:a. Based on the financial statements above, explain possible “debt to equity swap” scheme carried out by the client!b. What evidence do you need to collect to ensure that the client's debt to equity swap is free from material misstatement?arrow_forwardWhich of the following is correct regarding the classification of investment in debt instruments as financial asset at fair value through OCI? a. This classification is not allowed for investment in debt instruments. b. An entity may make an irrevocable election to classify investment in a debt instrument that is not ‘held for trading’ as such. c. In order to be classified as such, a debt instrument needs to both have simple principal and interest cash flows and be held in a business model in which both holding and selling financial assets are integral to meeting management’s objectives. d. All of the above.arrow_forwardUnder IFRS No. 9, which reporting categories are used to account for debt investments? What about for equity investments when the investor lacks the ability to significantly influence the operations of the investee?arrow_forward
- How do creditors assess risk when lending funds to a company? a. By establishing covenants in the borrowing agreement b. By monitoring the borrower’s debt-to-equity ratio c. By checking a prospective borrower’s credit rating before lending to it d. All of the above answers are correct.arrow_forward(a) From what sources might a corporation obtain fundsthrough long-term debt? (b) What is a bond indenture?What does it contain? (c) What is a mortgage?arrow_forward17. Which of the following is correct regarding the classification of investment in debt instruments as financial asset at fair value through OCI? Group of answer choices In order to be classified as such, a debt instrument needs to both have simple principal and interest cash flows and be held in a business model in which both holding and selling financial assets are integral to meeting management’s objectives. An entity may make an irrevocable election to classify investment in a debt instrument that is not ‘held for trading’ as such. All of these. This classification is not allowed for investment in debt instruments.arrow_forward
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