ACCOUNTING 4 LIABILITIES, PROVISION, BONDS PAYABLE

Multiple Choice (THEORIES)

1. Which of the following is not an aspect of the definition of a liability under the revised Conceptual
framework ?
a. Probable outflow of economic benefits
b. Transfer of economic resource
c. Obligation
d. Present obligation as a result of past event
e. Settlement in the future periods

2. Entity A enters into an executory contract. Entity A appropriately did not recognize any asset or liability
from the contract. Which of the following statements is correct?
a. If Entity A performs its obligation first, Entity A shall recognize an asset.
b. If Entity A performs its obligation first, Entity A shall recognize a liability.
c. If the counterparty performs its obligation first, Entity A shall recognize an asset.
d. Entity A should recognize a combined asset and liability upon signing the contract. 
e. Entity a should recognize a liability account upon signing of the contract.

3. Which of the following is not a financial liability?

a. Accrued payables  d. Constructive obligation 
b. Accounts payable  e. Bonds Payable.
c. Notes payable 

4. According to PFRS 9, when should an entity recognize a financial liability?

a. When the instrument imposes probable outflows of economic benefits that can be measured reliably.
b. When the entity becomes a party to the contractual provisions of the instrument.
c. Upon entering into the contract even if the contract is still executory.
d. Any of these as a matter of an accounting policy choice. 
e. None of these calls for recognition of a financial liability.

5. According to PFRS 9, financial liabilities are classified as

a. FVPL or amortized cost.  d. FVPL only
b. FVPL, FVOCI or amortized cost. e. FVOCI only
c. FVPL or FVOCI

6. Financial liabilities are initially measured at 

a. fair value plus transaction costs.
b. fair value plus transaction costs, except FVPL liabilities whose transaction costs are expensed
immediately.
c. fair value plus transaction costs, except FVOCI liabilities whose transaction costs are recognized in
OCI.
d. fair value minus transaction costs, except FVPL liabilities whose transaction costs are expensed
immediately. 
e. fair value only

7. Trade payables are normally classified as current liabilities. Which of the following is a trade payable? 
a. Dividends payable due in 3-months’ time
b. Unearned income representing advanced collections from customers. 
c. An obligation for purchases of inventory, supported by a promissory note.
d. Payables for city services, not supported by formal notes. 
e. Deferred tax liability
8. According to PAS 1, which of the following statements is correct regarding refinancing of long-term
obligations?
a. currently maturing obligation is classified as current even  if a refinancing agreement is completed
after the reporting period but before the financial statements are authorized for issue. 
b. currently maturing obligation is classified as noncurrent if it is refinanced on a long-term basis after
the reporting period but before the financial statements are authorized for issue.
c. A currently maturing obligation is always classified as a current liability, without exception.
d. A currently maturing obligation is classified as current if the entity expects, and has the discretion, to
refinance it on a long-term basis under an existing loan facility, 
e. A currently maturing obligation is always classified as a noncurrent liability.

9. According to PAS 1, which of the following statements is correct regarding liabilities that are payable on
the demand?
a. Such liabilities are presented as current liabilities.
b. Such liabilities are presented as noncurrent if there is no indication that the lender will demand
repayment within 12 months from the end of the reporting period
c. Such liabilities are classified as noncurrent only if the lender provides the debtor after the end of the
reporting period a 12-month grace period within which the lender will not demand repayment.
d. Such liabilities are presented as non-current
e. Such liabilitie are not disclosed liabilities

10. Entity A sells 2-year subscriptions for online software. As of December 31, 2021, Entity A's unearned
subscriptions revenue has a balance of P1M, of which 60% will be earned in 2022 and the remaining
balance in 2023. Entity A should present the unearned subscriptions as follows :

Current liabilities  Noncurrent liabilities

a. Unearned revenue, P1M
b. Unearned revenue, P.6M Deferred revenue, P.4M 
c. Deferred revenue, P1M
d. Deferred revenue, P.4M
e. Unearned revenue P1.4M Deferred revenue P.4M  

11. For a bond issue which sells for less than its par value, the market rate of interest is
a. Dependent on rate stated on the bond.
b. Equal to rate stated on the bond.
c. Less than rate stated on the bond. 
d. Higher than rate stated on the bond.
e. Prevailing market rate

12. The market price of a bond issued at a discount is the present value of its principal amount at the market
(effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the bond.
e. Less the present value of all future interest payments.

13. The issue price of a bond is equal to the present value of the future cash flows for interest and principal
when the bond is issued 
At face amount At a discount  At a premium 
a. Yes  No  Yes
b. Yes No    No 
c. No Yes Yes
d. Yes Yes Yes
e. No No No
14 Kenwood Co neglected to amortize the premium on outstanding ten-year bonds payable What is the effect
of the failure to record premium amortization on interest expense and bond carrying value, respectively?
a. Understate; understate d. Overstate; understate
b. Understate; overstate  e. Understate only the interest expense
c. Overstate; overstate

15. On March 1, 1997, Clark Co. issued bonds at a discount, Clark incorrectly used the straight-line method
instead of the effective interest method to amortize the discount. How were the following amounts, as of
December 31, 1997, affected by the error?

Bond carrying amount Retained earnings 

a. Overstated  Overstated
b. Understated  Understated
c. Overstated  Understated
d. Understated  Overstated
e. Overstated No effect

16. If interest-bearing obligations are issued between interest payment dates, the accrued interest sold
a. should be included in the carrying amount of the liability as a credit to 'interest expense' or 'interest
payable.'
b. should not be included in the carrying amount of the liability but rather credited to 'interest expense' or
'interest payable.
c. interest payable is debited
d. interest income is credited 
e. interest payable is credited

17. The equity component of a compound financial instrument is determined

a. by allocating the issue price to the liability and equity components based on their relative fair values. 
b. by allocating the equity component its fair value, 
c. by deducting the fair value of the liability component without the equity feature from the net proceeds
from the issuance of the compound instrument
d. by multiplying the no. of shares at its FMV
e. by multiplying the no. of shares at its par value

18. Upon conversion of convertible bonds,

a. no gain or loss is recognized
b any share premium recognized on the conversion feature is transferred directly to retained earnings
c. any unamortized discount is derecognized by a debit
d. gain on conversion is recognized
e. loss on conversion feature is transferred to retained earning

19. Upon retirement of convertible bonds, 

a. no gain or loss is recognized
b. gain or loss is recognized as the difference between the retirement price and the carrying amount of
the liability component,
c. any share premium recognized on the conversion feature is recognized in profit or loss
d gain or loss is recognized as the difference between the retirement price allocated to the liability
component and the carrying amount of the liability component. 
e. any share premium recognized on the conversion feature is transferred to retained earnings.

20. The share premium recognized on a convertible bond 

a. remains in equity only if the bonds are actually converted
b. reclassified out of equity to profit or loss if the bonds are not converted
c. remains in equity whether the bonds are actually converted or not
d. recognized as gain or loss on conversion
e. becomes part of the bonds payable account
21. When the equity feature of a compound instrument is exercised, the related share premium is
a. transferred directly to retained earnings
b. transferred to profit or loss 
c. transferred within equity
d. remains within the bonds payable
e. recognized as gain from non-conversion

22. In an asset swap, where a liability is settled through the transfer of noncash asset, 
a. the gain or loss on settlement is computed as the difference between the carrying amount of the
liability extinguished and the fair value of the noncash asset transferred
b. the gain or loss on settlement is computed as the difference between the carrying amount of the
liability extinguished and the carrying amount of the noncash asset transferred.
c. the gain or loss on settlement is computed as the difference between the carrying amount of the
liability extinguished and the more clearly determinable between the fair value of the liability extinguished
and the carrying amount of the noncash asset transferred.
d. no gain or loss is recognized 
e. only gain is recognized

23. In an "equity swap," where a liability is settled through the issuance of equity securities, the equity
securities issued are measured at
a. the fair value of the equity securities issued
b. the fair value of the liability extinguished
c. the carrying amount of the liability extinguished
d. FV of equity securities or FV of liability extinguished, which ever is clearly determinable
e. the par value of equity securities issued

24 In an "equity swap," where a liability is settled through the issuance of equity securities,

a. no gain or loss is recognized
b. any apparent gain or loss is recognized in equity as an addition to share premium
c. gain or loss is recognized as the difference between the measurement amount of the equity securities
issued and the carrying amount of the liability derecognized. 
d. Share premium is credited for the amount of gains
e. Retained earnings is debited for the loss 

25. There is substantial modification of a liability if the difference between the present value of the new
liability discounted at the original effective interest rate and the carrying amount of the old liability is
a. at least 10%  d. 50% or more 
b. more than 10%  e. equal to 50%
c. less than 10%

26. What distinguishes a provision from other types of liabilities? 

a. A provision must arise from contracts.
b. A provision is recognized only if the provision meets the definition of an element of financial
statements, it is probable, and can be measured reliably.
c. The settlement of a provision requires the delivery of cash or other financial instruments under
conditions which are potentially unfavorable.
d. A provision is a liability of uncertain timing or amount.
e. A provision does not require estimates

27. A provision is recognized only when

a. it meets the definition of a liability 
b. there is a probable outflow of resources
c. it can be measured reliably
d. it meets the definition of a liability, there is a probable outflow of resources and it can be measured
reliably  
e. the payee can be definitely identified
28. Provisions are presented
a. together with other liabilities under the caption and other payables." Disclosures are made in the
notes to distinguish the provisions from the other liabilities.
b. always as current liabilities.
c. separately from other liabilities.
d. only in the notes. 
e. always as non-current liabilities

29. When measuring a provision, an entity uses: 

a. best estimate
b. expected value
c. mid-point
d. best estimate, expected value or midpoint, depending on the case at hand.
e. at cost

30. A present obligation which would possibly require an outflow when settled is

a. accrued  d. ignored
b. disclosed only  e. never accrued
c. accrued and disclosed

31. The result on the year-end balance sheet of an issue of a 10-year term bond sold at face amount four
years ago with interest payable June 1 and December 1 each year, is a(an)
a. liability for accrued interest d. contingent in interest income
b. addition to bonds payable e. increase in interest income
c. increase in deferred charges

32. Unmortized bond discount should be reported on the financial statements of the issuer as a
a. Direct deduction from the face amount of the bond
b. Direct deduction from the present value of the bond
c. Deferred charge
d. Part of the issue cost
e. Addition to carrying amount of the bonds

33. Straight-line amortization of bond premium or discount:

a. can be used as an optional method of amortization in all situations
b. provides the same total amount of interest expense and interest revenue each interest period as
the effective interest method over the life of the bonds
c. provides the same amounts of interest expense and interest revenue as the effective interest
method
d. is appropriate when the bond term is especiallylong.
e. is appropriate for deep discount bonds

34. For a bond issue which sells for less than its face amount, the market rate of interest is
a. Dependent on the rate stated on the bond
b. Equal to rate stated on the bond
c. Less than rate stated on the bond
d. Higher than rate stated on the bond
e. Equal to effective rate of interest

35. The market price of a bond issued at a discount is the present value of its principal amount at the
market (effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
 d. Plus the present value of all future interest payments at the rate of interest stated on the bond
e. Less the present value of all future interest payments

36. Which of the following is not a relevant consideration when evaluating whether to derecognize a
financial liability?
a. Whether the obligation has been discharged
b. Whether the obligation has been canceled
c. Whether the obligation has expired
d. Whether substantially all the risks and rewards of the obligation have been transferred.
e. Whether the obligation has been derecognized

37. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument
b. The interest rate currently charged by the entity or by others for similar debt instruments (i.e.,
similar remaining maturity, cash flow pattern, currency, credit risk, collateral, and interest basis)
c. The interest rate that exactly discounts estimated future cash payments or receipts through the
expected life that exactly discounts estimated future cash payments or receipts through the
expected life of debt instrument or, when appropriate, a shorter period to the net carrying amount
of the instrument.
d. The basic, risk-free interest rate is derived from observable government bond prices.
e. At the effective rate of interest

38. Which of the following statements is false?

a. Bonds carry no corporate ownership privileges
b. A bond is financial contract
c. Bond prices remain fixed over time
d. A bond issuer must pay periodic interest
e. Callable bonds are bonds that the issuer can redeem prior to maturity

39. Most bonds:

a. are money market securities.
b. are floating-rate securities.
c. give bondholders a voice in the affairs of the corporation
d. are interest-bearing obligations of governments or corporations.
e. pays interest semi-annually

40. In an “asset swap” where a liability is settled through the transfer of noncash asset,
a. the gain or loss on settlement is computed as the difference between the carrying amount of the
liability extinguished and the fair value of the noncash asset transferred.
b. the gain or loss on settlement is computed as the difference between the carrying amount of the
liability extinguished and the more clearly determinable between the fair value of the liability
extinguished and the carrying amount of the noncash asset transferred
c. the gain or loss on settlement is computed as the difference between the carrying amount of the
liability extinguished and the more clearly determinable between the fair value of the liability
extinguished and the carrying amount of the noncash asset transferred.
d. no gain or loss is recognized
e. only gain is recognized

41. Which of the following is not considered cash for financial reporting purposes?
a. Petty cash funds and postal money order
b. Unrestricted compensating balances
c. Dividend, interest and tax fund
d. Postdated and stale checks from customers
e. Bank overdraft
42. Which of the following is cash for financial reporting purposes assuming the balance sheet date is
December 31, 2016?
a. Check payable to a supplier unreleased at the balance sheet date
b. Check received from a customer dated January 2, 2017
c. Check received from a customer marked as DAUD/DAIF
d. Undeposited customer’s check which is already outstanding for more than 6 months at the
balance sheet date
e. Debit balances in suppliers’ account

43. The following reconciling items are deducted from the bank balance of cash in order to arrive at the
unadjusted book balance of cash except
a. Erroneous bank credit d. Credit memo
b. Erroneous bank charge e. Debit memo
c. Outstanding checks

44. When specific customer’s account is written off by a company using the allowance method the effect
on net income, accounts receivable, and allowance for uncollectible accounts are?
Net income Account receivable Allowance for uncollectible accounts
a. No effect No effect Decrease
b. Increase No effect No effect
c. Increase Decrease Decrease
d. No effect Decrease Decrease
e. No effect No effect No effect

45. Which of the following would not be reported as inventory?

a. Goods out on consignment
b. Goods in transit sold under FOB Destination
c. Goods in transit purchased under FOB seller
d. Goods purchased under a buyback agreement
e. Goods in transit purchased under FOB Shipping point

46. Which of the following statement is incorrect about perpetual inventory system?
a. Inventory account is debited upon purchase
b. One of the entries made to make up return of goods sold on account is debit inventory and credit
cost of goods sold
c. A physical inventory account is required to set up cost of goods sold
d. The purchase account is debited for merchandise bought
e. The company does not maintain subsidiary ledger for its inventory

47. Which of the following is incorrect about bonds sold at a discount?

a. The carrying amount of the bond increases each year
b. The discount on bonds payable account decrease each year
c. At maturity the face value and carrying amount of the bonds will equal
d. The balance of the bonds payable account increases each year
e. The carrying amount of the bond decrease each year.

48. How would the carrying value of a bond payable be affected by amortization of each of the following?
DISCOUNT PREMIUM
a. No effect No effect
 b. Increase No effect
c. Increase Decrease
d. Decrease Increase
e. Increase Increase

49. Under the effective interest method of bond discount or premium amortization, the periodic interest
expense is equal to
a. The stated rate of interest multiplied by the face value of bonds
b. The effective rate of interest multiplied by the face value of the bonds
c. The stated rate multiplied by the beginning of the period carrying amount of the bonds
d. The effective rate multiplied by the beginning of the period carrying amount of the bonds
e. The effective rate multiplied by the face value of bonds

50. Bonds with a par value of P5.0 million carrying a stated interest rate of 12& payable semiannually
on March 1 , and September 1, were 1 were issued on July 1. The total proceeds from the issue
amounted to P5,200,000. The best explanation for the excess amount received over the par is
a. the bonds were sold at a premium
b. The bonds were sold at a higher effective interest rate
c. The bonds were issued at par value plus accrued interest
d. No explanation is possible without knowing the maturity date of the bond issue
e. The bonds were sold at a discount

51. Upon retirement of the bonds, any resulting gain on retirement of the bonds should be reported in
income statement when
a. Retirement price is less than the carrying value of the bonds
b. Retirement price is greater than the carrying the value of the bonds
c. Retirement price is equal to the carrying amount of the bonds
d. Retirement price is equal to face value of bonds
e. Retirement price is unknown

52. Contingent liability will or will not be recognized as a provision (liability) depending on
a. The degree of uncertainty
b. The outcome of a future
c. Whether they are probable and estimable
d. The present condition suggesting a liability
e. Amount of liability

53. Contingent liability will or will not become actual liabilities depending on
a. The outcome of a future event
b. The degree of uncertainty
c. The present condition suggesting a liability
d. Whether they are probable and estimable
e. Non-occurrence of a future event.

54. Which of the following is the mostly likely candidate for a contingent liability that can be accrued?
a. Potential liability on a product still in the planning stage (no items have been sold )
b. Potential liability for a lawsuit in which the firm is defendant
c. Property tax payable
d. Warranty liability
e. Potential liability whose amount cannot be measure

55. Which of the following is not a relevant consideration when evaluating whether to derecognize
a financial liability?
a. Whether the obligation has expired
 b. Whether the obligation has been canceled
c. Whether the obligation has been discharged
d. Whether substantially all the risk and rewards of the obligation have been transferred.
e. Whether the obligation has been restructured

56. Which of the following describes a liability?

I. It is a present obligation of an entity
II. The settlement of a liability is expected to result in an outflow of resources embodying
economic benefits
III. The liability arises from past event.
a. I only d. I, II and III
b. II only e. Neither I nor II nor III
c. Both I and II

57. Which one of the following items is NOT a liability?

a. Dividends payable in shares d. Maturing portion of long-term debt
b. Accrued estimated warranty cost e. Bank overdrafts
c. Advances from customers on contracts

58. Magazine subscriptions collected in advance are treated as

a. Deferred revenue in the liability section
b. Deferred revenue in the shareholders’ equity section
c. A contra account to magazine subscriptions receivable
d. Magazine subscription refund in the income statement in the period collected
e. Deferred revenue in he asset section

59. A retail store received cash and issued a gift certificate that is redeemable in merchandise. When the gift
certificate was issued,
a. Revenue account should be increased d. Deferred revenue account should be decrease
b. Revenue account should be decreased e. Sales account should be credited
c. Deferred revenue account should be increase

60. Which of the following should not be included in the current liabilities section of the balance sheet?
a. Trade notes payable d. Short-term non-interest-bearing notes payable
b. Deferred tax liability e. Bank overdraft
c. Trade accrued expenses

61. An event that gives rise to a present obligation, but which cannot be measured with sufficient reliability is
an example of a (an):
a. Accrual d. Contingent liability
b. Provision e. Contingent asset
c. Liability

62. Liabilities which fail the recognition criteria and where the possibility of an outflow is remote should:
a. Be recognized as an accrual d. Not be recognized in the financial statement
b. Be recognized as a provision e. Disclosed only
c. Be recognized as a contingent liability

63. Under PAS 37, provisions are liabilities of

a. Certain timing or amount d. Uncertain amount but certain timing
b. Uncertain timing or amount e. Certain timing but uncertain amount
 c. Uncertain timing but certain amount

64. All of the following are examples of a provision, EXCEPT

a. Warranty and guarantee d. Environmental contamination
b. Pending court case e. Estimated premium liabilities
c. Advanced receipt of subscription

65. Under PAS 37, provisions are recognized as liabilities if an entity has a present obligation that may be
a. Legal obligation only d. Neither legal nor constructive obligation
b. Constructive obligation only e. Both legal and constructive obligations
c. Either legal or constructive obligation

66. PAS 37 requires a provision based on a range of possible outcomes to be measured based on:
a. Midpoint of the range d. Best estimate of the expenditure
b. Minimum of the range e. Out of range
c. Maximum of the range

67. When the provision being measured involves a large population of items, what statistical method is used
when the provision is estimated by weighting all possible outcomes by their associated probabilities?
a. Expected value d. Normal distribution
b. Realizable value e. Scattergraph
c. Interpolation

68. For bonds payable, the cash interest paid in each interest period is:
a. The same amount regardless of whether the bonds were sold at a discount or a premium
b. Not the same amount when the stated and yield interest rates are different
c. Dependent on the initial amount of accrued interest
d. Different depending upon the date of sale
e. Includes any accrued interest

69. If a bond was sold at 105, then the stated rate of interest was:
a. Equal to market rate d. Lower than market rate
b. Not related to market rate e. No market rate
c. Higher than market rate

70. The bond interest expense for a period is more than interest paid when bonds are sold at
a. A premium d. A yield
b. Par e. At cost
c. A discount

71. The market price of a bond issued at a discount is the present value of its principal amount at the market
(effective) rate of interest:
a. Less than present value of all future interest payments at the market (effective) rate of interest
b. Less than present value of all future interest payments at the rate of interest stated on the bond
c. Plus the present value of all future interest payments at the market (effective) rate of interest
d. Plus the present value of all future interest payments at the rate of interest stated on the bond
e. Less the present value of all future interest payment

72. A troubled debt restructuring will generally result in a

a. Loss by both debtor and creditor d. Gain by the debtor, loss by the creditor
b. Gain by both debtor and creditor e. No gain or loss recognized
c. Loss by the debtor, gain by the creditor

73. Which is the correct definition of a provision?

a. A possible obligation arising from past event
b. A liability of uncertain timing or uncertain amount
 c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity
e. A contingent liability

74. A provision shall be recognized as a liability under which of the following conditions?
a. The entity has a present obligation, legal or constructive, as a result of a past event.
b. It is probable that an outflow of resources embodying economic benefits would be required to settle
the obligation.
c. The amount of the obligation can be measured reliably.
d. The amount cannot be measured reliably
e. The entity has a present obligation, as a result of past event which involves an outflow of revenues
embodying economic benefits and that it can be measured reliably

75. A legal obligation is an obligation that is derived from all of the following, except
a. Legislation d. An established pattern of past practice
b. A contract e. GAAP
c. Other operation of law

76. A contingent liability

a. Definitely exists as a liability but the amount and due date are indeterminable.
b. Is accrued even though not reasonably estimated.
c. Is the result of a loss contingency
d. Is not recognized in the financial statements.
e. Is disclosed in the financial statements

77. Which is the proper way to report a probable contingent asset?

a. As an accrued amount d. No disclosure or accrual required
b. As deferred revenue e. As a current liability
c. As a disclosure only

78. When the provision involves a large population of items, the best estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated probabilities.
b. Is determined as the individual most likely outcome.
c. May be the individual most likely outcome adjusted for the effect of other possible outcomes.
d. Midpoint of the possible outcomes
e. Cannot be determined

79. When the provision arises from a single obligation, the best estimate of the amount
a. Reflects the weighting of all possible outcomes by their associated probabilities.
b. Is determined as the individual most likely outcome.
c. Is the individual most likely outcome adjusted for the effect of other possible outcomes
d. Midpoint of the possible outcomes
e. Cannot be determined

80. General contingencies or unspecified risks should

a. Be accrued in the financial statements and disclosed in the notes
b. Not be accrued in the financial statements and need not be disclosed in the notes.
c. Not be accrued in the financial statement but should be disclosed in the notes.
 d. Be accrued in the financial statements but need not be disclosed in the notes.
e. Disclosed in the financial statements

81. Contingent liability will or will not be recognized as a provision (liability) depending on
a. The degree of uncertainty
b. The outcome of a future event
c. Whether they are probable and estimable
d. The present condition suggesting a liability
e. Compliance with GAAP

82. Contingent liability will or will not become actual liabilities depending on
a. The outcome of a future event
b. The degree of uncertainty
c. The present condition suggesting a liability
d. Whether they are probable and estimable
e. Compliance with GAAP

83. Which of the following is the most likely candidate for a contingent liability that can be accrued?
a. Potential liability on a product still in the planning stage (no items have been sold)
b. Potential liability for a lawsuit in which the firm is a defendant
c. Property tax payable
d. Warranty liability
e. Bank overdraft

84. Which of the following is NOT a relevant consideration when evaluating whether to derecognize a financial
liability?
a. Whether the obligation has expired
b. Whether the obligation has been cancelled
c. Whether the obligation has been discharged
d. Whether substantially all the risks and rewards of the obligation have been transferred.
e. Whether the obligation has been accrued

85. What is the principle of accounting for a compound instrument (e.g., an issued convertible debt
instrument)?
a. The issuer shall classify a compound instrument as either a liability or equity based on an
evaluation of the predominant characteristics of the contractual arrangement
b. The issuer shall classify the liability and equity components of a compound instrument
separately as financial liabilities, financial assets or equity instruments
c. The issuer shall classify compound instruments as a liability in into entirely, until converted into
equity, unless the equity components shall be presented separately
d. The issuer shall classify a compound instrument as a liability in it’s entirely, until converted into
equity
e. The issuer shall classify a compound instrument as part of the shareholders’ equity

86. Which of the following is an essential characteristic of a liability?

a. It must be an obligation to transfer assets or provide services in the future
b. The identity of the creditor must be known
c. It may be result of future transactions
d. The exact amount due must be known
e. Estimates are not used in the determination of amount

87. Which of the following is not an essential characteristic for an item to be reported as a liability on the
balance sheet?
a. The liability is the present obligation of a particular entity
b. The liability arises from past transactions or events
 c. The liability is payable to a specifically identified payee
d. The settlement of the liability requires an outflow of resources embodying economic benefits
e. Date of payment shall be known

88. Which of the following items would be excluded from current liabilities?
a. A long-term liability callable or due on demand by the creditor even though the creditor has given no
indication that the debt will be called
b. Normal accounts payable which had been assigned by the creditor to a finance company
c. Long-term debt callable within one year or less because the debtor violated a debt provision
d. A short-term debt which at the discretion of the entity can be rolled over at least twelve months after
the balance sheet date
e. Bank overdraft

89. Which of the following loss contingencies is usually not accrued?

a. Product warranty obligations d. Non-collectibility of receivables
b. Premium offer obligations e. Allowance for bad debts
c. Risk of loss from fire

90. Under PAS 37, for which of the following should a provision be recognized?
a. A liability to replace specific defective television set already returned to the manufacturer
b. A liability to pay pension benefits if a specific employee lives to retirement
c. A liability to pay any adverse judgment for a product liability case currently on appeal
d. A liability to pay for books received by the college bookstore; terms allow for the return for full
refund of any books not sold
e. A liability to train its employees to increase productivity and efficiency

91. According to PAS 37, which TWO of the following best describe the sources of legal obligation?
A legal obligation is an obligation that derives from
A- Legislation C- A published policy
B- A contract D- An established pattern of past practice
a. A and B d. B and D
b. A and C e. A and D
c. C and D

92. Which of the following is within the scope of PAS 37 (Provisions, contingent liabilities and contingent
assets)?
a. Financial instruments carried at fair value
b. Future payments under employment contracts
c. Future payments on vacant leasehold premises
d. An insurance company’s policy liability
e. Major overhaul or repair

93. According to PAS 37, for which of the following should a provision be recognized since it is not
contingent?
a. Future operating losses
b. Obligations under insurance contracts
c. Obligation for plant decommissioning costs
d. Reduction in fair value of financial instrument
e. An entity has a self-insurance policy
94. The cost of customer premium offer should be charged to expense
a. When the related product is sold
b. When the premium offer expire
c. Over the life cycle of the product
d. When the premium is claimed
e. When the financial statements are issued

95. The accounting concept that requires recognition of a liability for customer premium offer is
a. Time period
b. Prudence
c. Historical cost
d. Matching principle
e. Entity concept

96. Accounting for cost of incentive program for frequent customer purchases involves
a. Recording an expense and liability each period.
b. Recording a liability and a reduction of revenue
c. Recording an expense and an asset reduction
d. Recording an expense and revenue each period
e. No recognition is necessary

97. The most common type of liability is

a. One that comes into existence due to a loss contingency
b. One that must be estimated
c. One that comes into existence due to a gain contingency
d. One to be paid in cash and for which the amount and timing are known
e. One whose amount must be determined

98. Classifying liabilities as either current or noncurrent helps creditors assess

a. Profitability
b. The relative risk of an entity’s liabilities
c. The degree of an entity’s liabilities
d. The amount of an entity’s liabilities
e. Current ratio

99. Which does not meet the definition of a liability?

a. The signing of a an employment contract at fixed salary
b. An obligation to provide goods or services in the future
c. A note payable with no specified maturirty date
d. An obligation to distribute an entity’s own shares
e. Warranty liability

100. Which of the following is not an acceptable presentation of current liabilities?

a. Listing current liabilities in the order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against current assets
d. Showing current liabilities in the order of liquidation
e. As deferred revenues