Week 4: Theory of Accounts (Part IV) LIABILITIES QUIZ

Which of the following is not considered a characteristic of a liability?

Select one:
a. Arises from past event
b. Liquidation is reasonably expected to require use of existing resources classified as current assets
c. Results in an outflow of resources
d. Present obligation

What is the relationship between current liabilities and an operating cycle?

Select one:
a. Liquidation of current liabilities is reasonably expected within the operating cycle or one year, whichever is
longer.
b. Current liabilities cannot exceed the amount incurred in one operating cycle.
c. Current liabilities are the result of operating transactions.
d. There is no relationship between the two.

The accrual approach in accounting for product warranty cost

Select one:
a. Finds the expense account being charged when the seller performs in compliance with the warranty.
b. Represents accepted practice and should be used whenever the warranty is an integral and inseparable part
of the sale.
c. Is frequently justified on the basis of expediency when warranty cost is immaterial.
d. Is required for income tax purposes.

At the end of the current year, an entity received an advance payment of 60% of the sales price for special order
goods to be manufactured and delivered within five months. At the same time, the entity subcontracted for
production of the special order goods at a price equal to 40% of the main contract price. What liabilities should be
reported in the entity's year-end statement of financial position?

Select one:
a. Deferred revenue equal to 60% of the main contract price and no payable to subcontractor
b. None
c. Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40% of the
main contract price
d. No deferred revenue but payable to subcontractor is reported at 40% of the main contract price

If a long-term debt becomes callable due to the violation of a loan covenant

Select one:
a. Cash must be reserved to pay the debt.
b. Retained earnings must be restricted equal to the amount of the debt.
c. The debt may continue to be classified as long term if the entity believes the covenant can be renegotiate
d. The debt must be reclassified as current.

Which does not meet the definition of a liability?

Select one:
 a. An obligation that is estimated in amount.
b. The signing of a three-year employment contract at a fixed annual salary.
c. A note payable with no specified maturity date.
d. An obligation to provide goods or services in the future.

Which is a characteristic of a current liability but not a noncurrent liability?

Select one:
a. The obligation event creating the liability has already occurred
b. Present obligation that entails settlement by probable future transfer of cash, goods or services
c. Unavoidable obligation
d. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer.

How would the proceeds received from the advance sale of non-refundable tickets for a theatrical performance be
reported before the performance?

Select one:
a. Unearned revenue for the entire proceeds
b. Unearned revenue to the extent of related costs expended
c. Revenue for the entire proceeds
d. Revenue to the extent of related costs expended

Under a royalty agreement with another entity, an entity will receive royalties from the assignment of a patient for
four years. The royalties received in advance shall be reported as revenue

Select one:
a. Evenly over the life of the royalty agreement
b. In the period received
c. In the period earned
d. At the date of the royalty agreement

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 sol~ When should the entity recognized these warranty costs?

Select one:
a. When payments are made to the mechanic
b. When the service calls are performed
c. When machines are sold
d. Evenly over the life of the warranty

When an entity has a continuing policy guaranteeing new products against defects for three years, the liability arising
from the warranty

Select one:
a. Need not be disclosed
b. Should be reported as current
c. Should be reported as current and part noncurrent.
d. Should be reported as noncurrent

A retail store received cash and issued gift certificates that are redeemable in merchandise. How would he deferred
revenue account be affected by the redemption and nonredemption of certificates, respectively?
Select one:
a. Decrease and Decrease
b. No effect and Decrease
c. No effect and No effect
d. Decrease and No effect

Under a customer loyalty program, the consideration allocated to points

Select one:
a. Shall be recognized initially as deferred revenue and amortized as revenue over a reasonable period
b. Shall not be accounted for as revenue separately.
c. Shall be recognized initially as deferred revenue and subsequently recognized as revenue upon redemption
of the points.
d. Shall be recognized as revenue immediately.

Which of the following represents a liability?

Select one:
a. The exact amount must be known.
b. A past transaction or event must have occurred
c. The identity of the party owed must be known.
d. An obligation to cash in the future must exist.

Which of the following represents liability?

Select one:
a. The obligation to pay goods that an entity expects to order from suppliers next year.
b. The obligation to pay interest on a five-year note payable that was issued at year end
c. The obligation to provide goods that customers have ordered and paid for during the year.
d. The obligation to distribute an entity's own shares next year as a result of a share dividend

What is the relationship between present value and concept of liability?

Select one:
a. Present value is not used to measure liabilities.
b. Present value is used to measure certain liabilities.
c. Present value is used to measure all liabilities.
d. Present value is used to measure noncurrent liabilities.

Which is not an acceptable presentation of current liabilities?

Select one:
a. Listing current liabilities in the order of maturity
b. Showing current liabilities in the order of liquidation preference
c. Listing current liabilities according to amount
d. Offsetting current liabilities against asset that are to be applied to their liquidation

Which statement is not true regarding the presentation of current liabilities in accordance with PFRS?

Select one:
a. Current liabilities should not be offset against the asset used for liquidation.
b. The noncurrent liabilities follow the current liabilities.
 c. Current liabilities may be listed in the order of maturity, in descending order of magnitude or in
d. Current liabilities are generally recorded at face amount.

In June of the current year, an entity sold refundable merchandise coupons. The entity received a certain amount for
each coupon redeemable from July 1 to December 31 of the current year, for merchandise with certain retail price. At
June 30 of the current year, how should the entity report these coupon transactions?

Select one:
a. Unearned revenue at the cash received
b. Unearned revenue at the merchandise retail price
c. Revenue at the merchandise's retail price
d. Revenue at the cash received

The conceptually appropriate method of measuring a liability is to

Select one:
a. Discount the of amount expected cash outflows that are necessary to liquidate the liability using the market
rate of interest at the date of the liability was initially incurred
b. Discount the amount of expected cash outflows that are necessary to liquidate the liability using market rate
of interest at the date of the financial statements.
c. Record as liability the amount of cash that would be required to pay the liability in the ordinary course of
business on the date the financial statements.
d. Record as liability the amount of cash actually received when a liability is incurred