Corporate Accounting MCQ

Multiple Choice Questions MULTIPLE-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.

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Multiple Choice Questions

4.

An appropriate journal entry to record the receipts of cash on application of shares will include the following line: a. b. c. d. e.

5.

Underwriting and other share issue costs are classified as: a. b. c. d. e.

6.

an increase in expense; an increase in share capital; a decrease in liability; a decrease in share capital. an increase in asset;

A share option is a financial instrument that gives a shareholder the right to: a. b. c. d. e.

7.

Cr Cash trust; Cr Share capital; Dr Cash; Cr Application; Dr Application.

receive a certain number of shares in a company at no cost; buy or sell a certain number of shares in the company by a specific date and at a stipulated price; preferential allotment of shares under a new share issue by the company; not pay the unpaid balance on shares they own when that balance is called in by the company; buy or sell a certain number of shares in the company at fair value by a specific date.

Without the prior approval of shareholders a company is restricted to private placements of shares, in any one year, of no more than: a. b. c. d. e.

5% of existing capital; 10% of existing capital; 15% of existing capital; 20% of existing capital; 25% of existing capital.

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Multiple Choice Questions

8.

Which of the following statements about redeemable preference shares is incorrect? a. b. c. d. e.

9.

Redeemable preference shares, depending on their terms of issue, may be classified as equity or a liability, or a combination of both equity and a liability. Redeemable preferential shares may be redeemed out of profits or fresh issue of ordinary shares. Any premium paid on the redemption of preference shares is regarded as an additional dividend if the preference shares are treated as equity. A company’s capital cannot be reduced by the redemption of preference shares irrespective of the method of redemption. None of the above, ie all are correct.

Which of the following statements about debentures is incorrect? a. b. c. d. e.

Unlike shares, debentures may be issued at a premium or discount. Under the Act, debentures exclude unsecured notes and convertible notes. Debentures usually represent secured, long-term liabilities on which interest must be paid. The issue of debentures must be preceded by the issue of a disclosure document. None of the above, ie all are correct.

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Multiple Choice Questions

Company Operations – Chapter 3 10.

According to the Corporation Act 2001, dividends may: a. b. c. d. e.

11.

An appropriate journal entry to record the payment of final dividends paid will include the following line: a. b. c. d. e.

12.

only be paid to shareholders once a year; only be paid out of profits of a company; be declared and paid to shareholders irrespective of whether a company has accumulated losses; only be paid if approved by the Australian Securities and Investments Commission. only be paid from current year’s profit.

Dr Retained earnings; Dr Final dividend payable; Cr Cash trust; Cr Final dividends payable; Dr Cash.

Which of the following items is not a reason given for issuing bonus shares? a. b. c. d. e.

To provide a return to shareholders without any cash outlay, thus protecting the company’s current liquidity. To capitalise the long-term reserve of a company by converting reserves such as asset revaluation into share capital. To capitalise the profits of the company under the Corporations Act. To signal to the capital market that the company expects good future profitability levels for cash dividends. None of the above.

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Multiple Choice Questions

13.

Which of the following statements about reserves is incorrect? a. b. c. d. e.

14.

There is no definition of a reserve in the accounting standard or in Corporations Act. Reserves may be established by normal practice. Movements in a revaluation reserve can be reclassified in a later period as part of profit or loss. The reserves accounts of a company are regarded as equity. None of the above, ie all are correct.

For a company, retained earnings represent: a. b. c. d. e.

contributed equity from shareholders; profits retained by the company before tax is paid to the government; net cash retained by the company before any payment for dividends to shareholders; profits retained by the company after payment and provision for dividends, and after any transfer to and from reserves; profits retained by after payment and provision for dividends but before any transfer to reserves.

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Multiple Choice Questions

Accounting for company income tax – Chapter 6 15.

In accordance with AASB 112 Income Taxes, which of the following statements about accounting for income taxes is incorrect? a. b. c. d. e.

16.

17.

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. Accounting entries for current tax liabilities and assets are based on an assessment of an entity’s current taxable income or tax loss. AASB 112 requires a company to account for both the current and the future tax consequences of its economic events. Income tax expense recognized in the accounting records is a result of movements in current tax liabilities (assets). The future tax consequences of accounting transactions result in the recognition of deferred tax liabilities (assets).

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. I II III IV V

Impairment of goodwill Insurance expense Rental revenue Additional tax deduction for R & D Government grant

a. b. c. d. e.

I and IV. II and III. I, II and III I, IV and V I, III and IV

The tax base for an asset equals: a. b. c. d. e.

carrying amount – future taxable amount + future deductible amount; carrying amount + future taxable amount – future deductible amount; carrying amount – future taxable amount – future deductible amount; carrying amount + future taxable amount + future deductible amount; carrying amount – revenue received in advance which will not be taxable in the future periods.

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Multiple Choice Questions

18.

The tax effect method of accounting for a company’s income tax is based on an assumption that: a. b. c. d. e.

19.

20.

income tax expense is equal to income tax payable; 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; an accounting balance sheet and a tax balance sheet are the same; a tax balance sheet is prepared according to the income tax legislation and accounting standards. income tax expense is a function of the accounting profits adjusted for permanent differences.

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. b. c. d. e.

I, II and II.. I, II and VI. I, IV and V. II, III, and VI. I, and IV.

Current and deferred tax assets lead to the recognition of: a. b. c. d. e.

reserves; income; expenses; losses; assets.

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Multiple Choice Questions

21.

Deductible temporary differences arise from tax losses can lead to the recognition of: a. b. c. d. e.

22.

Where the impairment of goodwill is not tax deductible, AASB 112 Income Taxes: a. b. c. d. e.

23.

current tax liability; deferred tax liability; current tax asset; income tax expense; deferred tax asset.

does not permit the application of deferred tax accounting to goodwill; allows the recognition of a deferred tax item in relation to goodwill; requires that any deferred tax items in relation to goodwill be recognized directly in equity; requires that any deferred tax items for goodwill be capitalized in the carrying amount of goodwill; requires that the temporary difference be recognized as a deferred tax asset.

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. b. c. d. e.

I and VI. II and VI. II and V. I, III, IV and VI. I, III, V and VI.

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Multiple Choice Questions Property, Plant and Equipment – Chapter 7 24.

The revaluation under AASB 116 Property, Plant and Equipment apply to: a. b. c. d. e.

25.

all assets on an individual basis; individual current assets only; individual non-current assets only; assets on a class-by-class basis; none of the above.

A non-current property, plant and equipment asset is depreciated using the straight-line method. The asset was revalued upwards after four years of use. There is no change in the remaining useful life of six years or to the residual value. Which of the following relationships reflect the effect of the revaluation on the prospective depreciation of the asset? a. b. c. d. e.

Same depreciation rate – higher annual depreciation expense; Same depreciation rate – same annual depreciation expense; Higher depreciation rate – higher annual depreciation expense; Higher depreciation rate – same annual depreciation expense; Same depreciation rate – lower annual depreciation expense.

Business Combinations – Chapter 10 26.

The accepted method of accounting for a business combination under AASB 3 Business Combinations is: a. b. c. d. e.

27.

the purchase method; the cost method; the acquisition method; the fair value method; the accrual method.

Which of the following statements about the requirements of AASB 3 Business Combinations is incorrect? a. b. c. d. e.

An acquirer to be identified. Goodwill acquired to be recognized. The assets, liabilities and contingent liabilities to be measured initially at cost at acquisition date. Disclosure of information that enables users to evaluate changes in the carrying amount of goodwill. The measurement of the cost of a business combination.

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Multiple Choice Questions 28.

The appropriate account to debit in the records of the acquiring company for costs directly attributable to a business combination is: a. b. c. d. e.

29.

cash; retained earnings; goodwill; net assets acquired; expense.

Consider the following quotation and answer the question below. In accordance with AASB 3 Business Combinations, 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. This statement is: a. b. c. d. e.

30.

incorrect because this is the definition of an internally generated goodwill. incorrect because it is the future economic benefits arising from other assets acquired that are not capable of being individually identified and separately recognized. correct because this is the definition given by the accounting standard. correct because goodwill can be individually identified and separately recognized. correct because goodwill contains future economic benefits and is classified as an asset.

In a business combination, the acquiree is the part that: a. b. c. d. e.

gives up control over the net assets acquired; pays the acquisition consideration; obtains control of the net assets of the other entity; finances the business combination; gives up control over all of its issued shares.

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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

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e a c d a c c e b a