QUESTION 1-13 Multiple choice (PFRS 9)

1. An entity shall measure initially a financial liability not designated at fair value through profit loss at
a. Fair value
b. Fair value plus directly attributable transaction costs
c. Fair value minus directly attributable transaction costs
d. face amount
2. Transactions costs directly attributable to the issue of a financial liability include all of the following,
except
a. Fees and commissions paid to agents
b. Levies by regulatory agencies
c. Transfer taxes and duties
d. Financing costs
3. The fair value of liability is defined as
a. The appraised value of the liability.
b. The price that would be received to assume the liability in an orderly transaction between market
participants.
c. The amount that would be paid when transferring a liability in an orderly transaction between market
participants.
d. The carrying amount of the liability on the date of transaction.
4. After initial recognition, an entity shall measure a financial liability at
a. Amortized cost using the effective interest method.
b. Fair value through profit or loss.
c. Either amortized cost using the effective interest method or fair value through profit or loss.
d. Either amortized cost using the straight line interest method or fair value through profit or loss.
5. Which of the following statements is true in relation to the fair value option of measuring a financial
liability?
a. At initial recognition, an entity may irrevocably designate a financial liability at fair value through
profit or loss.
b. the financial liability is measured at fair value at every year-end and any change in fair value is
generally recognized in profit or loss.
c. The interest expense on the financial liability is recognized using the nominal interest rate.
d. all of these statements are true about the fair value option of measuring financial liability.
ANSWER 1-13
1. c
2. d
3. c
4. c
5. d

QUESTION 1-14 Multiple Choice (IAA)

1. The conceptually appropriate method of measuring a liability is to

a. Discount the amount of expected cash outflows that are necessary to liquidate the liability using the
market rate of interest at the date the liability was initially incurred.

b. Discount the amount of expected cash outflows that are necessary to liquidate the liability using the
market rate of interest at the date of the financial statements.

c. Record as liability the amount cash that would be required to pay the liability in the ordinary course of
business on the date of financial statements.

d. Record as liability the amount cash actually received when the liability was incurred.

2. For liability to exist

a. A past transaction or event must have occurred.

b. The exact amount must be known.

c. The identity of the party owed must be known.

d. An obligation to pay cash in the future must exist.

3. Which of the following represents a liability?

a. The obligation to pay for goods that an entity expects to order from the suppliers next year.

b. The obligation to provide goods that customers have ordered and paid during the current year.

c. The obligation to pay interest on a five-year note payable that was issued the last day of the current
year.

d. The obligation to distribute an entity’s own shares next year as a result of a stock dividend declared
near the end of the current year.

4. Which of the following does not meet the definition of a liability?

a. The signing of a three-year employment contract at a fixed annual salary,

b. An obligation to provide goods or services in the future.

c. A note payable with no specified maturity date.

d. An obligation that is estimated in amount.

5. Which of the following statements in relation to liabilities is not valid?

a. Current liabilities shall not be offset against assets that are to be applied to their liquidation.

b. Unasserted claims are never accrued because to do so would require an entity to implicitly admit
liability.

c. Commitments to make future purchase shall be accrued if losses become probable and if the amount is
reasonably measurable.

d. Estimated liabilities shall be accrued because these are known to exist and are only uncertain as to
amount.

ANSWERS 1-14

1. a

2. a

3. b

4. a

5. b

QUESTION 1-15 Multiple Choice (IAA)

1. Which of the following is a characteristic of a current liability but not a noncurrent liability?

a. Unavoidable obligation.

b. Present obligation that entails settlement by probable future transfer of cash, goods or services.

c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer.

d. The obligating evet creating the liability has already occurred.

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

a. Preset obligation

b. Arises from past event

c. Results in an outflow of resources

d. Liquidation is reasonably expected to require use of existing resources classified as current assets

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

a. Liquidation of current liabilities is reasonably expected within the operating cycle or one year,
whichever is longer.

b. Current liabilities are the result of operating transactions.

c. Current liabilities cannot exceed the amount incurred in one operating cycle.

d. There is no relationship between the two.

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

a. Present values is used to measure certain liabilities.

b. Present value is not used to measure liabilities.

c. Present values is used to measure all liabilities.

d. Present values is used to measure noncurrent liabilities.

5. 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 assets that are to be applied to their liquidation.

d. Showing current liabilities in the order of liquidation preference.

ANSWER 1-15

1. c

2. d

3. a

4. a

5. c

QUESTION 1-16 Multiple choice (AICPA Adapted)

1. Which of the following should be included in current liabilities?
a. Trade notes payable
b. Short-term zero-interest bearing note payable
c. Unearned revenue
d. All of these are included in current liabilities
2. 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
3. Which of the following is a current liability?
a. Bond payable due in two years for which there is an adequate sinking fund
b. Bond payable due in three years expected to be refinanced
c. Bond payable due in eleven months for which there is an appropriation of retained earning
d. Bond payable due in eight months ad refinanced on a long-term basis at the end of reporting period.
4. If a long term debt becomes callable due to the violation of a loan covenant
a. The debt may continue to be classified as long term if the entity believes the covenant can be
renegotiated.
b. The debt must be reclassified as current.
c. Cash must be reserved to pay the debt.
d. Retained earnings must be restricted equal to the amount of the debt.
5. At year-end, an entity classified a note payable as current liability. Under what conditions could the
entity reclassify the note payable from current to noncurrent?
a. If the entity has the intent and liability to reclassify the note before the end of the reporting period.
b. If the entity has executed an agreement to refinance the note before issuance of the financial
statements.
c. If the entity has the intent and liability to reclassify the note before the issuance of the financial
statements.
d. If the entity has executed an agreement to refinance the note before the end of the reporting period.

ANSWER 1-16

1. d

2. c

3. c

4. b

5. d
QUESTION 1-17 Multiple choice (IAA)

1. Liabilities are

a. Any accounts with credit balances

b. Deferred credits

c. Obligations to transfer ownership shares

d. Present obligations arising from past events and result in an outflow of resource
2. Which of the following is not a liability?
a. Deposit received from customer
b. Unearned revenue
c. Zero interest-bearing note payable
d. Stock dividend payable
3. Which of the following is a noncurrent liability?
a. Income tax payable
b. One-year magazine subscription received in advance
c. Unearned interest income related to noninterest-bearing lomg-term note receivable
d. Estimated warranty liability
4. 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. The current liabilities may be listed in the order of maturity, in descending order of magnitude or in the
order of liquidity preference.
c. Current liabilities are generally recorded at a face amount.
d. Current liabilities should not be offset against the assets used for liquidation.
5. What is the classification of debt callable by the creditor?
a. Noncurrent liability
b. Current liability
c. Current liability if the creditor intends to call the debt within one year
d. Current liability if it is probable that the creditor will call the debt within one year
ANSWER 1-17
1.d
2.d
3. C
4.a
5.b

QUESTION 3-15 Multiple Choice (PAS 37)

1. Which of the following is the correct definition of provision?
a. A possible obligation arising from the past event
b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity
2. A provision shall be recognized as liability when
a. An entity has a present obligation as a result of a past event.
b. It is probable that an outflow of resources embodying economic beliefs will be required to settle the
obligation.
c. The amount of the obligation can be measured reliably.
d. All of these are required for the recognition of a provision as liability.
3. A constructive obligation is an obligation
I. That is derived from an entity’s action that the entity will accept certain responsibilities because of past
practice, published policy or current statement.
II. The entity has created a valid expectation in other parties that it will discharge those responsibilities.
a. I only
b. II only
c. Both I and II
d. Either I or II
4. It is an event that recreates a legal or constructive obligation because the entity has no other realistic
alternative but to settle the obligation.
a. Obligating event
b. Past event
c. Subsequent event
d. Current event
5. An outflow of resources embodying economic benefits is regarded as “probable” when
a. The probability that the event will occur is greater than the probability that the event will not occur.
b. The probability that the event will occur is greater than the probability that the event will occur.
c. The probability that the event will occur is the same as the probability that the event will not occur.
d. The probability that the event will occur is 90% likely.
6. What amount is recognized as provision?
a. Best estimate of the expenditure.
b. Minimum of the range
c. Maximum of the range
d. Midpoint of the range
7. Where there is a continuous range of possible outcomes, and each point in the range is as likely as any
other, the range to be used is the
a. Minimun
b. Maximum
c. Midpoint
d. Sum of the minimum and maximum
8. When the provision involves a large population of items, the 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 the other possible outcomes.
d. Midpoint of the possible outcomes.
9. When the provision arises from a single obligation, the 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.
10. Which statement is incorrect where the expenditure required to settle a privision is expected to b
reimburesed 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
reimbursenent.
d. The reimbursement shall not be treated as separate asset and therefore “netted” against the estimated
liability for the provision.
ANSWERS 3-15
1.b
2.d
3.c
4.a
5.a
6.a
7.c
8.a
9.c
10.d

QUESTION 3-16 Multiple choice (PAS 37)

1. For an event to be an obligating event, it is necessary that the entity has no realistic alternative but
to settle the obligation created by the event and this is the case only:
I. Where the settlement of the obligation can be enforced by law
II. Where the event creates valid expectation in other parties that the entity will
discharge the obligation as in case of a constructive obligation.
a. I only
b. II only
c. Either I or II
d. Neither I nor II
2. Which of the following statements is true concerning the measurement of a provision?
I. The amount recognized as a provision should be the best estimate of the expenditure
required to settle the present obligation at the end of reporting period.
II. The best estimate of the expenditure required to settle the present obligation is the
amount that an entity would rationally pay to settle the obligation at the end of
reporting period or to transfer it to a third party at that time.
a. I only
b. II only
c. Both I and II
d. Neither I and II
3. 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 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. I only
b. II only
c. Both I and II
 d. Neither I nor II
4. Provisiom shall be discounted if the effect of the time value of money is material. Which of the
following is incorrect regarding the discount rate?
a. Reflects current market assessment of the time value of money.
b. Reflects risks specific to the liability.
c. Does not reflect risks for which future cash flow estimates have been adjusted.
d. Is a post-tax discount rate.
5. Which of the following terms is associated with recognising a provision?
a. Possible
b. Virtually certain
c. Remote
d. Probable
ANSWER 3-16
1.c
2.c
3.c
4.d
5.d

QUESTIONS Multiple choice ( PAS 37)

1. Which of the following statements is true in relation to the measurement of a provision?
I. The risks and uncertainties that inevitably surround many events and circumstances
shall be taken into account in reaching the best estimate of a provision.
II. Where the effect of the time value of money is material, the amount of a provision
shall be the present value of the expenditure expected to settle the obligation.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Which of the following statements is true in relation to the measurement of a provision?
I. Future events that may affect the amount required to settle the obligation shall be
reflected in the amount of the provision where there is sufficient objective evidence
that the future events will occur.
II. Gains from expected disposal of assets shall not be taken into account in measuring a
provision.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
3. Which of the following statements is incorrect concerning recogtion of a provision?
a. Provisions shall be reviewed at the end of each reporting period and adjusted to
reflect the current best estimate.
 b. A provision shall be used only for expenditures for which the provision was
originally recognized.
c. Provision shall be recognized for future operating losses.
d. If an entity has an onerous contract, the present obligation under the contract
shall be recognized and measured as a provision.
4. It is a contract in which the unavoidable costs of meeting the obligation under the contract exceed
the economic benefits to be received under the contract.
a. Onerous contract
b. Executory contract
c. Executed contract
d. Sale contact
5. 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
ANSWER 3-17
1.c
2.c
3.c
4.a
5.c

QUESTION 3-21 Multiple choice (AICPA Adapted)

1. A provision is
a. An event which is not recognized because it is not probable or cannot be measured
reliably.
b. An event which is probable and measurable.
c. An event which is probable, possible or remote and measurable.
d. An event which is probable but not measurable
2. Which of the following would not be considered a “provision”?
a. Warranty liability
b. Bad debt
c. Tax payable
d. Note payable
3. In calculating present value in a situation with a range of possible outcomes all discounted using
the sane interest rate, the expected present value would be
a. The most-likely outcome
b. The maximum outcome
 c. The minimum outcome
d. The sum of probability-weighed present value
4. An entity received notification of legal action against the entity. The attorneys determined that it
is probable the entity will lose suit and the loss can be estimated reliably. How should the
estimated loss be reported?
a. As a loss recorded in other comprehensive income
b. As a contingent liability reported in the statement of financial and a loss in the income
statement.
c. As a loss in the income statement and a provision in the statement of financial position.
d. In the notes to financial statements as a contingency.
ANSWER 3-21
1.b
2.d
3.d
4.c

QUESTIONS 4-8
1. A contingent liability is a
I. Possible obligation that arise 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. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Which of the following statements in relation to a contingent liability is true?
I. 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 measured is a
contingent liability.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
3. Which of the following statement is incorrect concerning a contingent liability?
a. A contingent liability is not recognized in the financial statements.
b. A contingent liability is disclosed only.
c. If the contingent liability is remote, no disclosure is required.
d. A contingent liability is both probable and measurable.
 4. It is a possible asset that arises from past event and whose existence will be confirmed only by
the occurrence or nonoccurences of one or more uncertain future events not wholly within the
control of the entity.
a. Contingent asset
b. Other asset
c. Suspense account
d. Current asset
5. Which of the following statements is incorrect concerning a contingent asset?
a. A contingent asset is not recognized in the financial statements because this
may result to recognition of income that may never be realized.
b. When the realization of income is virtually certain, the related asset is no
longer contingent asset and its recognition is appropriate.
c. A contingent asset is only disclosed when the occurrence of the future event is
possible or remote.
d. The related gain arising from contingent asset is recognized usually when it is
realized.
ANSWER 4-8
1.a
2.b
3.d
4.a
5.c

QUESTIONS 4-9
1. The likelihood that the future event will not occur can be expressed by a range of outcomes.
Which range means that the future event occuring is a very slight?
a. Probable
b. Reasonably possible
c. Certain
d. Remote
2. An entity did not record an accrual for a present obligation but disclose the nature of the
obligation and the range of the loss. How likely is the loss?
a. Remote
b. Reasonably possible
c. Probable
d. Certain
3. A present obligation that is probable and for which the amount can be reliably measured shall
a. Not be accrued but shall be disclosed in the notes to the financial statements.
b. Be accrued by debiting an appropriated retained earnings account and crediting a liability
account.
c. Be accrued by debiting an expense account and crediting an appropriated retained
earnings account.
 d. Be accrued by debiting an expense account and crediting a liability account.
4. An item that is not a contingent liability is
a. Premium offer to customers for labels or box tops
b. Accommodation endorsement on customer note
c. Additional compensation that may be payable on a dispute now being arbitrated
d. Pending lawsuit
5. An entity has a self-insurance plan. Each year, the entity appropriated retained earnings for
contingencies is an amount equal to insurance premiums saved less recognized losses from law
suits and other claims. As a result of an accident in the current year, the entity is a defendant in a
lawsuit in which it probably have to pay measurable amount of damages. What are the effects of
the lawsuit’s probable outcome on the entity’s financial statements for the current year?
a. An increase in expenses and no effect on liabilities
b. An increase in both expenses and liabilities
c. No effect on expenses and an increase in liabilities
d. No effect on either expense or liabilities
6. Contingent assets are usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can be reliably measured
c. Occurrence is probable and the amount can be reliably measured
d. The amount can be reliably measured
7. Which of the following is the proper accounting treatment of a contingent asset?
a. An accrued account
b. Deferred earnings
c. An account receivable with an additional disclosure explaining the nature of the
transaction
d. A disclosure only
8. When the occurrence of a contingent asset is probable and the amount can be reliably measured,
the contingent asset should be
a. Recognized in the statement of financial position and disclosed.
b. Classified as an appropriation of retained earnings
c. Disclosed but not recognized in the statement of financial position.
d. Neither recognized in the statement of financial position nor disclosed.
9. An entity operates a plant in a foreign country. It is probable that the plant will be expropriated.
However, the foreign government has indicated that the entity will receive a definite amountof
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 nites to financial statements
d. In the statement of financial position
10. At year-end, an entity was suing a competitor for patent infringement. The award from the
probable favorable outcome could be reliably measured. The entity’s financial statements should
report the expected award as
a. Receivable and revenue
b. Receivable and reduction of patent
c. Receivable and deferred revenue
d. Disclosure only
ANSWER 4-9
1.d
2.b
3.d
4.a
5.b
6.a
7.d
8.c
9.c
10.d

QUESTIONS 4-10
1. An entity has cosigned the mortgage note on the home of its president guaranteeing the
indebtedness in the event that the president should default. The entity considers the likelihood of
default to be remote. How should the guarantee be treated in the financial statements?
a. Disclosed
b. Accrued
c. Accrued and disclosed
d. Neither accrues nor disclosed
2. 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.
3. An expropriation of asset which is imminent and for which the amount of loss can be reasonably
estimated should be
a. Accrued
b. Disclosed
c. Accrued and disclosed
d. Not accrued and not disclosed
4. An entity signed abn agreement with another entity which requires that if the latter does not meet
certain contractual obligations, it must forfeit a piece of land to the former. How should the
former report of the land?
a. An investment property
b. As a contingent current asset
c. In a note disclosure if the economic benefits are probable
d. As a contingent asset and other comprehensive income
 5. An entity is the plaintiff in a patent infringement case. The enitity has a high probability of a
favorable outcome and can reasonably estimate the amount of the settlement. What is the proper
accounting treatment of the patent infringement case?
a. No reporting is required at this time.
b. A gain contingency for the minimum estimated amount of the settlement
c. Disclosure in the notes to financial statements
d. A gain contingency for estimated probable settlement
ANSWER 4-10
1. A
2. B
3. C
4. C
5. C

QUESTION 4-11
1. Contingent liabilities will or will not become actual liabilities depending on
a. Whether they are probable and measurable
b. The degree of uncertainty
c. The present condition suggesting a liability
d. The outcome of a future event
2. 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 even 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 statements that a liability has been incurred.
3. How should a contingent liability be reported in the financial statements when it is resonably
possible that the entity will have to pay the liability at a future date?
a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As a account payable with an additional disclosure explaining the nature of the
transaction
4. Disclosure usually is not required for
a. Contingent gains that are probable and can be reliably measured
b. Contingent losses that are reasonably possible and cannot be reliably measured
c. Contingent losses that are probable and cannot be reliably measure
d. Contingent losses that are remote and can be reliably measured.
5. Reporting in the financial statements is required for
a. Loss contingencies that are probable and can be reliably measured.
b. Gain contingencies that are probable and can be reliably measured.
c. Loss contingencies that are possible and can be reliably measured.
d. All loss contingencies.
 6. Pending litigation would generally be considered
a. Nonmonetary liability
b. Contingent liability
c. Estimated liability
d. Current liability
7. Gain contingencies that are remote and can be reliably measured
a. Must be disclosed in a note to the financial statements
b. May be disclosed in a note to the financial statements
c. Must be reported in the body of the financial statements
d. Should not be reported or disclosed.
8. A contingent liability
a. Has a most probable value of zero but may require a payment if a given future event
occurs.
b. Definitely exists as a liability but the amount or due date is indeterminate.
c. Is commonly associated with the loss carryforward.
d. Is not disclosed in the financial statements.
9. Provisions are accrued because the likelihood of an unfavorable outcome is
a. Virtually certain
b. Greater that 50%
c. At least 70%
d. Possible
10. Which of the following should be disclosed in the financial statements as a contingent liability?
a. The entity has accepted liability prior to the year-end for unfair dismissal of an employee
and is to pay damages.
b. The entity has received a letter from a supplier complaining about an old upaid invoice
c. The entity is involved in a legal case which it may possibly lose.
d. The entity has not yet paid certain claims under product warranties.
ANSWER 4-11
1. D
2. D
3. C
4. D
5. A
6. B
7. D
8. A
9. B
10. C

QUESTION 4-12
1. What condition is necessary to recognize an environmental liability
a. The entity has an existing legal obligation and the amount of liability can be reliably
estimated.
b. The entity can reliably estimate the amount of the liability.
 c. The entity has an existing legal obligation.
d. Obligating event has occurred.
2. Which of the following is not considered when evaluating whether or not to record a liability for
pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The typenof litigation involved.
c. The profitability of an unfavorable outcome.
d. The ability to make a reliable estimate of the amount of the loss.
3. Which of the following is required to be disclosed regarding risk and uncertainties that exist?
a. Factor causing an estimate to be sensitive.
b. The potential impact of estimate when it is reasonably possible that the estimate will
change in the future.
c. The potential impact of estimate when it is remotely possible that the estimate will
change in the future.
d. A description of operation both within and outside of the home country.
4. A contingent liability is
a. An estimated liability.
b. An event which is not recognized because it is not probable that an outflow will be
required or the amount cannot be reliably estimated.
c. A potential large liability.
d. A potential small liability.
5. How should incurred costs associated with relocating employees in a restructuring be accounted
for?
a. Measured at fair value and recognized over two years.
b. Measured at fair value and recognized when the liability is incurred.
c. Recognized when costs are paid.
d. Measured at fair value and treated as prior period error.
ANSWER 4-12
1. A
2. B
3. B
4. B
5. B