BL - Debts

Question 1

When are long term liabilities due to be repaid?

Answer 1

In one year or more

Question 2

What is a bad debt?

Answer 2

A debt is a ‘bad debt’ when a business knows with certainty that it is never going to receive it.

Question 3

What is a doubtful debt?

Answer 3

A doubtful debt occurs when a business is providing for the possibility that a debt or debts may not be paid

Question 4

How are doubtful debt provisions treated in the balance sheet?

Answer 4

Its nature, and effect on the Balance Sheet, is most similar to that of a liability account and it is treated as such, because the amount of assets available to the business is reduced by the amount of the provision

Question 5

What does the capital account of a partner in a partnership represent?

Answer 5

The original capital introduced by them

Question 6

What does the current account of a partner in a partnership represent?

Answer 6

The capital available for withdrawal at the partner’s discreation

Question 7

When must a private company file accounts at company’s house?

Answer 7

9 months after the APE

Question 8

When must a public company file accounts at company’s house?

Answer 8

6 months after the APE

Question 9

Where is tax shown in a company’s accounts?

Answer 9

The Profit and Loss Account of a company includes a statement of the tax the company should pay on its profits.

Question 10

Where are dividends shown?

Answer 10

Statement of Changes in Equity (SoCiE). This shows profits brought forward and added to current year profits subject to any deductions for dividends

Question 11

Can private companies issue bonds to the general public?

Answer 11

No - only targeted investors

Question 12

What is a debenture?

Answer 12

Any form of debt security issued by a company
AND
A document which creates security. The loan agreement sets out the terms of the loan, and the debenture sets out the details of the security.

Question 13

What does a fixed charge mean for the borrower

Answer 13

creditor can control what the security provider can do with the fixed charge assets. Borrower can still use the asset generally but cannot dispose or charge it.

Question 14

What does a floating charge mean for the borrower

Answer 14

whatever assets in that class are subject to floating charge. Security provider can dispose of the assets until crystallization (fixes the assets in relevant class and creditor acquires control)

Question 15

What is a debt security?

Answer 15

a type of debt - e.g. a bond

Question 16

What is a security on a debt?

Answer 16

something that the lender will take over the assets of the borrower in order to protect their interests.

Question 17

What is a “representation”?

Answer 17

A statement of fact as to legal and commercial matters, it is made on signing an agreement and repeated periodically during the life of the loan.

Question 18

When must a charge be registered?

Answer 18

within 21 days beginning with the day after the charge is created.

Question 19

Where must a charge be registered?

Answer 19

With companies House

Question 20

Who can register a charge?

Answer 20

Either the borrower or the lender

Question 21

What are the implications of not registering a charge?

Answer 21

the charge is void against a liquidator, administrator or any creditor of the comapny;
and
the debt becomes immediately payable

Question 22

What is the order of priority between creditors

Answer 22

• Creditors with fixed charges - entitled to the first call on the proceeds from the sale of those assets charged to them under a fixed charge.
• Preferential creditors – primarily wages (up to £800 per employee), occupational pensions and certain sums owed to HMRC.
• Creditors with floating charges (which will have crystallised, if not before, upon commencement of the winding up). For floating charges created on or after 15 September 2003, a proportion of the proceeds of the floating charge assets will be set aside for payment to unsecured creditors. This is commonly referred to as the ’prescribed part fund’.
• Unsecured creditors, to the extent not paid off from the prescribed part fund.
• Shareholders (according to the rights attaching to their shares).

Question 23

Generally, if two people have a fixed charge over a fixed of floating asset, the earliest charge wins. Can the debtors re-arrange this?

Answer 23

Yes - The creditors can allow for a different ordering via a a Deed of Priority, an Intercreditor Agreement or a Subordination Agreement.

Question 24

Where is the premium paid on shares shown in the balance sheet?

Answer 24

Share premium account