Topic 5 - Accounting for Equity and Debt Overview

Question 1

Entities usually prefer to have:

• High levels of owners equity
• Low levels of debt

This preference occurs because:

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Next, name the two types of distributions.

Answer 1

• entities are less likely to breach debt covenants if their debt is lower
• entities preserve their ability to take on additional debt in the future
• distributions to owners equity holders are classified as dividends (distribution of profits) whilst distributions to debt holders are classified as expenses

Question 2

For some items, it is difficult to decide if they should be treated as owners equity or debt.

Name two examples.

What is the decision based on?

Answer 2

Question 3

The accounting decision for redeemable preference shares is difficult because these shares may:

Answer 3

Question 4

Convertible notes are liabilities that can either (or must) be converted to equity at a later date.

If the conversion is:

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Answer 4