Liabilities

The most relevant measurement of liabilities at initial recognition and fresh start
measurement should always reflect
a. The expectation of the management
b. Historical cost
c. The credit standing of the entity
d. The single most likely minimum or maximum possible amount
Which of the following statements is not true regarding the presentation of current
liabilities in accordance with IFRS?
a. The noncurrent liabilities follow the current liabilities
b. Current liabilities may be listed in the order of maturity in descending order of
magnitude or in order of liquidity preference
c. Current liabilities are generally recorded at face amount
d. Current liabilities should not be offset against the assets used for liquidation
CURRENT LIABILITIES - Premium and Warranty Liability, Accrued Liabilities
and Deferred Revenue
The accrual approach in accounting for product warranty cost
a. Is required for income tax purposes
b. Is frequently justified on the basis of expediency when warranty cost is
immaterial
c. Finds the expense account being charged when the seller performs in
compliance with the warranty
d. Represents accepted practice and should be used whenever the
warranty is an integral and inseparable part of the sale
Which of the following best describes the accrual approach of accounting for
warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred
Which of the following is a characteristic of the accrual of warranty but not the sale
of warranty?
a. Warranty liability
b. Warranty expense
c. Unearned warranty revenue
d. Warranty revenue

A retail store received cash and issued gift certificates that are redeemable in
merchandise. How would the deferred revenue account be affected by the
redemption and nonredemption of certificates, respectively?
a. Decrease and No Effect
b. Decrease and Decrease
c. No effect and No Effect
d. No Effect and Decrease
An entity is a retailer of home appliances and offers a service contract on each
appliance sold. The entity sells appliances on installment contracts but all service
contracts must be paid in full at the time of sale. Collections received for service
contracts shall be recorded as an increase in
a. Deferred revenue account
b. Sales contracts receivable valuation account
c. Shareholders equity valuation account
d. Service revenue account
How would the proceeds received from the advance sale of nonrefundable tickets
for a theatrical performance be reported in the sellers financial statements before
the performance?
a. Revenue for the entire proceeds
b. Revenue to the extent of related costs expended
c. Unearned revenue to the extent of related costs expended
d. Unearned revenue for the entire proceeds
At the end of the current year, an entity received and advance payment of 60% of
the sales price for special order goods to be manufacture and delivered within five
production of the special order goods at a price equal to 40% of the main contract
price. What liabilities should be reported in the entitys year-end statement of
financial position?
a. None
b. Deferred revenue equal to 60% of the main contract price and payable to
subcontractor equal to 40% of the main contract price
c. Deferred revenue equal to 60% of the main contract price and no
payable to subcontractor
d. No deferred revenue but payable to subcontractor equal to 40% of the main
contract price
An entity sells appliances that include a three-year warranty. Service calls under the
warranty are performed by an independent mechanic under a contract with the
entity. Based on experience, warranty costs are expected to be incurred for each
machine sold. When should the entity recognize these warranty costs?
a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the mechanic
d. When the machines are sold

Provision
Which statement is incorrect where the expenditure required to settle a provision is
expected to be reimbursed by another party?
a. The reimbursement shall be recognized only when it is virtually certain that
the reimbursement would be received if the entity settles the obligation.
b. The amount of the reimbursement shall not exceed the amount of the
provision.
c. In the income statement, the expense relating to the provision may be
presented net of the reimbursement.
d. The reimbursement shall not be treated as separate asset and
therefore netted against the estimated liability for the provision.
Which of the following statements is true in relation to recognition of a provision?
I. No provision is recognized for costs that need to be incurred to operate in the
future.
II. A provision for the decommissioning of an oil installation or a nuclear plant station
shall be recognized to the extent that an entity is obliged to rectify damage
already caused.
a.
b.
c.
d.

I only
II only
Both I and II
Neither I nor II

The unavoidable costs under an onerous contract represent the least net cost of
exiting from the contract which is equal to
a. Cost of fulfilling the contract
b. Penalty arising from failure to fulfill the contract
c. Lower of the cost of fulfilling the contract or the penalty arising from
failure to fulfill the contract
d. Higher of the cost of fulfilling the contract or the penalty arising from failure
to fulfill the contract
An entity is closing one of its operating divisions, and the conditions for making
restructuring provision have been met. The closure will happen in the first quarter of
the next financial year. At the current year-end, the entity has announced the formal
plan publicly and is calculating the restructuring provision. Which of the following
costs should be included in the restructuring provision?
a. Retraining staff continuing to be employed
b. Relocation costs relating to staff moving to other division
c. Contractually required costs of retraining staff being made
redundant from the division being closed
d. Future operating losses of the division being closed up to the date of closure

A factory owned by an entity was destroyed by fire. The entity lodged an insurance
claim for the value of the factory building and plant, and an amount equal to one
years net profit. During the year, there were a number of meetings with the
representatives of the insurance company. Finally, before year-end, it was decided
that the entity would receive compensation for 90% of its claim. The entity received
a letter that the settlement check for that amount had been mailed, but it was not
received before year-end. How should the entity treat this in the financial
statements?
a. Disclose the contingent asset in the footnotes.
b. Wait until next year when the settlement check is actually received and not
recognize or disclose this receivable at all since at year-end it is a contingent
asset.
c. Record 90% of the claim as receivable as it is virtually certain that
the contingent asset will be received.
d. Record 100% of the claim as a receivable at year-end as it is virtually certain
that the contingent asset will be received, and adjust the 10% next year
when the settlement check is actually received.
The board of directors of an entity decided in the latter part of the current year to
wind up international operations in the Far East and move them to Australia. The
decision was based on a detailed formal plan of restructuring. This decision was
conveyed to all workers and management decision was conveyed to all workers and
management personnel at the headquarters in Europe. The cost of the restructuring
plan can be estimated reliably. How should the entity treat the restructuring at the
current year-end?
a. Disclose only the restructuring decision and the cost of restructuring
because the entity has not announced the restructuring to those
affected by the decision and thus has not raised an expectation that
the entity would actually carry out the restructuring.
b. Recognize a provision for restructuring since the board of directors has
approved it and it has been announced in the headquarters of the entity in
Europe.
c. Mention the decision to restructure and the cost involved in the chairmans
statement in the annual report.
d. Do nothing because the restructuring has not commenced before year-end.
An entity has been served a legal notice at year-end by the Department of
Environmental and Natural Resources to fit smoke detectors in its factory on or
before middle of next year. The cost of fitting smoke detector can be measured
reliably. How should the entity treat this at year-end?

a. Recognize a provision for the current year equal to the estimated amount.
b. Recognize a provision for the current year equal to one-half only of the
estimated amount.
c. No provision is recognized at year-end because there is not present
obligation for the future expenditure since the entity can avoid the
future expenditure by changing the method of operations but
disclosure is required.
d. Ignore this for purposes of the financial statements at year-end.

Contingent Liability and Contingent Asset

A contingent liability is a
I. Possible obligation that arises from past event and whose existence will be
confirmed only by the occurrence or nonoccurrence of one or more uncertain
future events not wholly within the control of the entity.
II. Present obligation that arises from past event and it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation
and the amount of the obligation can be measured reliably.
a.
b.
c.
d.

I only
II only
Both I and II
Neither I nor II

Which of the following statements in relation to a contingent liability is true?

An obligation as a result of the entity creating a valid expectation that it will
discharge its responsibilities is a contingent liability.
II. A present obligation that arises from past event but cannot be reliably measure is a
contingent liability.
I.

a.
b.
c.
d.

I only
II only
Both I and II
Neither I nor II

An entity operates a plant in a foreign country. It is probably that the plant will be
expropriated. However, the foreign government has indicated that the entity will
receive a definite amount of compensation for the plant. The amount of
compensation is less than the fair value but exceeds the carrying amount of the
plant. The contingent asset should be reported
a. As a valuation allowance as a part of shareholders equity

b. As a fixed asset valuation allowance account

c. In the notes to financial statements
d. In the statement of financial position
Reserves for contingencies for general or unspecified risks should
a. Be accrued in the financial statements and disclosed.
b. Not be accrued in the financial statements and need not be
disclosed.
c. Not be accrued in the financial statements but should be disclosed.
d. Be accrued in the financial statements but need not be disclosed.
Contingent liabilities will or will not become actual liabilities depending on
a. Whether they are probably and measurable.
b. The degree of uncertainty.
c. The present condition suggesting a liability.
d. The outcome of a future event.
A contingent liability shall be recognized when
a. Any lawsuit is actually filed against an entity.
b. It is certain that funds are available to pay the amount of the claim.
c. It is probable that a liability has been incurred event though the amount of
the loss cannot be reliably measured.
d. The amount of the loss can be reliably measured and it is probable
prior to issuance of financial statement that a liability has been
incurred.

Bonds Payable
Interest for Premium - decreases each year
Interest for Discount - increases each year
Amortization for Premium/Discount - increases each year

Effective Interest Method

Which of the following statements is true for a bond maturing on a single date when
the effective interest method of amortizing bond discount is used?
a. Interest expense as a percentage of the bond carrying amount varies from
period to period
b. Interest expense increases each six-month period
c. Interest expense remains constant each six-month period
d. Nominal interest rate exceeds effective interest rate

Compound Financial Instrument

When an entity issued bonds payable with detachable share warrants, how will
share premium be computed if the warrants are exercised by the bondholders?
a. It is the difference between the proceeds received based on the exercise
price and the total par or stated value of the shares issued.
b. It is the difference between the proceeds received based on the
exercise price including the share warrants outstanding and total
par or stated value of the shares issued.
c. It is the sum of the share warrants outstanding and total par or stated value
of the shares issued.
d. It is the balance of the share warrants outstanding.
When an entity issued convertible bonds, how will share premium be computed if
the bonds were converted into ordinary shares?
a. It is the difference between the carrying amount of the bonds and the total
par or stated value of the shares issued.
b. It is the difference between the face value of the bonds and the total par or
stated value of the shares issued.
c. It is the difference between the carrying amount of the bonds
including share premium from conversion privilege and the total par
or stated value of the shares issued.
d. It is the difference between the face value of the bonds including the share
premium from conversion privilege and the total par or stated value of the
shares issued.
The major difference between convertible bonds and bonds issued with share
warrants is that upon exercise of the warrants
a. The shares are held by the issuer for a certain period before they are issued
to the warrant holder.
b. The holder has to pay a certain amount to obtain the shares.
c. The shares involved are restricted.
d. No share premium can be part of the transaction.
Convertible bonds
a. Are separated into the liability component and the expense component.

b. Allow an entity to issue debt financing at lower rate.

c. Are separated into liability and equity components based on relative fair
value.
d. All of the choices are correct.
The conversion of bonds payable into ordinary shares is commonly recorded by
a. Incremental method
b. Proportional method
c. Fair value method
d. Book value or carrying amount method

Note Payable
An entity borrowed cash from a bank and issued to the bank a short-term
noninterest-bearing note payable. The bank discounted the note at 10% and
remitted the proceeds to the entity. What is the effective interest rate?
a. Equal to the stated discount rate of 10%
b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%
When a note payable is issued for property, the present value of the note is
measured by
a. The fair value of the property
b. The fair value of the note
c. Using an imputed interest rate to discount all future payments on the note
payable
d. All of these are considered in measuring the present value of the
note payable

Debt Restructure
In a debt extinguishment in which the debt is continued with modified terms and the
carrying amount of the debt is more than the fair value of the debt
a. A loss should be recognized by the debtor.
b. A new effective interest rate must be computed.
c. A gain should be recognized by the debtor.
d. No interest expense should be recognized in the future.

Operating Lease
The appropriate valuation of an operating lease in the statement of financial
position of the lessee is
a. Zero
b. The absolute sum of the lease payments
c. The present value of the sum of the lease payments discounted at an
appropriate rate
d. The market value of the asset at the inception of the lease
Lessors should show assets subject an operating lease and income therefrom as
which of the following?
a. The asset should be kept off the statement of financial position and the lease
income should go to reserves.
b. The asset should be kept off the statement of financial position and the lease
income should go to the income statement.
c. The asset should be shown in the statement of financial position and the
lease income should go to reserves.
d. The asset should be shown in the statement of financial position and
the lease income should go to the income statement.
When equipment held under an operating lease is subleased by the original lessee,
the original lessee would account for the sublease as
a. Operating Lease
b. Sales type lease
c. Direct financing lease
d. Finance lease
A twenty-year operating lease provides for a 10% increase in annual rent every five
years. In the sixth year compared to the fifth year, what could be the effect on the
expenses?
a. Rent and interest expense will both increase.
b. Interest expense will increase but not rent expense.
c. Rent expense will increase but not interest expense.

d. No increase in both rent and interest expense.

Finance Lease Lessee

It is that portion of the lease payments that is not fixed in amount but is based on a
factor other than just the passage of time, for example, percentage of sales,
amount of usage, price index and market rate of interest.
a. Variable rent
b. Contingent rent
c. Bargain purchase option
d. Executory cost
What is the treatment of initial direct costs incurred by the lessee in a finance
lease?
a. Added to the lease liability
b. Added to the carrying amount of the leased asset
c. Expensed immediately
d. Added to the carrying amount of the asset and lease liability
The interest rate implicit in the lease is the discount rate that causes the aggregate
of the present value of the minimum lease payments and the unguaranteed residual
value to be equal to the
a. Fair value of the asset.
b. Fair value of the asset and initial direct cost of the lessor.
c. Fair value of the asset and initial direct cost of the lessee.
d. Gross investment in the lease.
An entity signed an agreement to lease land and a building for 20 years. At the end
of the lease, the property will not transfer to the lessee. The useful life of the
building is 20 years. How should the entity account for the lease?
a. The lease is recorded as a finance lease.
b. The lease is recorded as an operating lease.
c. The land is recorded as an operating lease and the building is
recorded as a finance lease.
d. The land is recorded as a finance lease and the building is recorded as an
operating lease.

Which of the following situations would prima facie lead to a lease being classified
as an operating lease?
a. Transfer of ownership to the lessee at the end of lease term.
b. Option to purchase at an amount below the fair value of the asset.
c. The lease term is for a major part of the useful life of the asset.
d. The present value of the minimum lease payments is 50% of the fair
value of the asset.

Which of the following statements is true regarding the lease term?

a. The lease term does not include all periods covered by bargain renewal
option.
b. The lease term includes all periods for which failure to renew
imposes a penalty sufficiently high that he lessee probably will
renew.
c. The lease term may extend beyond the date a bargain purchase option
becomes exercisable.
d. The lease term does not include all periods representing renewals or
extensions of the lease at the lessors option.
What is the cost basis of an asset acquired in a financial lease?
a. The absolute sum of the minimum lease payments over the lease term
b. The present value of the minimum lease payments including executory costs
discounted at an appropriate rate
c. The present value of the minimum lease payments exclusive of
executory costs discounted at an appropriate rate
d. The present value of the market value of the asset discounted at an
appropriate rate
For finance lease, the amount recorded initially by the lessee as a liability should
a. Exceed the present value of the minimum lease payments
b. Exceed the minimum lease payments
c. Not exceed the fair value of the leased property at the inception of
the lease
d. Equal to the minimum lease payments
Which of the following is not part of the minimum lease payments from the
standpoint of the lessee?
a. The minimum rental payments
b. Any guarantee the lessee is required to make at the end of the lease term
regarding any deficiency from a specified minimum
c. Any estimated residual value at the end of the lease term

d. Any payment the lessee must make at the end of the lease term to purchase
the leased property under a bargain purchase option
An entity leased a new machine having an expected useful life of 12 years. The
noncancelable lease term is 10 years, and the entity may exercise a purchase
option at the end of the noncancelable term. The machine should be capitalized by
the entity and depreciated over
a. 9 years
b. 12 years
c. 10 years
d. 10 or 12 years at entitys option

Which of the following statements concerning guaranteed residual value is

appropriate for the lessee?
a. The asset and related liability shall be increased by the absolute amount of
the residual value.
b. The asset and related liability shall be decreased by the absolute amount of
the residual value.
c. The asset and related liability shall be decreased by the present value of the
residual value.
d. The asset and related liability shall be increased by the present
value of the residual value.
If the residual value of a leased asset is greater than the amount guaranteed by the
lessee
a. The lessee pays the lessor for the difference.
b. The lessee recognizes a gain at the end of the lease term.
c. The lessee has no obligation related to the residual value.
d. The lessor pays the lessee for the difference.
Which of the following best describes current practice in accounting for leases?
a. Leases are not capitalized.
b. Leases similar to installment purchases are capitalized.
c. All long-term leases are capitalized.
d. All leases are capitalized.
In computing depreciation of a leased asset under a finance lease, the lessee should
deduct
a. A guaranteed residual value and depreciate over the lease term.
b. An unguaranteed residual value and depreciate over the lease term.
c. A guaranteed residual value and depreciate over the life of the asset.
d. An unguaranteed residual value and depreciate over the life of the asset.

A six-year finance lease specifies equal minimum annual lease payments. Part of
this payment represents interest and part represents a reduction in the lease
liability. The portion of the minimum lease payment in the fifth year applicable to
the reduction of the lease liability should be
a. Less than in the fourth year
b. More than in the fourth year
c. The same as in the sixth year
d. More than in the sixth year

Finance Lease Lessor

Which is the correct accounting treatment for a finance lease in the accounts of a
lessor?
a. Treat as a noncurrent asset equal to net investment in the lease. Recognize
all finance payments in income statement.
b. Treat as a receivable equal to gross amount receivable on lease. Recognize
finance payments in cash by reducing debt.
c. Treat as a receivable equal to net investment in the lease. Recognize
finance payment by reducing debt and taking interest to income
statement.
d. Treat as a receivable equal to net investment in the lease. Recognize finance
payments in cash by reduction of debt.
The lease receivable in a direct financing lease is equal to
a. The cost of the leased asset on the part of lessor.
b. The difference between the gross rentals and the fair value of the leased
asset.
c. The present value of minimum least payments.
d. The cost of the asset less any accumulated depreciation.
The primary difference between a direct financing lease and a sales type lease is
the
a. Manner in which rental collections are recorded as rental income.
b. Depreciation recorded each year by the lessor.

c. Recognition of the manufacturer or dealer profit at the inception of

the lease.
d. Allocation of initial direct costs incurred by the lessor over the least term.
All of the following would be included in the lease receivable, except
a. Guaranteed residual value
b. Unguaranteed residual value
c. Bargain purchase option
d. All would be included
These are incremental costs that are directly attributable to negotiating and
arranging a lease.
a. Initial direct costs
b. Transaction costs
c. Costs of services
d. Executory costs

What is the treatment of unguaranteed residual value in determining the cost of

goods sold under a sales type lease?
a. The unguaranteed residual value is ignored.
b. The unguaranteed residual value is added to the cost of the leased asset.
c. The unguaranteed residual value is deducted from the cost of the leased
asset at absolute amount
d. The unguaranteed residual value is deducted from the cost of the
leased asset at present value
Which of the following statements characterizes a sales type lease?
a. The lessor recognizes only interest revenue over the life of the asset.
b. The lessor recognizes only interest revenue over the lease term.
c. The lessor recognizes a dealer profit at lease inception and interest revenue
over the lease term.
d. The lessor recognizes a dealer profit at lease inception and interest revenue
over the life of the asset.
The excess of the fair value of leased property at the inception of the lease over the
carrying amount should be recognized by the dealer lessor as
a. Unearned income from a sales type lease
b. Unearned income from a direct financing lease
c. Manufacturer profit from a sales type lease
d. Manufacturer profit from a direct financing lease
In a lease that is recoded as a sales type lease by the lessor, interest revenue

a.
b.
c.
d.

Does not arise

Should be recognized over the lease term using the interest method
Should be recognized over the lease term using the straight line method
Should be recognized in full as revenue at the inception of the lease

Sales and Leaseback