INTERMEDIATE ACCOUNTING II 5.
Which situation would not require that noncurrent liabilities be reported as cur-
Author: Conrado T. Valix, Jose F. Peralta & Christian Aris M. Valix
BSA2
Problem 1-34 Multiple choice (IAA)
1.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.
2. Which is not a characteristic of a liability?
a. It represents a transfer of an economic resource.
b. It must be payable in cash.
c. It arises from present obligation to other entity.
d. It results from past transaction or event.
3. 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
4. Short-term obligations are reported as noncurrent if
a. The entity has a long-term line of credit.
b. The entity has tentative plan to issue long-term bonds payable.
C. The entity has the discretion to refinance as long-term.
d. The entity has the ability to refinance on a long-term basis.
rent?
a. The long-term debt is callable by the creditor.
b. The creditor has the right to demand payment due to a contractual vio-
lation.
C. The long-term debt matures within the upcoming year.
d. All of these require the current classification.
6.Which of the following represents a liability?
a. The obligation to pay for goods that an entity expects to order from sup -
pliers next year
b. The obligation to provide goods that customers have ordered and paid
for during the current year
C. The obligation to pay interest on a five-year note payable that was is-
sued the last day of the year
d. The obligation to distribute an entity's own shares
7.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 maturity date
d. An obligation that is estimated in amount
8.Which of the following is a characteristic of a current liability but not a noncurrent
liability?
a. Unavoidable. obligation.
b. Present obligation to transfer an economic resource.
C. Settlement is expected within the normal operating cycle or within 12
months, whichever is longer.
d. The obligating event has already occurred.
9.Which of the following is not considered a characteristic of a liability?
 a. Present obligation a. Current liability with separate disclosure of the note refinancing

b. Arises from past event b. Current liability with no disclosure required

C. Results in a transfer of economic resource c. Noncurrent liability with separate disclosure of the note refinancing

d. Liquidation is reasonably expected to require use of current assets d. Noncurrent liability with no separate disclosure required

10. Which of the following is not an acceptable presentation of current liabilities? 4.An entity has a loan due for repayment in six months' time, but the entity has the
option to refinance for repayment two years later. The entity plans to refinance this
a. Listing current liabilities in the order of maturity loan. In which section of the statement of financial position should this loan be pre -
b. Listing current liabilities according to amount sented?

C. Offsetting current liabilities against assets that are to be applied to their a. Current liabilities
liquidation b. Current assets
d. Showing current liabilities in the order of liquidation preference c. Noncurrent liabilities
Problem 1-35 Multiple Choice (IAA) d. Noncurrent assets
1. Among the short-term obligations at year-end are 90-day notes, renewable for 5. At year-end, an entity classified a note payable as current liability. Under what
another 90-day period. What is the classification of the notes payable? condition could the entity reclassify the note payable from current to noncurrent?
a. Current liabilities a. If the entity has the intent and ability to reclassify the note before the
b. Deferred credits end of reporting period.

c. Noncurrent liabilities b. If the entity has executed an agreement to refinance the note before is-
suance of the financial statements.
d. Intermediate debt
c. If the entity has the intent and ability to reclassify the note before the is -
2.At year-end, an entity has 120-day note payable outstanding. The entity has fol- suance of the financial statements.
lowed the policy of replacing the note rather than repaying it over the last three
years. The entity's treasurer says that this policy is expected to continue indefi - d. If the entity has executed an agreement to refinance the note before the
nitely, and the arrangement is acceptable to the bank to which the note was issued. end of reporting period.
What is the proper classification of the note in the year-end statement of financial Problem 1-36 Multiple choice (AICPA Adapted)
position?
1.The most relevant measurement of liabilities at initial recognition should always
a. Dependent on the intention of management reflect
b. Dependent on the actual ability to refinance a. The expectation of the management
c. Current liability, unless specific refinancing criteria are met b. Historical cost
d. Noncurrent liability c. The credit standing of the entity
3. An entity had a note payable due next year. After the end of reporting period and d. The single most likely minimum possible amount
before the issuance of the current year financial statements, the entity issued long-
term bonds payable. Proceeds from the bonds were used to repay the note when 2.Which statement best describes the term liability?
due. How should the entity classify the note payable at current year-end?
 a. An excess of equity over current assets
b. Resources to meet financial commitments when due
c. The residual interest in the assets of the entity
d. A present obligation arising from past event
3. What is the relationship between present value and the concept of a liability?
a. Present value is used to measure certain liabilities.
b. Present value is not used to measure liabilities.
c. Present value is used to measure all liabilities.
d. Present value is used to measure noncurrent liabilities only.
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 noncurrent if the covenant can
be renegotiated.
b. The debt should be reclassified as current.
C. Cash must be reserved to pay the debt.
d. Retained earnings must be restricted.
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
Problem 1-37 Multiple choice (IAA)
1.Advance payments from customers represent
a. Liabilities until the product is provided.
b. A component of shareholders' equity.
c. Assets until the product is provided.
d. Revenue upon receipt of the advance payment.
2.Revenue associated with gift card sales should be recognized
a. When the gift card is sold.
b. No later than the last day of the reporting period.
c. When the probability of gift card redemption is viewed as remote.
d. Under no circumstances
3. All else equal, a large increase in unearned revenue in the current period would
be expected to produce what effect on revenue in a future period?
a. Large increase because unearned revenue becomes revenue when
earned.
b. large decrease because unearned revenue implies that less revenue has
been earned which reduces future revenue.
C. No effect because unearned revenue is a liability.
D. Large decrease because unearned revenue indicates collection problems
that will reduce net revenue in future period.
4.When a product is delivered for which a customer advance has been previously
received, the appropriate journal entry includes
a. A debit to revenue and credit to liability
b. A debit to revenue and credit to asset
c. A debit to asset and credit to revenue
d. A debit to liability and credit to revenue
5. When cash is received from customers in the form of a refundable deposit, the
cash account is increased with a corresponding increase in
a. Current liability
b. Revenue
c. Shareholders' equity
d. Contributed capital
Problem 1-38 Multiple choice (AICPA Adapted)
1.A department store received cash and issued a gift certificate that is redeemable
in merchandise. When the gift certificate was issued
 a. Deferred revenue account should be decreased b. Revenue to the extent of related costs expanded

b. Deferred revenue account should be increased c. Unearned revenue to the extent of related costs expended

c. Revenue account should be decreased d. Unearned revenue for the entire proceeds

d. Revenue account should be increased 6.Magazine subscriptions collected in advance should be treated as

2.A retail store received cash and issued gift certificates that are redeemable in a. A contra account to magazine subscriptions receivable
merchandise. How would the deferred revenue account be affected by the redemp-
tion and nonredemption of certificates, respectively? b. Deferred revenue in the liability section

a. Decrease and No effect c. Deferred revenue in the shareholders' equity section

b. Decrease and Decrease d. Magazine subscription revenue in the income statement in the period
collected
c. No effect and No effect
7. Under a royalty agreement with another entity, an entity will receive royalties
d. No effect and Decrease from the assignment of a patent for four years. The royalties received in advance
should be reported as revenue
3.An entity received an advance payment for special order goods that are to be
manufactured and delivered within six months. How should the advance payment a. In the period received
be reported?
b. In the period earned
a. Deferred charge
c. Evenly over the life of the royalty agreement
b. Contra asset account
d. At the date of the royalty agreement
c. Current liability
8. An entity is a retailer of home appliances and offers a service contract on each
d. Noncurrent liability appliance sold. Collections received for service contracts should be recorded as an
increase in a
4. At year-end, an entity sold refundable merchandise coupons. The entity received
a certain amount for each coupon redeemable next year for merchandise with a a. Deferred revenue account
certain retail price. At year-end, how should the entity report these coupon transac-
tions? b. Sales contracts receivable valuation account

a. Unearned revenue at the merchandise's retail price c. Shareholders' equity valuation account

b. Unearned revenue at the cash received d. Service revenue account

C. Revenue at the merchandise's price 9.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
d. Revenue at the cash received entity. Based on experience, warranty costs are expected to be incurred for each
machine sold. When should the entity recognize these warranty costs?
5. How would the proceeds received from the advance sale of nonrefundable tick-
ets for a theatrical performance be reported in the statement of financial position a. Evenly over the life of the warranty
before the performance?
b. When the service calls are performed
a. Revenue for the entire proceeds
C. When payments are made to the mechanic
 d. When the machines are sold c. Recording an expense and an asset reduction each period.

10.At the end of the current year, an entity received an advance payment of 60% of d. Recording an expense and revenue each period.
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 4. Accounting for cost of incentive program for customer purchases
order goods at a price equal to 40% of the main contract price. a. Requires probability estimation.
What liabilities should be reported in the year-end statement of financial position? b. Follows the matching principle.
a. None c. Is a loss contingency situation.
b. Deferred revenue equal to 60% of the main contract price and payable d. All of these are correct.
to subcontractor equal to 40% of the main contract price
5. Providing a monetary rebate program
c. Deferred revenue equal to 60% of the main contract price and no
payable to subcontractor a. Is accounted for similarly to a premium offer

d. No deferred revenue but payable to subcontractor is reported at 40% of b. Creates an expense for the seller in the period of sale.
the main contract price
c. Creates a liability for the seller at the time of sale.

d. All of these are correct.

Problem 2-23 Multiple choice (IAA)
Problem 3-19 Multiple choice (IAA)
1. The cost of customer premium offer should be charged to expense
1.The accrual approach in accounting for warranty
a. When the related product is sold.
a. Is required for income tax reporting.
b. When the premium offer expires.
b. Is frequently justified on the basis of expediency.
C. Over the life cycle of the product to which the premium relates.
c. Finds the expense account being charged when the seller performs in
d. When the premium is claimed. compliance with the warranty.

2. The accounting concept that requires recognition of a liability for customer pre - d. Represents accepted practice and should be used whenever the war-
mium offer is ranty is an integral and inseparable part of the sale.

a. Time period 2.Which of the following best describes the accrual approach of accounting for war-
ranty cost?
b. Prudence
a. Expensed when paid
c. Historical cost
b. Expensed when warranty claims are certain
d. Matching principle
c. Expensed based on estimate in year of sale
3. Accounting for cost of incentive program for frequent customer purchases in-
volves d. Expensed when incurred

a. Recording an expense and a liability each period. 3. Which of the following best describes the expense as incurred approach of ac-
counting for warranty cost?
b. Recording a liability and a reduction of revenue each period.
 a. Expensed based on estimate in year of sale 3. A legal obligation is an obligation that is derived from all of the following, except

b. Expensed when liability is accrued a. Legislation

c. Expensed when warranty claims are certain b. A contract

d. Expensed when incurred c. Other operation of law

4. What is the classification of the estimated warranty liability in a three-year war- d. An established pattern of practice
ranty?
4. A constructive obligation is an obligation
a. Noncurrent
I. That is derived from an entity's action that the entity will accept certain responsi -
b. Current bilities because of past practice or published policy.

c. Partly current and partly noncurrent II. The entity has created a valid expectation in other parties that it will discharge
those responsibilities.
d. No need for disclosure
a. I only
5. Which of the following is a characteristic of the accrual of warranty but not the
sale of warranty? b. II only

a. Warranty liability c. Both I and II

b. Warranty expense d. Either I or II

c. Unearned warranty revenue 5.It is an event that creates a legal or constructive obligation because the entity has
no other realistic alternative but to settle the obligation.
d. Warranty revenue
a. Obligation event
Problem 4-33 Multiple choice (IFRS)
b. Past event
1.Which is the correct definition of a provision?
c. Subsequent event
a. A possible obligation arising from past events
d. Current event
b. A liability of uncertain timing or uncertain amount
6. An outflow of resources embodying economic benefits is regarded as "probable"
c. A liability which cannot be easily measured when
d. An obligation to transfer funds to an entity a. The probability that the event will occur is greater than the probability
2. A provision shall be recognized when that the event will not occur.

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 benefits
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.
b. The probability that the event will not occur is greater than the probabil-
ity 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.
7.Where there is a continuous range of possible outcomes, and each point in that
range is as likely as any other, the range to be used is the
a. Minimum
b. Maximum
c. Midpoint
d. Summation 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 prob-
abilities.
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.
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 prob-
abilities.
b. Is determined as the individual most likely outcome.
c. Is the individual most likely outcome adjusted for the effect of other pos -
sible outcomes.
d. Midpoint of the possible outcomes.
10.Which statement is incorrect when the expenditure required to settle a provi-
sion is expected to be reimbursed by another party?
a. The reimbursement shall be recognized only when it is virtually certain
that the reimbursement will be received if the entity settles the obligation.
b. The amount of the reimbursement shall not exceed the amount of the
provision.
c. The reimbursement shall be "netted" against the estimated liability for
the provision.
d. In the income statement, the expense relating to the provision may be
presented net of the reimbursement.
Problem 4-34 Multiple choice (IFRS)
1.A provision shall be recognized for
a. Future operating losses
b. Obligations under insurance contracts
c. Reductions in fair value of financial instruments
d. Obligations for plant decommissioning costs
2.Provisions shall be recognized for all of the following, except
a. Cleaning-up costs of contaminated land when an oil entity has a pub-
lished policy that it will undertake to clean up all contamination that it
causes.
b. Restructuring costs after a binding sale agreement.
c. Rectification costs relating to products sold.
d. Future refurbishment costs due to introduction of a new computer sys-
tem.
3. 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 divisions
c. Contractually required costs of retiring staff being made redundant from
the division being closed
d. Future operating losses of the division being closed up to the date of clo-
sure
4. An entity has been served a legal notice at year-end by the Department of Envi -
ronment and Natural Resources to fit smoke detectors in its factory on or before
middle of the next year. The cost of fitting smoke detector can be measured reli-
ably.
How should the entity treat this in the financial statements at year-end?
 a. Recognize a provision for the current year equal to the estimated b. Reasonably possible
amount.
C. Certain
b. Recognize a provision for the current year equal to one-half only of the
estimated amount. d. Remote

c. No provision is recognized at year-end because there is no present obli- 3. An expropriation of asset which is imminent and for which the amount of loss can
gation for the future expenditure since the entity can avoid the future ex- be reasonably estimated should be
penditure by changing the method of operations, but disclosure is re- a. Accrued
quired.
b. Disclosed
d. Ignore the event.
c. Accrued and disclosed
5.An entity operates chemical plants. The published policies include a commitment
to making good any damage caused to the environment by its operations. The en - d. Ignored
tity has always honored this commitment.
4.A present obligation that is probable and for which the amount can be reliably es-
Which of the following scenarios relating to the entity would give rise to a provi- timated should
sion?。
a. Not be accrued but disclosed in the notes to the financial statements.
a. On past experience it is likely that a chemical spill which would result in
having to pay fines and penalties will occur in the next year. b. Be accrued by debiting an appropriated retained earnings account and
crediting a liability account.
b. Recent research suggests there is a possibility that the entity's actions
may damage surrounding wildlife. C. Be accrued by debiting an expense account and crediting an appropri-
ated retained earnings account.
c. The government has outlined plans for a new law requiring all environ-
mental damage to be rectified. d. Be accrued by debiting an expense account and crediting a liability ac-
count.
d. A chemical spill from one of the entity's plants has caused harm to the
surrounding area and wildlife. 5.General or unspecified contingencies should

Problem 4-35 Multiple choice (AICPA Adapted) a. Be accrued in the financial statements and disclosed.

1.An entity did not record an accrual for a present obligation but disclose the nature b. Not be accrued and need not be disclosed.
of the obligation and the range of the loss. How likely is the loss? c. Not be accrued but should be disclosed.
a. Remote d. Be accrued but need not be disclosed.
b. Reasonably possible Problem 4-36 Multiple choice (IAA)
c. Probable 1. Contingent liabilities will or will not become actual liabilities depending on
d. Certain a. Whether probable and measurable.
2. The likelihood that the future event will or will not occur can be expressed by a b. The degree of uncertainty.
range of outcome. Which range means that the future event occurring is very
slight? c. The present condition.

a. Probable 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 but the amount 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 reasonably possible?
a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable
4. Disclosure usually is not required for
a. Contingent gain that is probable and measurable.
b. Contingent loss that is possible and measurable.
c. Contingent loss that is probable and cannot be reliably measured
d. Contingent loss that is remote and measurable
5. Reporting in the financial statements is required for
a. Loss contingency that is probable and measurable
b. Gain contingency that is probable and measurable
c. Loss contingency that is possible and measurable
d. All loss contingencies
6.A contingent liability
a. Definitely exists as a liability but the amount and due date are indeter -
minable.
b. Is accrued even though not reasonably estimated.
c. Is the result of a loss contingency.
d. Is not recognized in the financial statements.
7. A contingent liability is
a. An estimated liability.
b. An event which is not recognized because it is not probable that an out-
flow will be required or the amount cannot be reliably estimated.
c. A potential large liability.
d. A potential small liability.
8. Which statement is incorrect concerning a contingent liability?
a. A contingent liability is not recognized.
b. A contingent liability is disclosed only.
c. No disclosure is required for remote contingent liability.
d. A contingent liability is both probable and measurable.
9. 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.
c. Is reported as current liability.
d. Is not disclosed in the financial statements.
10. Which of the following is not considered when evaluating whether or not to
record a liability for pending litigation?
a. Time period of the underlying cause of action
b. The type of litigation involved
c. The probability of an unfavorable outcome
d. The ability to make a reliable estimate of the loss
Problem 4-37 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. a. Realized

c. An event which is possible and measurable. b. Occurrence is reasonably possible and the amount can be reliably mea-
sured
d. An event which is probable but not measurable.
c. Occurrence is probable and measurable
2.Which of the following is not considered a provision?
d. The amount can be reliably measured
a. Warranty liability
2. Which is the proper treatment of contingent asset?
b. Bad debt
a. An accrued account
c. Tax payable
b. Deferred income
d. Note payable
C. An account receivable
3. An entity received notification of legal action. How should the probable and mea-
surable loss be reported? d. A disclosure only

a. As a loss recorded in other comprehensive income 3. Gain contingency that is remote and measurable

b. As a loss in the income statement and a contingent liability a. Must be disclosed in a note to financial statements.

c. As a loss in the income statement and a provision b. May be disclosed in a note to financial statements.

d. In the notes to financial statements c. Must be reported in the body of the financial statements.

4. The present value in a range of possible outcomes all discounted using the same d. Should not be reported or disclosed.
rate would be
4. A probable and measurable contingent asset should be
a. The most-likely outcome
a. Recognized and disclosed.
b. The maximum outcome
b. Classified as an appropriation of retained earnings.
c. The minimum outcome
c. Disclosed but not recognized.
d. The sum of probability-weighted present value
d. Neither recognized nor disclosed.
5. What is the proper treatment of a patent infringement case of the plaintiff with
probable favorable outcome and measurable settlement? 5. Which is the proper way to report a contingent asset, receipt of which is virtually
certain?
a. No reporting is required at this time
a. As an asset
b. Disclosure
b. As unearned revenue
c. A gain contingency for the minimum settlement
c. As a disclosure only
d. A gain contingency for the probable settlement
d. No disclosure and no accrual
Problem 4-38 Multiple choice (IAA 37)
Problem 5-26 Multiple choice (IAA)
1. Contingent asset is usually recognized when
1. Most corporate bonds are 6. The discount on bonds payable is reported as

a. Mortgage bonds a. A prepaid expense

b. Debenture bonds b. An expense account

c. Secured bonds c. A current liability

d. Collateral bonds d. A contra liability

2.The method used to pay interest depends on whether the bonds are 7.In the amortization schedule for discount on bond payable

a. Registered or coupon a. The interest expense is less with each successive interest payment

b. Morgaged or unmortgaged b. The total effective interest over the term to maturity is equal to the
amount of the discount plus the total cash interest paid
c. Indebentured or debentured
c. The carrying amount of the bonds payable declines eventually to face
d. Callable or redeemable amount
3.Zero-coupon bonds d. The reduction in the discount is less with each successive interest pay-
a. Offer a return in the form of a deep discount off the face amount ment

b. Result in zero interest expense for the issuer 8.An amortization schedule for bonds issued at a premium

c. Result in zero interest revenue for the investor a. Summarizes the amortization of/the premium on bonds payable, a con-
tra-asset account
d. Are reported as shareholders' equity by the issuer
b. Is reported in the statement of financial position
4. To evaluate the risk and quality of an individual bond issue, investors rely heavily
on c. Is a schedule that reflects the changes in the bonds payable over the
term to maturity
a. Bond ratings provided by investment houses
d. All of these are correct
b. Newspaper articles
9.When bonds are retired prior to maturity date
c. Bond interest payments
a. GAAP has been violated
d. The audit report
b. The issuer probably will report an ordinary gain. or loss
5. Bonds payable should be reported as noncurrent at
c. The issuer probably will report an extraordinary gain or loss
a. Face amount less any unamortized discount or plus any unamortized
premium d. The issuer will not report a gain or loss

b. Current market price
c. Face amount less any unamortized premium or plus any unamortized
discount
d. Face amount less accrued interest since the last interest payment date
10. An entity has bonds outstanding during a year in which the market rate of inter -
est has risen. The entity elected the fair value option. What will the entity report for
the year?
a. Interest expense and a gain
 b. Interest expense and a loss a. Increase and Decrease

c. A gain and no interest expense b. Increase and Increase

d. A loss and no interest expense c. Decrease and Decrease

Problem 5-27 Multiple choice (AICPA Adapted) d. Decrease and Increase

1. Bonds that mature on a single date are called

a. Term bonds 6.Unamortized bond discount should be reported as

b. Serial bonds a. Direct deduction from the face amount of the bond

c. Callable bonds b. Direct deduction from the present value of the bond

d. Convertible bonds c. Deferred charge

2. Bonds issued with scheduled maturities at various dates are called d. Part of the bond issue cost

a. Convertible bonds 7.When the interest payment dates of a bond are May 1 and November 1, and a
bond issue is sold on June 1, the amount of cash received by the issuer will be
b. Terms bonds
a. Decreased by accrued interest from June 1 to November 1
c. Serial bonds
b. Decreased by accrued interest from May 1 to June 1
d. Callable bonds
c. Increased by accrued interest from June 1 to November 1
3.Debentures are
d. Increased by accrued interest from May 1 to June 1
a. Unsecured bonds
8.The issuer of a bond sold at face amount with interest payable February 1 and Au -
·b. Secured bonds gust 1 should report
c. Ordinary bonds a. Liability for accrued interest
d. Serial bonds b. An addition to bonds payable
4. How would the amortization of premium on bonds payable affect the carrying c. Increase in deferred charge
amount of bond and net income, respectively?
d. Contingent liability
a. Increase and Decrease
9.A bond issued on June 1 has interest payment dates of April 1 and October 1.
b. Increase and Increase Bond interest expense for the current year ended December 31 is for a period of
c. Decrease and Decrease a. three months
d. Decrease and Increase b. Four months
5. How would the amortization of discount on bonds payable affect the carrying c. Six months
amount of bond and net income, respectively?
d. Seven months
10. A bond was issued at a discount with a call provision. When the bond issuer ex-
ercised the call provision on an interest date, the amount of bond liability derecog -
nized should have equaled the
a. Call price
b. Call price less unamortized discount
c. Face amount less unamortized discount
d. Face amount plus unamortized discount
Problem 5-28 Multiple choice (IAA)
1. When bonds are sold between interest dates, any accrued interest.is credited to
a. Interest payable
b. Interest revenue
c. Interest receivable
d. Bonds payable
2. Which statement is true about accrued interest on bonds sold between interest
dates?
a. The accrued interest is computed at the effective rate.
b. The accrued interest will be paid to the seller when the bonds mature.
c. The accrued interest is extra income to the buyer.
d. All of the statements are not true.
3.Which statement is true about a premium on bonds payable?
a. The premium or bonds payable is a contra shareholders' equity account.
b. The premium on bonds payable is an account that appears only on the
books of the investor.
c. The premium on bonds payable increases when amortization entries are
made until maturity date.
d. The premium on bonds payable decreases when amortization entries
are made until the balance reaches zero at maturity date.
4. The amortization of discount on bonds payable
a. Decreases the face amount of bonds payable.
b. Decreases the amount of interest expense.
c. Decreases the carrying amount of bonds payable.
d. Increases the carrying 'amount of bonds payable.
5. The carrying amount of a bond liability is
a. Call price of the bond plus bond discount or minus bond. premium.
b. Face amount of the bond plus related premium or minus related dis-
count.
C. Face amount of the bond plus related discount or minus related pre-
mium.
d. Maturity value of the bond plus related discount or minus related pre-
mium.
6. The proceeds from the issue of the bonds payable
a. Will always be equal to the face amount.
b. Will always be less than the face amount.
C. Will always be more than the face amount.
d. May be equal, more or less than the face amount depending on market
interest rate.
7. An extinguishment of bonds payable originally issued at a premium is made by
purchase of the bonds between interest dates. Which statement is true at the time
of extinguishment?
a. Any costs of issuing the bonds payable must be amortized up to the pur-
chase date.
b. The premium on bonds payable must be amortized up to the purchase
date..
c. Interest must be accrued from the last interest date to the purchase
date.
d. All of these statements are true.
8. When bonds are retired prior to maturity with proceeds from a new bond issue,
any gain or loss from the early extinguishment should be
a. Amortized over the remaining original life of the retired bond issue.
b. Amortized over the life of the new bond issue.
 c. Recognized in retained earnings a. Increase if the bonds were issued at a discount.

d. Recognized in income from continuing operations. b. Decrease if the bonds were issued at a premium.

9. An entity neglected to amortize the discount on outstanding bonds payable. c. Increase if the bonds were issued at a premium.
What is the effect' of the failure to record discount amortization on interest ex-
pense and bond carrying amount, respectively? d. Increase if the bonds were issued at either a discount or a premium.

a. Understated and understated 4.The discount on bond payable is charged to interest expense

b. Understated and overstated a. Equally over the life of the bond

c. Overstated and overstated b. Only in the year the bond is issued

d. Overstated and understated c. Using the effective interest method

10.An entity neglected to amortize the premium on outstanding bonds payable. d. Only in the year the bond matures
What is the effect of the failure to record premium amortization on interest ex- 5.Bond issue cost
pense and bond carrying amount, respectively?
a. Is included in the measurement of the bonds payable measured at amor-
a. Understated and understated tized cost.
b. Understated and overstated b. Is amortized using the interest method over the life of the bonds
c. Overstated and overstated payable.

d. Overstated and understated c. Will effectively increase the market rate of interest.

Problem 6-28 Multiple choice (IAA) d. All of these relate to bond issue cost.

1. What is the interest rate written on the face of the bond? 6.Under the effective interest method of amortization, the interest expense is equal
to
a. Coupon rate
a. The stated rate of interest multiplied by the face amount of the bonds.
b. Nominal rate
b. The market rate of interest multiplied by the face amount of the bonds.
c. Stated rate
c. The stated rate of interest multiplied by the beginning carrying amount
d. Coupon rate, nominal rate or stated rate of the bonds.

2.What is the rate of interest actually incurred? d. The market rate of interest multiplied by the beginning carrying amount
of the bonds.
a. Market rate
7. When interest expense for the current year is more than interest paid, the bonds
b. Yield rate were issued at
c. Effective rate a. A discount
d. Market, yield or effective rate b. A premium
3. When the effective interest method is used, the periodic amortization would c. Face amount
 d. Cannot be determined 2. When bonds are sold at a discount and the effective interest method is used, at
each subsequent interest payment date, the cash paid is
8.When interest expense for the current year is less than interest paid, the bonds
were issued at a. More than the effective interest

a. A discount b. Less than the effective interest

b. A premium C. Equal to the effective interest

c. Face amount d. More than if the bonds had been sold at a premium

d. Cannot be determined 3.When bonds are sold at a discount and the effective interest method is used, at
each interest payment date,. the interest expense
9. Bonds usually sell at
a. Increases
a. Maturity amount
b. Decreases
b. Face amount
c. Remains the same
c. Present value
d. Is equal to the change in carrying amount
d. Statistical expected value
4.When bonds are sold at a premium and the effective interest method is used, at
10. Which statement is true about bonds payable? each interest payment date, the interest expense
a. The specific provisions of a bond issue are described in a document a. Remains constant
called bond indenture.
b. Is equal to the change in carrying amount
b. Periodic interest expense is the stated interest rate times the amount of
bond outstanding. c. Increases

C. Bonds will sell for a premium when the market rate of interest exceeds d. Decreases
stated rate.
5.Interest expense is
d. The initial sale price of bond represents the sum of all future cash out -
flows. a. The effective rate times the carrying amount of the bond during the in-
terest period.
Problem 6-29 Multiple choice (IAA)
b. The stated rate times the face amount of the bond.
1.When bonds are sold at a premium and the effective interest method is used,at
each subsequent interest payment date, the cash paid is c. The effective rate times the face amount of the bond.

a. Less than the effective interest d. The stated interest rate times the carrying amount.

b. Equal to the effective interest Problem 6-30 Multiple choice (AICPA Adapted)

C. Greater than the effective interest 1. What is the effective interest rate of a bond measured at amortized cost?

d. More than if the bonds had been sold at a discount a. The stated rate of the bond.

b. The interest rate currently charged by the entity or by others for similar
bond.
 C. The interest rate that exactly discounts estimated future cash payments
through the expected life of the bond or when appropriate, a shorter pe-
riod to the net carrying amount of the bond.
d. The basic risk-free interest rate that is derived from observable govern-
ment bond prices.
2. For a bond issue which sells for less than face 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
3. What is the market rate of interest for a bond issue which sells for more than
face value?
a. Less than rate stated on the bond
b. Equal to rate stated on the bond
c. Higher than rate stated on the bond
d. Independent of rate stated on the bond
4.If bonds are issued at a premium, this indicates that
a. The yield rate exceeds the nominal rate
b. The nominal rate exceeds the yield rate
c. The yield and nominal rates coincide
d. No necessary relationship exists between the two rates
5. Which of the following is true for a bond maturing on a single date when the ef -
fective 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
6.In theory, the proceeds from the sale of a bond will be equal to
a. The face amount of the bond.
b. The present value of the principal due at the end of the life of the bond
plus the present value of the interest payments made during the life of the
bond.
C. The face amount of the bond plus the present value of the interest pay-
ments made during the life of the bond.
d. The sum of the face amount of the bond and the periodic interest pay-
ments.
7.The market price of a bond issued at a discount is the present value of the princi-
pal amount at the market rate of interest
a. Less the present value of all future interest payments at the market rate
of interest.
b. Less the present value of all future interest payments at the rate of in -
terest stated on the bond.
c. Plus the present value of all future interest payments at the market rate
of interest.
d. Plus the present value of all future interest payments at the rate of in-
terest stated on the bond.
8.Under international accounting standard, the valuation method used for bond
payable is
a. Historical cost
b. Discounted cash flow valuation at current yield rate
C. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance
9. How should an entity calculate the net proceeds to be received from bond is-
suance?
a. Discount the bonds at the stated rate of interest.
b. Discount the bonds at the market, rate of interest.
c. Discount the bonds at the stated rate of interest and deduct bond is-
suance cost.
d. Discount the bonds at the market rate of interest and deduct bond is-
suance cost.
10. An entity issued a bond with a stated rate of interest that is less than the effec - b. The exercise of the warrants within the next reporting period seems re -
tive interest rate. The bond was issued on one of the interest payment dates. What mote.
should the entity report on the first interest payment date?
c. The warrants issued are nondetachable.
a. An interest expense that is less than the cash payment made to bond-
holders. d. The proceeds should be allocated between liability and equity under all
of these circumstances.
b. An interest expense that is greater than the cash payment made to
bondholders. 4. When the cash proceeds from bonds issued with share warrants exceed the fair
value of the bonds without the warrants, the excess should be credited to
c. A debit to discount on bond payable.
a. Share premium -ordinary
d. A debit to premium on bond payable.
b. Retained earnings
Problem 7-19 Multiple choice (IFRS)
c. Liability account
1. What is the principal accounting for a compound financial instrument?
d. Share premium - share warrants
a. The issuer shall classify a compound instrument as either liability or eq -
uity. 5. When bonds are issued with share warrants, the equity component is equal to

b. The issuer shall classify the liability and equity components of a com- a. Zero
pound instrument separately as liability or equity instrument. b. The excess of the proceeds over the face amount of the bonds.
C. The issuer shall classify a compound instrument as a liability in its en - C. The market value of the share warrants.
tirety, until converted into equity.
d. The excess of the proceeds over the fair value of the bonds without the
d. The issuer shall classify a compound instrument as a liability in its en- share warrants.
tirety.
Problem 7-20 Multiple choice (IAA)
2.How are the proceeds from issuing a compound instrument allocated between
the liability and equity? 1. A bond convertible by the holder into a fixed number of ordinary shares of the is-
suer is
a. The liability component is measured at fair value and the remainder of
the proceeds is allocated to the equity component. a. A compound financial instrument

b. The proceeds are allocated to the liability and equity based on fair value. b. A primary financial instrument

C. The proceeds are allocated to the liability and equity based on carrying c. A derivative financial instrument
amount.
d. An equity instrument
d. The proceeds are not allocated because the compound instrument is ac-
counted for either as liability or equity. 2.Convertible bonds

3. The proceeds from an issue of bonds with share warrants should not be allocated a. Have priority over other indebtedness.
between the liability and equity components when b. Are usually secured by a mortgage.
a. The fair value of the warrants is not readily available. c. Pay interest only in the event net income is sufficient to cover the inter-
est.
 d. May be exchanged, for equity shares.
3. What is the main reason for issuing convertible bond?
a. The ease with which convertible bond is sold even if the entity has a
poor credit rating.
b. The fact that share capital has issue cost and convertible bond has none.
c. Entities can obtain financing at lower rate.
d. Convertible bond always sells at a premium.
4. 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 issuance 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.
5.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 fair value.
d. All of the choices are correct.
6. What is the accounting for issued convertible bond?
a. The instrument should be recorded solely as bond.
b. The instrument should be recorded as either bond or equity but not
both.
c. The instrument should be recorded solely as equity.
d. The instrument should be recorded as part bond and part equity.
7.Issued convertible bonds are
a. Separated into liability and equity components with the liability compo-
nent recorded at fair value and the residual assigned to the equity compo-
nent
b. Always recorded using the fair value option
c. Recorded at face amount for the liability along with the associated pre-
mium or discount
d. Recorded at face amount for the liability without consideration of a pre-
mium or discount
8. Bondholders exchanged their convertible bonds for ordinary shares. The carrying
amount of these bonds was lower than market value but greater than the par value
of the ordinary shares issued. If the book value method is used, which of the follow-
ing correctly states an effect of the conversion?
a. Shareholders' equity increased
b. Share premium decreased
c. Retained earnings increased
d. A loss is recognized
9. 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
10.When convertible bond is not converted but paid at maturity
a. A gain or loss is recorded for the difference between the carrying
amount of the bond and the present value of the cash flows.
b. The amount allocated to equity is recorded as a gain.
c. The amount allocated to equity is recorded as a loss.
d. The carrying amount of the bond equal to face amount is derecognized.
Problem 8-24 Multiple choice (AICPA Adapted)
1.When an entity issued a note solely in exchange for cash, the present value of the
note at issuance is equal to
a. Face amount
b. Face amount discounted at the prevailing interest rate
 C. Proceeds received
d. Proceeds received discounted at the prevailing interest rate
2.If the present value of a note issued in exchange for a property is less than face
amount, the difference should be
a. Included in the cost of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance
3.An entity borrowed cash from a bank and issued to the bank a short-term nonin-
terest bearing note payable. The bank discounted the note at 10% and remitted the
proceeds to the entity. The effective interest rate paid by the entity in this transac-
tion would be
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%
4.At issuance date, the present value of a promissory note is equal to the face
amount if the note
a. Bears a stated rate of interest which is realistic.
b. Bears a stated rate of interest which is less than the prevailing market
rate for similar notes.
c. Is noninterest bearing and the implicit interest rate is less than the pre-
vailing market rate for similar notes.
d. Is noninterest bearing and the implicit interest rate is equal to the pre -
vailing market rate for similar notes.
5. Which statement concerning discount on note payable is incorrect?
a. Discount on note payable may be debited when entity discounts its own
note with the bank.
b. The discount on note payable is a deduction from the face amount note
payable.
C. The discount on note payable represents interest charges applicable to
future periods.
d. Amortizing the discount on note payable gradually decreases the carry-
ing amount of the liability over the life of the note.
6. When a note payable with no ready market is exchanged for property whose fair
value is currently indeterminable
a. The present value of the note payable must be approximated using an
imputed interest rate.
b. The note payable should not be recorded until the fair value of the prop-
erty becomes evident.
c. The entity receiving the property should estimate a value for the prop-
erty.
d. Both entities involved in the transaction should negotiate a value to be
assigned to the property.
7.When a note payable is issued for property, the present value of the note is mea-
sured by
a. The fair value of the property
b. The fair value of the note payable
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
8.When a note payable is exchanged for property, the stated interest rate is pre-
sumed to be fair when
a. No interest rate is stated.
b. The stated interest rate is unreasonable.
c. The face amount of the note is materially different from the cash sale
price for similar property.
d. The stated interest rate is equal to the market rate.
9.The discount resulting from the determination of the present value of a note
payable should be reported as
a. Deferred credit
 b. Direct deduction from the face amount of the note
c. Deferred charge
d. Addition to the face amount of the note
10. Which statement is correct when an entity issued a note payable with no stated
interest rate in exchange for a depreciable asset?
a. The asset should be depreciated over the term of the note payable.
b. If fair value is unavailable, the note payable should be recorded at
present value discounted at the market rate of interest.
c. Both the note and the asset are recorded at the face amount of the note
payable.
d. The note payable is recorded at face amount even if the fair value of the
asset is readily available.
Problem 9-19 Multiple choice (IFRS)
1. In a debt restructuring that is considered an asset swap, the gain on extinguish -
ment is equal to
a. Excess of the fair value of the asset over its carrying
amount b. Excess of the carrying amount of the debt over the fair value of
the asset
c. Excess of the fair value of the asset over the carrying amount of the debt
d: Excess of the carrying amount of the debt over the carrying amount of
the asset
2.For a debt restructuring involving, substantial modification of terms, it is appropri-
ate for a debtor to recognize a gain when the carrying amount of the debt
a. Exceeds the total future cash payments specified by the new terms.
b. Is less than the total future cash payments specified by the new terms.
c. Exceeds the present value of the future cash payments specified by the
new terms.
d. Is less than the present value of the future cash payments specified by
the new terms.
3.For a debt restructuring involving a substantial modification of terms, which of
the following specified by the new terms would be compared to the carrying
amount of the debt to determine if the debtor should report a gain on extinguish-
ment?
a. The total future cash payments
b. The present value of the new debt at the original interest rate
c. The present value of the new debt at thé modified interest rate
d. The amount of future cash payments
4.Under a debt restructuring involving substantial modification of terms, the future
cash flows under the new terms shall be discounted using
a. Original effective interest rate
b. Interest rate under the new terms
c. Market rate of interest
d. Prime interest rate
Problem 9-20 Multiple choice (IFRIC 19)
1.An entity shall initially measure equity instruments issued to extinguish a financial
liability at
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished
2. If the fair value of the equity instruments issued cannot be reliably measured, the
equity instruments issued to extinguish a financial liability shall be measured at
a. Fair value of the liability extinguished
b. Par value of the equity instruments issued
c. Carrying amount of the liability extinguished
d. Book value of the equity instruments issued.
3. If both the fair value of the equity instruments issued and the fair value of the fi -
nancial liability extinguished cannot be measured reliably, the equity instruments is-
sued shall be measured at
a. Carrying amount of the liability extinguished
 b. Par value of equity instruments issued a. Twelve months or less

c. Carrying amount of the equity instruments issued b. Six months or less

d. Value assigned by the Board of Directors c. Twelve-month lease with a purchase option

4.The difference between the carrying amount of the financial liability extinguished d. Two-year lease with option to terminate
and the fair value of equity instruments issued shall be recognized in
4. Which statement is true about low value lease?
a. Profit or loss
a. The value of an underlying asset is based on the value of the asset when
b. Other comprehensive income new regardless of the age of the asset.

c. Retained earnings b. The term of a low value lease may be more than twelve months.

d. General reserve c. An underlying asset does not qualify as low value lease if the nature of
the asset is such that the asset is typically not of low value when new.
5.The gain or loss from extinguishment of a financial liability by issuing equity in-
struments is presented as d. All of these statements are true about low value lease.

a. other income or other expense 5. A right of use asset is initially measured at

b. Separate line item in the income statement a. Cost

C. Component of other comprehensive income b. Fair value

d. Component of finance cost c. Current cost

Problem 10-31 Multiple choice (IFRS 16) d. Present value of expected cash inflows

1.Under IFRS, a lessee is required to recognize 6. The cost of right of use asset comprises all, except

a. Right of use asset and lease liability a. The present value of lease payments

b. Right of use asset but not lease liability b. Lease payments made to lessor on or before commencement date

c. Lease liability but not right of use asset c. Initial direct cost incurred by lessee

d. Neither right of use asset nor lease liability d. Estimated cost of dismantling, removing or restoring the underlying as-
set for which the lessee has no present obligation
2.The lessee may apply the operating lease model under what condition?
7. The right of use asset is reported as
a. Short-term lease
a. Noncurrent as separate line stem
b. Low value lease
b. Property, plant and equipment
c. Both short-term lease and low value lease
c. Intangible asset
d. Under all circumstances
d. Investment property
3. A short-term lease is defined as
8. A lessee with a lease containing a purchase option that is reasonably certain to be
exercised should depreciate the right of use asset over
a. Useful life of the asset
b. Lease term
c. Useful life of the asset or the lease term, whichever is shorter
d. Useful life of the asset or the lease term, whichever is longer
9. A lease liability is measured at
a. The absolute amount of lease payments
b. The present value of lease payments
c. The present value of fixed lease payments
d. The fair value of the underlying asset
10. The lease payments include all of the following, except
a. Fixed lease payments
b. Leasehold improvement
c. Exercise price of a purchase option that is reasonably certain to be exer-
cised
d. Residual value guarantee of the lessee
Problem 10-32 Multiple choice (IAA)
1.Which is not included in lease payments?
a. Any payment required by a purchase option that is reasonably certain to
be exercised
b. Costs for services and taxes paid by and lessee
c. Required payments over the lease term
d. Amount guaranteed by a party related to the lessee
2.Which is not part of the lease payments?
a. The rental payments called for by the lease
b. Any residual value guarantee of the lessee
c. Any residual value at the end of the lease term
d. Any payment the lessee must make to purchase the underlying asset un-
der a purchase option that is reasonably certain to be exercised
3. The lease payments include all of the following, except
a. The residual value guarantee
b. The lessee's obligation to pay executory cost
c. The purchase option that is reasonably certain to be exercised
d. Any payment that the lessee must make upon failure to extend or renew
the lease
4. What is the interest rate used when the implicit interest rate cannot be deter-
mined?
a. The prime rate
b. The lessor's published rate
c. The lessee's average borrowing rate
d. The lessee's incremental borrowing rate
5. What is the treatment of initial direct cost incurred by the lessee in a finance
lease?
a. Added to the lease liability
b. Added to the carrying amount of the right of use asset
c. Expensed immediately
d. Added to the carrying amount of the right of use asset and lease liability
6.Which of the following statements concerning residual value guarantee is appro-
priate for the lessee?
a. The asset and related liability should be increased by the absolute
amount of the residual value.
b. The asset and related liability should be decreased by the absolute
amount of the residual value.
C. The asset and related liability should be decreased by the present value
of the residual value.
d. The asset and related liability should be increased by the present value
of the residual value.
7.In computing depreciation of a right of use asset under a lease, the lessee should
deduct
a. The residual value guarantee and depreciate over the lease term.
b. An unguaranteed residual value and depreciate over the lease term.
c. The residual value guarantee and depreciate over the useful life of the
asset.
d. An unguaranteed residual value and depreciate over the useful life of
the asset.
8. If the residual value of a underlying asset is greater than the amount guaranteed
by the lessee
a. The lessor pays the lessee 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 lessee pays the lessor for the difference.
9.What is the cost of a right of use asset acquired in a finance lease?
a. The absolute sum of the lease payments over the lease term
b. The present value of the lease payments including executory costs dis-
counted at an appropriate rate
C. The present value of the 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 ap-
propriate rate
10.The carrying amount of the right of use asset from the capitalization of a lease
would be periodically reduced by
a. Total lease payment
b. Portion of the lease payment allocable to the interest
C. Portion of the lease payment allocable to reduction of the lease liability
d. Depreciation of the asset
Problem 10-33 Multiple choice (AICPA Adapted)
1. The lessee's lease liability for a finance lease would be periodically reduced by
a. Lease payment plus the depreciation of the asset
b. Lease payment less the depreciation of the asset
c. Lease payment less the portion allocable to interest
d. Lease payment
2. A six-year finance lease entered into on December 31 of the current year speci -
fied equal annual lease payments due on December 31 of each year. The first an-
nual lease payment paid on December 31 of the current year consists of which of
the following?
a. Interest expense
b. Lease liability
c. Both interest expense and lease liability
d. Neither interest expense nor lease liability
3. A six-year finance lease specified equal annual lease payments. The lease pay-
ment 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
4. A lessee had a ten-year finance lease requiring equal annual payments. The re-
duction of the lease liability in the second year should equal
a. The current liability shown for the lease at the end of first year
b. The current liability shown for the lease at the end of second year
c. The reduction of the lease liability in the first year
d. One-tenth of the original lease liability
Problem 12-21 Multiple choice (AICPA Adapted)
1.Rent received in advance by the lessor in an operating lease should be recognized
as revenue
a. When received
b. At the lease inception
 c. At the lease expiration a. At the end of the lease term

d. In the period specified by the lease b. After a "cooling off" period of one year

2.When should a lessor recognize in income a nonrefundable lease bonus paid by a c. At the inception of the lease
lessee?
d. When the entity deems it to be necessary
a. When received
2. The classification of a lease as either operating or finance lease is based on
b. At the inception of the lease
a. The length of the lease.
c. At the lease expiration
b. The transfer of the risks and rewards of ownership.
d. Over the lease term
c. The lease payments being at least 50% of fair value.
3.Lease payments under an operating lease shall be recognized as an income by the
lessor on d. The economic life of the underlying asset.

a. Straight line basis over the lease term 3. All of the following situations would prima facie lead to a lease being classified as
a finance lease, except
b. Diminishing balance basis
a. Transfer of ownership to the lessee.
c. Sum of units basis
b. Option to purchase at a value below the fair value of the underlying as-
d. Cash basis set.

4.In an operating lease that is recorded by the lessor, the equal monthly rental pay - C. The lease term is for a major part of the asset's life.
ments should be
d. The present value of the lease payments is 50% of the fair value of the
a. Recorded as reduction of depreciation. asset.

b. Allocated between reduction in lease receivable and interest expense. 4. In case of lease of land and building, the lease payments should be split

c. Recorded as reduction in the lease receivable. a. According to relative fair value of the two elements.

d. Recorded as a rental income. b. Based on the useful life of the two elements.

5.Which statement characterizes an operating lease? c. Using the sum of digits method.

a. The lessee records depreciation and interest. d. According to method devised by the entity.

b. The lessee records a lease obligation. 5. Where there is 'a lease of land and building and the title to the land is not trans-
ferred, generally the lease is treated as if
c. The lessor transfers title of the underlying asset to the lessee for the du -
ration of the lease term. a. The land is finance lease.

d. The lessor records depreciation and lease revenue. b. The land is finance and the building is operating.

Problem 12-22 Multiple choice (IFRS) c. The land is operating and the building is finance.

1. The classification of a lease is normally carried out. d. The land and building are an operating lease.
Problem 12-23 Multiple choice (IAA)
1.The accounting concept that is principally used to classify leases into operating
and finance on the part of lessor is
a. Substance over form
b. Prudence
c. Neutrality
d. Completeness
2.Which statement is correct regarding the lease capitalization criteria?
a. The lease transfers ownership to the lessor.
b. The lease contains a purchase option.
c. The lease term is equal to at least 75% of the economic life of the under-
lying asset.
d. The lease payments are at least 90% of fair value of asset.
3.Which condition would require lease capitalization?
a. The lease does not transfer title to the lessee.
b. There is an uncertain purchase option.
c. The present value of the lease payments is significantly more than the
fair value of the asset.
d. The lease term is below the useful life of asset.
4. One of the four determinative criteria for a finance lease specifies that the lease
term be equal to or greater than
a. The economic life of the underlying asset.
b. 90 percent of the economic life of the asset.
c. 75 percent of the economic life of the asset.
d. 50 percent of the economic life of the asset.
5. One of the four determinative criteria for a finance lease is that the present value
at the beginning of the lease term of the lease payments equals or exceeds
a. The fair value of the underlying asset
b. 90 percent of the fair value of the underlying asset
c. 75 percent of the fair value of the underlying asset
d. 50 percent of the fair value of the underlying asset
Problem 13-16 Multiple choice (IFRS)
1. Gross investment in the lease is equal to
a. Sum of the lease payments receivable by a lessor under a finance lease
and any unguaranteed residual value accruing to the lessor.
b. The lease payments under a finance lease of the lessor.
C. Present value of lease payments under a finance lease of the lessor and
any unguaranteed residual value.
d. Present value of the lease payments under a finance lease of the lessor.
2. Net investment in a direct financing lease is equal to
a. Cost of the asset
b. Cost of the asset plus initial direct cost paid by the lessor
C. Cost of the asset minus guaranteed residual value
d. Cost of the asset plus unguaranteed residual value
3. 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 lease and recog-
nize 'all finance payments in income statement.
b. Treat as a receivable equal to gross amount receivable òn lease and rec-
ognize finance payments in cash by reducing debt.
C. Treat as a receivable equal to net investment in the lease and recognize
finance payments by reducing debt and taking interest to income state-
ment.
d. Treat as a receivable equal to net investment in the lease and recognize
finance payments in cash. by reduction of debt.
4.Lessors shall recognize asset held under a finance lease as a receivable at an
amount equal to the
a. Gross investment in the lease
b. Net investment in the lease
 C. Gross rentals
d. Residual value, whether guaranteed or unguaranteed
5. The lease receivable in a direct financing lease is
a. The gross amount of lease payments.
b. The difference between the gross rentals and the fair value of the leased
asset.
C. The present value of lease payments.
d. The cost of the asset less any accumulated depreciation
6. 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 lease
term.
7.All of the following would be included in the lease receivable, except
a. Guaranteed residual value
b. Unguaranteed residual value
c. A purchase option that is reasonably certain
d. All would be included
8.Under a direct financing lease, the excess of aggregate rentals over the cost of the
underlying asset should be recognized as interest income of the lessor
a. In increasing amounts during the term of the lease
b. In constant amounts during the term of the lease
c. In decreasing amounts during the term of the lease
d. After the cost of the underlying asset has been fully recovered through
rentals
9. In a direct financing lease, unearned interest income
a. Should be amortized over the lease term using the interest method.
b. Should be amortized over the lease term using the straight line method.
c. Does not arise.
d. Should be recognized at the lease expiration.
10.Which statement is true regarding initial direct costs incurred by the lessor?
a. In a direct financing lease, initial direct costs are added to the net invest -
ment in the lease.
b. In a sales type lease, initial direct costs are expensed as component of
cost of goods sold.
c. In an operating lease, initial direct costs incurred by the lessor are de-
ferred and allocated over the lease term.
d. All of these statements are correct.
Problem 14-20 Multiple choice (IFRS)
1.Under a sales type lease, what is the meaning of gross investment in the lease?
a. Present value of lease payments
b. Absolute amount of lease payments
c. Present value of lease payments plus present value of unguaranteed
residual value
d. Sum of absolute amount of lease payments and unguaranteed residual
value
2. Net investment in a sales type lease is equal to
a. Gross investment in the lease less unearned finance income
b. Cost of the underlying asset
c. The lease payments
d. The lease payments less unguaranteed residual value
3.Which statement characterizes a sales type lease?
a. The lessor recognizes only interest revenue over the useful life of the as-
set.
b. The lessor recognizes only interest revenue over the lease term.
 c. The lessor recognizes a dealer profit at lease inception and interest rev-
enue over the lease term.
d. The lessor recognizes a dealer profit at lease inception and interest rev -
enue over the useful life of the asset.
c. Manufacturer profit from a sales type lease
d. Manufacturer profit from a direct financing lease
8. In a lease that is recorded as a sales type lease by the lessor, interest revenue

4. The profit on a finance lease transaction for lessors who are manufacturers or
dealers should
a. Not be recognized separately from finance income
b. Be recognized in the normal way on the transaction
c. Only be recognized at the end of the lease term
d. Be recognized on a straight line basis over the lease term
5.The sales revenue recognized at the commencement of the lease by a manufac-
turer or dealer lessor is the
a. Fair value of the asset
b. Present. value of the lease payments
C. Fair value of the asset or present value of the lease payments, which-
ever is lower.
d. Fair value of the asset or present value of the lease payments, which-
ever is higher.
a. Does not arise
b. Shall be recognized over the lease term using the interest method
c. Shall be recognized over the lease term using the straight line method
d. Shall be recognized in full as revenue at the inception of the lease
Problem 16-34 Multiple choice (PAS 12)
1.Which entities are required to apply deferred tax accounting?
a. Public entities
b. Nonpublic entities
c. Both public and nonpublic entities
d. Neither public entities nor nonpublic entities
2. It is the profit for a period determined in accordance with the rules established
by tax authorities upon which income taxes are payable.
a. Accounting profit

6. What is the treatment of an unguaranteed residual value in determining the cost b. Taxable profit
of goods sold under a sales type lease?
c. Net profit
a. The unguaranteed residual value is ignored.
d. Accounting profit subject to tax
b. The unguaranteed residual value is added to the cost of the underlying
asset. 3. It is the profit for a period before deducting tax expense.

C. The unguaranteed residual value is deducted from the cost of the under- a. Accounting profit
lying asset at absolute amount. b. Taxable profit
d. The unguaranteed residual value is deducted from the cost of the under- c. Gross profit
lying asset at present value.
d. Net profit
7. The excess of the fair value of underlying asset at the inception of the lease over
the carrying amount shall be recognized by the dealer lessor as 4.These are differences that will result in future taxable amount in determining tax -
able profit of future periods.
a. Unearned income from a sales type lease
a. Temporary differences
b. Unearned income from a direct financing lease
 b. Taxable temporary differences b. Current tax expense

c. Deductible temporary differences c. Deferred tax expense

d. Permanent differences d. Deferred tax benefit

5.These are differences that result in future deductible amount in determining tax - 10.The deferred tax expense is equal to
able profit in future periods.
a. Increase in deferred tax asset less increase in deferred tax liability.
a. Taxable temporary differences
b. Increase in deferred tax liability less increase in deferred tax asset.
b. Deductible temporary differences
C. Increase in deferred tax asset.
c. Taxable temporary and permanent differences
d. Increase in deferred tax liability.
d. Deductible temporary and permanent differences
Problem 16-35 Multiple choice (IFRS)
6.It is the deferred tax consequence attributable to a taxable temporary difference.
1. A deferred tax asset is recognized for deductible temporary differences and oper -
a. Deferred tax liability ating loss carryforward when

b. Deferred tax asset a. It is probable that taxable income will be available against which the de -
ferred tax asset can be used.
c. Current tax liability
b. It is probable that accounting income will be available against which the
d. Current tax asset deferred tax asset can be used.
7.It is the deferred tax consequence attributable to a deductible temporary differ- c. It is possible that taxable income will be available against which the de-
ence and operating loss carryforward. ferred tax asset can be used.
a. Deferred tax liability d. It is possible that accounting income will be available against which the
b. Deferred tax asset deferred tax asset can be used.

c. Current tax liability 2. An entity shall offset a deferred tax asset and deferred tax liability

d. Current tax asset a. When the income taxes are levied by different taxing authority.

8. It is the amount of income tax payable in respect of taxable profit. b. When the entity has no legal enforceable right to offset.

a. Current tax expense C. When the income taxes are levied by the same taxing authority and the
entity has a legal enforceable right to offset a current tax asset against a
b. Total income tax expense current tax liability
c. Deferred tax expense d. Under all circumstances.
d. Deferred tax benefit 3.Which is correct about deferred tax assets and liabilities?
9.It is the aggregate amount included in the determination of net profit for the pe- a. Current deferred tax assets are netted against current deferred tax liabil-
riod in respect of current tax and deferred tax. ities.
a. Tax expense
 b. All noncurrent deferred tax assets are netted against noncurrent de-
ferred tax liabilities.
c. Deferred tax assets are never netted against deferred tax liabilities.
d. Deferred tax assets are netted against deferred tax liabilities if they re -
late to the same tax authority.
4.Which statement is incorrect concerning tax assets and liabilities?
a. Deferred tax assets and liabilities shall be discounted.
b. Tax assets and liabilities shall presented separately from other assets
and liabilities in the statement of financial position.
C. Deferred tax assets and liabilities shall be distinguished from current tax
assets and liabilities.
d. When an entity makes a distinction between current and noncurrent as-
sets and liabilities, it shall not classify deferred tax assets and liabilities as
current.
5. All of the following must be disclosed separately, except
a. The tax bases of major items on which deferred tax has been calculated.
b. The amount of deductible temporary differences for which no deferred
tax asset is recognized.
C. The amount of taxable temporary differences associated with invest-
ments in subsidiaries and associates for which no deferred tax liability is
recognized.
d. The amount of income tax relating to each component of other compre-
hensive income.
Problem 16-36 Multiple choice (AICPA Adapted)
1. Justification for the method of determining periodic deferred tax expense is
based on the concept of
a. Matching of periodic expense to periodic revenue.
b. Objectivity in the calculation of periodic expense.
c. Recognition of asset and liability.
d. Consistency of tax expense measurement with actual tax planning
strategies.
2. Which of the following differences would result in future taxable amount?
a. Expenses or losses that are deductible after they are recognized in ac-
counting income.
b. Revenues or gains that are taxable before they are recognized in ac-
counting income.
C. Expenses or losses that are deductible before they are recognized in ac-
counting income.
d. Revenues or gains that are recognized in accounting income but are
never included in taxable income.
3.A temporary difference which would result in a deferred tax liability is
a. Interest revenue on municipal bonds
b. Accrual of warranty expense
c. Excess tax depreciation over accounting depreciation
d. Subscription received in advance
4. A temporary difference which would result in a deferred tax asset is
a. Tax, penalty or surcharge.
b. Dividend received on share investment.
c. Excess tax depreciation over accounting depreciation.
d. Rent received in advance included in taxable income at the time of re -
ceipt but deferred for accounting purposes.
5. An entity, cash basis taxpayer, prepares accrual basis financial statements. In the
year-end statement of financial position, the deferred tax liabilities increased com-
pared to the prior year. Which of the following changes would cause this increase in
deferred tax liabilities?
a. An increase in prepaid insurance
b. An increase in rent receivable
c. An increase in warranty obligation
d. An increase in prepaid insurance and increase in rent receivable
6. An entity reported deferred tax assets and deferred tax liabilities at the end of
the prior year and at the end of the current year. For the current year, the entity
should report deferred income tax expense or benefit equal to the
 a. Decrease in the deferred tax assets
b. Increase in the deferred tax liabilities
c. Amount of the current liability plus the sum of the net changes in de -
ferred tax assets and deferred tax liabilities
d. Sum of the net changes in deferred tax assets and deferred tax liabilities
7. Because an entity uses different methods to depreciate equipment for account-
ing and income tax purposes, the entity has temporary differences that will reverse
during the next year and add to taxable income. Deferred income taxes that are
based on these temporary differences shall be classified as
a. Contra account to current assets
b. Contra account to noncurrent assets
c. Current liability
d. Noncurrent liability
8. At the current year-end, an entity had a deferred tax liability arising from acceler-
ated depreciation that exceeded a deferred tax asset relating to rent received in ad-
vance which is expected to reverse in the next year.
Which of the following shall be reported in the current year-end statement of finan -
cial position?
a. The excess of the deferred tax liability over the deferred tax asset as a
noncurrent liability.
b. The excess of the deferred tax liability over the deferred tax asset as a
current liability.
c. The deferred tax liability as a noncurrent liability.
d. The deferred tax liability as a current liability.
9. Which statement is true regarding reporting deferred income taxes in the finan -
cial statements?
a. Deferred tax assets are always netted against deferred tax liabilities.
b. Deferred taxes of one jurisdiction are offset against another jurisdiction
in the netting process.
c. Deferred tax assets and liabilities may only be classified as noncurrent.
d. Deferred tax assets and liabilities are classified as current and noncur-
rent based on expiration date.
10.A deferred tax liability is computed using
Current tax law regardless of expected or enacted future tax law
b. Expected future tax law regardless of whether enacted or not
c. Current tax law unless a future enacted tax law is different
d. Either current or expected future tax law regardless of whether the ex-
pected future tax law is enacted or not
Problem 16-37 Multiple choice(IAA)
1. The purpose of interperiod tax allocation is to
a. Allow entities to utilize carryforward loss.
b. Allow entities whose tax liabilities vary significantly from year to year to
smooth tax payments.
C. Recognize an asset or liability for the tax consequences of temporary
differences that exist at year-end.
d. Amortize the deferred tax liability.
2.Intraperiod tax allocation
a. Involves the allocation of income taxes between current and future peri-
ods.
b. Associates tax effect with different items in the income statement.
c. Is not generally acceptable.
d. Arises because different income statement items are taxed at different
rates.
3.Which is true about intraperiod tax allocation?
a. Intraperiod tax allocation arises because certain items are recognized for
accounting and tax purposes.
b. Intraperiod tax allocation is required for the effect of accounting policy.
c. The purpose is to allocate income tax expense evenly over a number of
accounting periods.
 d. The purpose is to relate the income tax expense to the items which af-
fect the amount of tax.
4. All would require intraperiod tax allocation, except
a. Discontinued operation
b. Prior period error
C. Change in accounting estimate
d. Income from continuing operations.
5.Tax expense should be allocated to all, except
a. Discontinued operation
b. Prior period error
C. Gross profit
d. Other comprehensive income
Problem 17-14 Multiple choice (IAA)
1.Which statement characterizes defined, contribution plan?
a. Defined contribution plans are more complex than defined benefit plans.
b. The employer's obligation is satisfied by making the appropriate amount
of periodic contribution.
c. The investment risk is borne by the employer.
d. Contributions are made in equal amounts by employer and employees.
2. Which is not a characteristic of defined contribution plan?
a. The employer contribution each period is based on a formula.
b. The benefits to be received are usually determined by an employee's
highest salary.
c. The accounting for a defined contribution plan is straightforward and un-
complicated.
d. The benefit of gain or the risk of loss from the assets contributed to the
plan is borne by the employee.
3. A formula in a defined contribution plan
a. Defines the benefits that the employee will receive at the time of retire-
ment.
b. Ensures that the defined benefit cost and funding are the same.
C. Requires an employer to contribute a certain sum each period based on
the formula.
d. Ensures that enough fund would be available.
4. Which statement is true concerning the recognition and measurement of a de-
fined contribution plan?
a. The contribution shall be recognized as expense in the period it is
payable.
b. Any unpaid contribution at the end of the period shall be recognized as
accrued liability.
c. Any excess contribution shall be recognized as prepaid expense but only
to the extent that the prepayment will lead to a reduction in future pay-
ments or a cash refund.
d. All of these statements are true about a defined contribution plan.
5.Which statement characterizes defined benefit plan?
a. Defined benefit plans are comparatively simple.
b. Retirement benefits are based on the plan's benefit formula.
C. Retirement benefits depend on how well pension fund assets have been
managed.
d. The investment risk is borne by the employee.
6. Which statement is incorrect concerning the recognition and measurement of a
defined benefit plan?
a. Actuarial assumptions are required to measure the obligation and ex-
pense and there is a possibility of actuarial gains and losses. '
b. The obligation is measured on a discounted basis.
C. The defined benefit plan must be fully funded.
d. The expense recognized for a defined benefit plan is not necessarily the
amount of contribution due for the period.
7. In a benefit plan, the process of funding refers to
 a. Determining the defined benefit obligation. b. Net interest

b. Determining the accumulated benefit obligation. c. Remeasurements

c. Making the periodic contributions to a funding agency to ensure that d. Contribution to the plan
funds are available to meet claims.
2. The service cost of a defined benefit plan comprises all, except
d. Determining the amount reported for pension expense.
a. Current service cost
8. In accounting for a defined benefit plan
b. Past service cost
a. An appropriate funding must be established to ensure that enough fund
would be available at retirement. c. Gain or loss on plan settlement

b. The employer responsibility is simply to make a contribution each year. d. Net interest

c. The expense recognized each period is equal to the cash contribution to 3. Which of the following components of defined benefit cost shall be recognized
the plan. through other comprehensive income?

d. The liability is determined based upon variables that reflect current a. Current service cost
salary levels. b. Past service cost
9.The formula in a defined benefit plan c. Net interest
a. Requires that the benefit of gain or the risk of loss from the assets con - d. Remeasurements
tributed to the plan should be borne by the employee.
4.Remeasurements of defined benefit plan include
b. Defines the benefits that the employee will receive at the time of retire-
ment. a. The difference between actual return and interest income on plan as-
sets.
c. Requires that the defined benefit cost and funding must the same.
b. Actuarial gain or loss on projected benefit obligation.
d. Defines the contribution to be made by the employer and no promise is
made concerning the ultimate benefits to be paid out to the employees. c. Change in the effect of asset ceiling minus interest expense on the begin-
ning effect of asset ceiling.
10. In rare circumstances, when a retirement benefit plan has attributes of both de-
fined contribution and defined benefit plan, the plan is deemed d. All of these are included in remeaurements of defined benefit plan.

a. Defined benefit plan 5. When an entity amends a pension plan, past service cost should be

b. Defined contribution plan a. Treated as a prior period adjustment because no future periods are ben-
efited.
c. Neither defined benefit nor defined contribution plan
b. Amortized over the remaining service period of employees.
d. Both defined benefit and defined contribution plan
c. Recorded in other comprehensive income.
Problem 17-15 Multiple choice (PAS 19)
d. Reported as an expense in the period the plan is amended.
1.The components of defined benefit cost include all, except
6.What is the meaning of net interest in relation to a defined benefit cost?
a. Service cost
 a. Interest expense on defined benefit liability 10. It is an insurance policy issued by an insurer that is not a related party of the re-
porting entity and the proceeds of the policy can be used only to pay employee
b. Interest income on the fair value of plan assets benefits under a defined benefit plan.
c. The difference between interest expense on defined benefit liability, in- a. Qualifying insurance policy
terest expense on effect of asset ceiling and interest income on plan assets
b. Aggregate policy
d. Interest expense on defined benefit liability less applicable income tax
c. Annuity
7.Which of the following should be included in plan assets?
d. Unconditional insurance policy
a. Assets held by a long-term employee benefit fund
Problem 18-24 Multiple choice (IAA)
b. Qualifying insurance policy
1. A pension liability is reported when
C. Both assets held by a long-term employee benefit fund and qualifying in-
surance policy a. The projected benefit obligation exceeds the fair value of plan assets.

d. Neither assets held by a long-term employee benefit fund nor qualifying b. The accumulated benefit obligation is less than the fair value of plan as-
insurance policy sets.

8.The return on plan assets C. The pension expense reported for the period is greater than the funding
amount for the same period.
a. Is equal to the change in the fair value of the plan assets during the year.
d. Cumulative other comprehensive income exceeds the fair value of plan
b. Includes interest, dividends and change in the fair value of the plan as- assets.
sets during the year.
2. A pension asset is reported when
c. Is equal to the discount rate times the fair value of the plan assets at the
beginning of the period. a. The accumulated benefit obligation exceeds the fair value of plan assets.

d. Is equal to the expected rate of return times the fair value of plan assets b. The accumulated benefit obligation exceeds the fair value of plan assets
at the beginning of the period. but a past service cost exists.

9.Plan assets are assets held by a long-term benefit fund and must satisfy all of the C. Plan assets at fair value exceed the accumulated d. benefit obligation.
following conditions, except
d. Plan assets at fair value exceed the projected benefit obligation.
a. The assets are held by an entity, the fund itself, that is legally separate
from the reporting entity. 3.Which measure requires the use of future salaries in the computation of benefit
obligation?
b. The assets in the fund are available to pay only employee benefits.
a. Vested benefit obligation
The assets in the fund are not available to the
b. Accumulated benefit obligation
C. reporting entity's own creditors.
c. Projected benefit obligation
d. The assets in the fund can be returned to the entity even if the remain-
ing assets are insufficient to meet all employee benefit obligations. d. Current benefit obligation

4. What is the discount rate for pension plans?

 a. The market yield at the end of the reporting period for high quality cor -
porate bonds
b. The expected rate of return on plan assets
c. The weighted average interest rate
d. The bank prime interest rate
5.The interest on the projected benefit obligation
a. Reflects the incremental borrowing rate.
b. Reflects the rate at which retirement benefits could be effectively set-
tled.
c. Is the same as the actual return on plan assets.
d. May be stated implicitly.
6. Interest cost included in the net pension cost recognized under a defined benefit
plan represents the
a. Shortage between the expected and actual returns on plan assets.
b. Change in the nature of benefits.
C. Increase in the projected benefit obligation due to the passage of time.
d. Increase in the fair value of plan assets due to the passage of time.
7.Vested benefits
a. Usually require a certain minimum number of years of service.
b. Are those that the employee is entitled to receive even if fired.
C. Are not contingent upon additional service under the plan.
d. Are defined by all of these.
8. What is the relationship between the amount funded and the amount reported
for defined benefit cost?
a. Defined benefit cost must equal the amount funded.
b. Defined benefit cost is less than the amount funded.
c. Defined benefit cost is more than the amount funded.
d. Defined benefit cost may be more than, equal to, or less than the
amount funded.
9.The defined benefit obligation in the measure of pension obligation that
a. Is required to be used for reporting the current service cost component
of pension expense.
b. Requires pension expense to be determined solely on the basis of the
plan formula applied to years of service to date and based ón existing
salary level.
c. Requires the longest possible period for funding to maximize the tax de-
duction.
d. Is not sanctioned under international financial reporting standards for
reporting the current service cost component of pension expense.
10.In computing the current service cost component of pension expense
a. The accumulated benefit obligation provides a more realistic measure of
the pension obligation on a going concern basis.
b. An entity should employ an actuarial funding method to report pension
expense that best reflects the cost. of benefits to employees.
c. The defined benefit obligation using future compensation level provides
a realistic measure of present pension obligation and expense.
d. The actual and estimated return on plan assets should be recognized.
Problem 18-25(AICPA Adapted)
1.The present value of pension benefits accrued to date using assumptions as to fu-
ture compensation level is
a. Accrued pension cost
b. Projected benefit obligation
c. Past service cost
d. Accumulated benefit obligation
2. The vested benefits in a pension plan represent
a. Benefits to be paid to the retired employee.
b. Benefits accumulated in the hands of trustee.
c. Benefits to be paid to the retired employee in the current year.
d. Benefits that are not contingent on the employee's continuing in the ser-
vice of the employer.
3. In the calculation of pension expense under a defined benefit plan, which compo - C. Short-term employee benefits by definition are payable no later than
nent will not be included? twelve months after year-end.

a. Actuarial present value of benefits attributed by the pension benefit for- d. Short-term employee benefit obligations are measured on a discounted
mula to employee service during current period basis.

b. Interest cost on the projected benefit obligation 3. These are compensated or paid absences that are carried forward and can be
used in future periods and the employees are entitled to a cash payment for unused
c. Actual return on plan assets entitlement on leaving the entity.
d. Gain or loss on plan settlement a. Accumulating and vesting
4.When may the entity net assets and liabilities of the various retirement plans? b. Accumulating and nonvesting
a. When the estimated cash inflows and outflows are similar in pattern. C. Nonaccumulating and vesting
b. When the assets and liabilities are both financial. d. Nonaccumulating and nonvesting
C. Assets and liabilities may always be netted. 4.Which of the following criteria is not required for the recognition of a liability for
d. Assets and liabilities may be netted when there is a legally enforceable compensated absences?
right to use the assets of one plan to settle the obligations of another plan. a. The amount of the obligation must be estimable.
5. Retirement benefit plan investments shall be carried at b. Payment of the obligation must be probable.
a. Fair value C. Payment of the obligation will require the use of current assets.
b. Historical cost d. The compensation either vests with the employee or can be carried for-
C. Amortized cost ward to subsequent years.

d. Value in use 5. These are employee benefits that are payable as a result of an employee's deci-
sion to accept an offer of benefits in exchange for termination of employment.
Problem 19-18 Multiple choice (PAS 19)
a. Termination benefits
1. Short-term employee benefits include all, except
b. Short-term employee benefits
a. Wages, salaries and social security contributions.
C. Other long-term employee benefits
b. Short-term compensated absences.
d. Postemployment employee benefits
c. Profit-sharing bonus payable in more than twelve months after the end
of reporting period. Problem 19-19 Multiple choice (IFRS)

d. Nonmonetary benefits, such as medical care, housing, car and free and 1.Employees are each entitled to 20 days of paid holiday leave per year. Unused
subsidized goods. holiday leave cannot be carried forward and does not vest. What is the holiday
leave?
2.Short-term employee benefits are described by all, except
a. Short-term employee benefit
a. No actuarial assumptions are required.
b. Postemployment benefit
b. There is no possibility of any actuarial gain or loss.
 c. Other long-term employee benefit d. Paid time off

d. Termination benefit 2. A liability for paid absences should

2. Employees are entitled to 10 days holiday leave per year. Unused holiday leave a. Be accrued during the period when the compensated time is expected to
may be carried forward until the employee leaves the employment of the entity, at be used by employees.
which time the entity will pay the employee for all unused holiday leave. What is
the holiday leave? b. Be accrued during the period following vesting.

a. Short-term employee benefit C. Be accrued during the period when earned.

b. Postemployment benefit d. Not be accrued unless a written contractual obligation exists.

c. Other long-term employee benefit 3.The amount of the liability for paid absences should be based on

d. Termination benefits a. The current rate of pay in effect when employees earn the right to com-
pensated absences.
3. An entity made a public announcement of a commitment to a voluntary redun -
dancy plan. The entity has an obligation to pay employees that choose voluntary re - b. The expected rate of pay expected to be paid when employees use com-
dundancy a lump sum equal to twice their gross annual salary. What is the obliga - pensated time.
tion to pay employees that choose voluntary redundancy? C. The present value of the amount expected to be paid in future periods.
a. Short-term employee benefit d. Either the current rate of pay in effect when the employees earn the
b. Postemployment benefit right to compensated absences or the expected rate of pay expected to be
paid when employee use compensated time.
c. Other long-term employee benefit
4. If the payment of employees' compensation for future absences is probable, the
d. Termination benefit amount can be reasonably estimated and the obligation relates to rights that. accu -
mulate, the compensation should be
4: A profit-sharing plan requires an entity to pay a specified proportion of the cumu -
lative profit for a five-year period to employees who serve throughout the five-year a. Accrued if attributable to employees' services not yet rendered.
period. What is the profit-sharing plan?
b. Accrued if attributable to employees' services already rendered.
a. Short-term employee benefit
c. Accrued if attributable to employees' services whether already rendered
b. Postemployment benefit or not.

c. Other long-term employee benefit d. Recognized when paid.

d. Termination benefit 5.In determining whether to accrue employees' compensation for future absences,
one of the conditions that must be met is that the employer has an obligation to
Problem 19-20 Multiple choice (IAA) make payment even if an employee terminates. This is an example of what?
1.What are compensated absences? a. Accumulated right
a. Unpaid time off b. Estimable right
b. A form of healthcare c. Contingent right
c. Payroll deductions d. Vested right
6. In accounting for paid absences, the difference between vested rights and accu - 2. When shares without par value are sold, the proceeds shall be credited to
mulated rights is
a. Share capital
a. Vested rights are normally for a longer period of employment than accu-
mulated rights. b. Shareholders' equity

b. Vested rights are not contingent upon an employee's future service. C. Share capital to the extent of the stated value and any excess is credited
to share premium
C. Vested rights are a legal and binding obligation whereas accumulated
rights expire at year-end. d. Share premium

d. Vested rights carry a stipulated amount whereas accumulated rights are 3. If shares are issued for noncash consideration, the proceeds shall be measured by
nonmonetary. the

7.An employer offered special termination benefits. The employees accepted the a. Fair value of the shares issued
offer which provided for immediate lump sum payments and future payments at b. Fair value of the noncash consideration received
the end of the next two years. The amount of expense recognized in the current
year should include c. Par value of the shares issued

a. The total of the lump sum and future payments d. Cost of the noncash consideration received

b. One third of the lump sum payments and one third of the present value 4.If shares are issued to extinguish a financial liability, what is the initial measure -
of the future payments ment of the shares issued?

c. Only the lump sum payments a. Par value of the shares issued

d. The lump sum payments and the present value of the future payments b. Fair value of the shares issued

8. What is the requirement for the accrual of a sick pay? c. Fair value of liability extinguished

a. Sick pay benefits can be reliably estimated. d. Book value of the shares issued

b. Sick pay benefits vest. 5.When shares are issued for services received, the least appropriate measure is
equal to
c. Sick pay benefits do not vest.
a. Fair value of such services
d. Sick pay benefits accumulate.
b. Par value of the shares issued
Problem 20-21 Multiple choice (Philippine GAAP)
c. Book value of the shares issued
1. When shares with par value are sold, the excess of the proceeds over the par
value is credited to d. Fair value of the shares issued

a. Share capital Problem 20-22 Multiple choice (IAA)

b. Share premium 1. What is the meaning of net assets of a corporation?

c. Retained earnings a. Contributed capital

d. Gain on issuance of share capital b. Retained earnings

 c. Shareholders' equity c. Shares held in the corporate treasury

d. Legal capital d. Shares in the hands of shareholders

2.The two primary account classifications within shareholders' equity are 7. Issued shares refer to the number of shares

a. Preference shares and retained earnings a. Outstanding plus treasury shares

b. Par value of ordinary shares and retained earnings b. Shares issued for cash

C. Contributed capital and retained earnings c. In the hands of shareholders

d. Preference shares and ordinary shares d. That may be issued under state law

3. Details of each class of share capital should be reported 8.Authorized share capital refers to the total number of shares

a. On the face of the statement of financial position only. a. Outstanding

b. In disclosure notes only. b. Issued

C. On the face of the statement of financial position or in disclosure notes. c. Issued and outstanding

d. On the face of the statement of comprehensive income and in disclosure d. That can be issued
notes.
9.The share capital account is measured as
4. The corporate charter is known as
a. The number of shares outstanding multiplied by the par value
a. Articles of incorporation
b. The number of shares outstanding multiplied by the market value
b. Statement of organization
C. The number of shares issued multiplied by the par value
c. By-laws
d. The number of shares issued multiplied by book value
d. Registration statement
10. The par value of shares issued is normally recorded in
5.Characteristics of the corporate form that have led to the growth of this form of
business ownership include all of the following, except a. Additional paid in capital

a. Ease of raising capital b. Share capital account

b. Low government regulation c. Retained earnings account

c. Limited liability d. Appropriated retained earnings account

d. Ease of ownership transfer Problem 20-23 Multiple choice (IAA)

6. Outstanding ordinary shares are 1.Total shareholders' equity represents

a. Shares that are performing well on the Philippine Stock Exchange a. A claim against specific assets.

b. Shares that have been authorized by the state for issue b. The maximum amount that can be borrowed.

c. A claim against the total assets of an entity.

 d. Only the amount of retained earnings.
2. In accounting for shareholders' equity, the accountant is primarily concerned
with which of the following?
a. Determining the total amount of shareholders' equity
b. Distinguishing between realized and unrealized revenue
c. Recording the source of each of the various elements of shareholders'
equity
d. Making sure that the directors do not declare dividends in excess of re-
tained earnings
3.The term residual owner means that ordinary shareholders
a. Are entitled to a dividend every year in which the entity earns an in-
come.
b. Have the rights to specific assets of the entity.
C. Bear the ultimate risks and uncertainties and receive the benefits of
ownership.
d. Can negotiate individual contracts for the entity.
4.Shares that have a fixed per-share amount printed on the share certificate are
called
a. Stated value shares
b. Fixed value shares
c. Uniform value shares
d. Par value shares
5. The par value of an ordinary share represents
a. The liquidation value of the share.
b. The book value of the share.
C. The legal nominal value assigned to the share.
d. The amount received by the corporation when the share is originally is-
sued.
6. Contributed capital does not include
a. Share premium on ordinary and preference shares
b. Preference share capital
c. Capital resulting from reissuance of treasury shares at a price in excess
of acquisition cost
d. Capital accumulated by retention of earnings
7.Discount on share capital
a. May be recorded as either an asset or an expense
b. Should be closed to income summary account
C. May be offset against share premium on the same class of share capital
d. None of the above may be done
8.Which of the following is not one of the basic shareholders' rights?
a. The right to participate in earnings.
b. The right to maintain one's proportional interest.
c. The right to participate in the proceeds of the sale of corporate assets
upon liquidation of the corporation.
d. The right to inspect the accounting records.
9. An ordinary shareholder does not possess which of the following?
a. The right to share in the earnings of the corporation.
b. The right to vote in the election of the board of directors.
c. The right to direct ownership of the corporate assets.
d. The right to share proportionately in corporate assets in case of liquida-
tion.
10. The preemptive right of an ordinary shareholder is the right to
a. Share proportionately in corporate assets.
b. Share proportionately in any new issue of shares of the same class.
C. Receive cash dividends before they are distributed to preference share-
holders.
d. Exclude preference shareholders from voting rights.
Problem 20-24 Multiple choice(IAA) d. The average book value of outstanding shares.

1. Share premium is reported 6.In terms of business volume, the dominant form of business organization is

a. As a reduction of shareholders' equity a. Partnership

b. As a noncurrent asset b. Corporation

c. As a noncurrent liability c. Limited liability company

d. As an increase in shareholders' equity d. Proprietorship

2.Share issue costs are 7.Ordinary shareholders usually have all of the following rights,except

a. Not recorded separately a. To share in the net income

b. Recorded as an asset. b. To share in the assets upon liquidation

c. Recorded as a liability c. To elect the board of directors.

d. Amortized over time d. To participate in the day-to-day operations

3.When more than one security is sold for a single price and the total selling price is 8.When preference shares are retired by the issuer at a price below the original is-
not equal to the sum of the market prices, the cash received is allocated between sue price, the transaction
the securities based on
a. Increases net income for the year
a. Relative book value
b. Increases retained earnings
b. Par value
c. Increases revenue for the year
c. Relative market value.
d. Increases contributed capital of ordinary shareholders
d. The earnings per share
9.When preference shares carry a redemption privilege, the shareholders may
4. When shares traded on an active exchange are issued for an asset
a.-Purchase new shares when available.
a. No entry is recorded until restrictions are lifted.
b. Exchange their preference shares for ordinary shares.
b. An asset is recorded at the fair value of the shares.
c. Surrender the preference shares for a specified amount of cash.
c. An asset is recorded at the appraised value.
d. Purchase treasury shares ahead of ordinary shareholders.
d. Share capital is increased by the appraised value of the asset.
10.An entity that issued shares of Class B should report the share capital
5.When shares are issued in exchange for property, the best evidence of fair value
might be any of the following, except a. Among liabilities under all circumstances.

a. The fair value of the property received. b. As equity unless the shares are mandatorily redeemable.

b. The selling price of the shares in a recent transaction. c. As equity unless the shares are redeemable at the option of the issuer.

c. The price of the shares quoted on the stock exchange. d. Among liabilities unless the shares are mandatorily redeemable.
Problem 20-25 Multiple choice (AICPA Adapted) d. Deduction from reserves

1.The issuance of preference shares Problem 21-26 Multiple choice (Philippine GAAP)

a. Increases preference shares outstanding
b. Has no effect on preference shares outstanding
C. Increases authorized preference share capital
d. Decreases authorized preference share capital
2.When an entity calls in all of the preference shares for more than the original is-
sue price, the excess over the original issue price should be
1.The cost of treasury shares acquired for noncash consideration is usually mea-
sured by
a. Carrying amount of the noncash asset surrendered
b. Fair value of the noncash asset surrendered
c. Fair value of the treasury shares
d. Book value of the treasury shares

a. Accounted for as loss on exchange 2. The total cost of treasury shares shall be reported as

b. Charged against share premium of ordinary shares a. Deduction from shareholders' equity

c. Charged to a discount on preference shares b. Financial asset

d. Charged against retained earnings c. Deduction from retained earnings

3. When preference shares are called in by the issuing entity for less than original is- d. Deduction from share premium
sue price, proper accounting for the redemption
3. If treasury shares are reissued for noncash consideration, the proceeds shall be
a. Increases the amount of dividends available to ordinary shareholders measured by

b. Increases the contributed capital of the ordinary shareholders a. Fair value of the treasury shares

c. Increases reported income for the period b. Fair value of the noncash consideration received

d. Increases the treasury shares held by the entity c. Carrying amount of the noncash consideration received

4. Convertible preference shares d. Carrying amount of the treasury shares

a. Are compound financial instrument. 4. Which is not a method to account for treasury shares?

b. Include an option for the holder to convert preference shares into a a. Cost method
fixed number ordinary shares.
b. Par value method
c. Are accounted for as financial liability
c. Retained earnings method
d. All of the choices are correct.
d. Constructive retirement method
5. Dividend paid on redeemable preference share shall be accounted for as
5. "Loss" from sale of treasury shares shall be charged to
a. Direct deduction from retained earnings
a. Loss on sale of treasury shares
b. Interest expense as component of finance cost
b. Retained earnings and then share premium from
c. Component of other comprehensive income
 treasury shares
c. Share premium from treasury shares and then retained earnings
d. Share premium from original issuance and then retained earnings
6.Loss on retirement of treasury shares is debited to
a. Retained earnings
b. Share premium from treasury shares and then retained earnings
c. Share premium from treasury shares, share premium from original is-
suance and then retained earnings
d. Share premium from original issuance, share premium from treasury
shares and then retained earnings
b. The total cost of treasury shares shall be deducted from shareholders'
equity.
c. Treasury shares may be recognized as financial asset.
d. Gain or loss on sale of treasury shares shall not be credited or charged to
income.
Problem 21-27 Multiple choice (IAA)
1. An entity makes only a memorandum entry when
a. Entities give warrants to executives compensation.
b. Entities include warrants to make a security more attractive.
c. Entities issue rights to existing shareholders.

7.Gain on retirement of treasury shares shall credited to d. All of the choices are correct.

a. Share premium 2. Which of the following is issued to shareholders of a corporation to acquire unis-
sued shares within a specified time at a specified price?
b. Retained earnings
a. Share option
c. Share capital
b. Share warrant
d. Income
c. Share subscription
8. Shares issued would exceed shares outstanding as a result of
d. Share appreciation right
a. Declaration of share split
3. An entity issued rights to the existing shareholders to purchase unissued ordinary
b. Declaration of share dividend shares at more than par value. Share premium would be recorded when the rights
C. Purchase of treasury shares a. Expire
d. Payment in full of subscribed shares b. Are exercised
9. When treasury shares are sold at a price above cost c. Become exercisable
a. A gain account is credited. d. Are issued
b. A loss is reported 4.Share warrants outstanding account shall be reported as
c. A revenue account is credited a. Liability
d. Contributed capital is increased b. Reduction of share premium
10. Which statement is incorrect in relation to treasury shares? c. Share capital
a. Treasury shares shall be recorded at cost irrespective of whether ac - d. Share premium
quired below or above par value.
5. Share split is issued primarily to C. Retained earnings sometimes may be increased but never decreased

a. Increase the number of outstanding shares
b. Increase the number of authorized shares
c. Increase legal capital
d. Induce a decline in market value per share
d. Retained earnings account is always affected unless the sale price is ex-
actly equal to cost
5.Treasury shares were acquired for cash at a price in excess of par value. The trea -
sury shares were subsequently sold for cash at a price in excess of acquisition cost.
What is the effect on total shareholders' equity?

Problem 21-28 Multiple choice (AICPA Adapted) Purchase of treasury Sale of treasury

1. When collectibility is reasonably assured, the excess of the subscription price a. Increase Decrease
over the stated value of no par ordinary share subscribed shall be recorded as b. Decrease No effect
a. No par ordinary share capital C. Decrease Increase
b. Share premium when the subscription is recorded. d. No effect No effect
c. Share premium when the subscription is collected. 6.Treasury shares were acquired for cash at more than par value, and then subse-
d. Share premium when the ordinary share is issued. quently sold for cash at more than acquisition price. What is the effect on share pre-
mium from treasury shares?
2. The purchase of treasury ordinary shares
Purchase of Sale of
a. Decreases authorized ordinary share capital
treasury shares treasury shares
b. Decreases issued ordinary shares
a. Increase Increase
c. Decreases outstanding ordinary shares
b. Decrease No effect
d. Has no effect on ordinary shares outstanding
c. No effect Increase
3. When treasury shares are purchased for more than par value, what account or
accounts shall be debited? d. No effect No effect

a. Treasury shares for the par value and share premium for the excess of 7.How would a share split in which the par value per share decreases in proportion
purchase price over the par value. to the number of additional shares issued affect share premium and retained earn-
ings, respectively?
b. Share premium for the purchase price.
a. Increase and No effect
c. Treasury shares for the purchase price.
b. No effect and No effect
d. Treasury shares for the par value and retained earnings for excess of the
purchase price over the par value. C. No effect and Decrease

4.Which statement best describes the net effect on retained earnings of the pur- d. Increase and Decrease
chase and subsequent sale of treasury shares? 8.How would a share split affect asset and shareholders' equity, respectively?
a. Retained earnings may never be increased but sometimes decreased a. Increase and Increase
b. Retained earnings sometimes may never be increased or decreased
 b. No effect and No effect b. Descreases total shareholders' equity and increases ordinary shares.

c. No effect and Increase C. Decreases assets and total shareholders' equity.

d. Increase and No effect d. Does not change retained earnings or ordinary shares.

Problem 22-31 Multiple choice (IAA) Problem 22-32 Multiple choice (Philippine GAAP)

1. Retained earnings represent 1. Nonstock dividends shall be recognized as liabilities on the

a. Earned capital a. Date of declaration

b. Cash b. Date of record

c. Assets C. Date of payment

d. Net assets d. Date of issuing check

2. Retained earnings represent 2. When shareholders may elect receive cash in lieu of share dividend, the amount
to be charged to retained earnings is equal to the
a. Undistributed net income
a. Optional cash dividend
b. Undistributed net assets
b. Fair value of the shares
c. Extra contributed capital
c. Par value of the shares
d. Undistributed cash
d. Book value of the shares
3. The total retained earnings balance typically is not affected by
3.Treasury shares may be reissued as dividends, in which case what amount snai be
a. Net income cnargeà to retaineà earriings!
b. A prior period error a. Cost of the treasury shares
c. Dividends paid b. Par value of the treasury shares
d. Restrictions c. Fair value of the treasury shares on the date of declaration
4. When a property dividend is declared, the dividend payable should be measured d. Fair value of the treasury shares on the date of issuance
based on the fair value of property on
4. If the share dividend is less than 20%, how much of the retained earnings shall be
a. Record date capitalized?
b. Distribution date a. Par value of the shares
C. Declaration date, reporting date and distribution date b. Fair value of the shares on the date of declaration
d. Reporting date c. Fair value of the shares on the date of record
5. The declaration and issuance of a share dividend on ordinary shares d. Fair value of the shares on the date of issuance
a. Has no effect on assets, liabilities and total shareholders' equity.
5.At what amount should retained earnings be reduced if the share dividend is 20% c. Sale of treasury shares at more than cost
or more?
d. Declaration of a cash dividend
a. Zero
5. How would the declaration and subsequent issuance of a 10% share dividend af -
b. Par value Market value fect share capital and share premium, respectively, when the fair value of the
shares exceeds par value?
c. at the declaration
a. No effect and No effect
d. Market value at the date of issuance
b. No effect and Increase
Problem 22-33 Multiple choice (AICPA Adapted)
C. Increase and No effect
1.An entity declared a cash dividend on a certain date, payable on another date. Re -
tained earnings would d. Increase and Increase

a. Increase on the date of declaration 6. An entity declared a dividend, a portion of which was liquidating. How would this
declaration affect each of the following?
b. Not be affected on the date of declaration
Contributed capital Retained earnings
c. Not be affected on the date of payment
a. Decrease No effect
d. Decrease on the date of payment
b. Decrease Decrease
2.The actual total amount of a cash dividend to be paid is determined on the date
of C. No effect Decrease

a. Record d. No effect No effect

b. Declaration 7. How would the declaration of a liquidating dividend affect each of the following?

c. Declaration or record, whichever is earlier Contributed capital Retained earnings

d. Payment a. No effect Decrease

3. A dividend which is a return to shareholders of a portion of their original invest - b. Decrease No effect
ment is
c. No effect No effect
a. Liquidating dividend
d. Decrease Decrease
b. Patronage dividend
8. The issuer shall directly charge retained earnings for the fair value of the shares
c. Liability dividend issued in

d. Participating dividend a. Two for one share split

4. Total shareholders' equity is not affected by the b. Share options

a. Issuance of a share dividend c. Ten percent share dividend

b. Conversion of bonds payable into share capital d. Share appreciation right

9.The issuer shall directly charge retained earnings for the par value of shares is - d. A note to the financial statements.
sued in。
4.Which of the following would not affect retained earnings?
a. 1 for 5 share dividend
a. Conversion of preference share into ordinary share.
b. 1 for 8 share dividend
b. Share split
c. 4 for 1 share split
c. Treasury share transaction
d. 2 for 1 share split
d. Share dividend
10. A transfer from retained earnings to share capital equal to the fair value of the
shares issued is ordinarily a characteristic of 5.How would retained earnings be affected by the declaration of share dividend and
share split, respectively?
a. Either a share dividend or share split
a. Decrease and Decrease
b. Neither a share dividend nor share split
b. No effect and Decrease
c. Share split but not a share dividend
C. No effect and No effect
d. Share dividend but not a share split
d. Decrease and No effect
Problem 22-34 Multiple choice (IAA)
6.Which statement about property dividend is not true?
1. An entry is not made on the
a. A property dividend is usually in the form of securities of other entities.
a. Date of declaration
b. A property dividend is also called a dividend in kind.
b. Date of record
c. The accounting for a property dividend should be based on the carrying
c. Date of payment amount of the noncash asset transferred.

d. An entry is made on all of these dates d. All of these statements are true.

2. Cash dividends are paid on the basis of the number of shares 7.Which of the following is a capitalization of retained earnings?

a. Authorized a. Cash dividend

b. Issued b. Share dividend

c. Outstanding c. Property dividend

d. Outstanding less the number of treasury shares d. Liquidating dividend

3. Undistributed share dividends shall be reported as 8.Liquidating dividends

a. A current liability. a. Are prohibited under IFRS

b. An addition to share capital outstanding. b. Require a credit to share capital

c. A reduction in total shareholders' equity. c. Reduce amounts paid in by shareholders

 d. All of the choices are correct a. Profit or loss

9.Unlike a share split, a share dividend requires a formal journal entry because b. Other comprehensive income

a. Share dividends increase the relative book value of share capital. C. Equity

b. Share dividends increase shareholders' equity. d. Retained earnings

c. Share dividends are payable on the date of declaration. 4. An entity shall measure a noncurrent asset classified as held for distribution to
owners at
d. Share dividends represent a transfer from retained earnings to share
capital. a. Carrying amount

10. When a share dividend is declared b. Fair value less cost to distribute

a. Total shareholders' equity does not change. C. Lower of carrying amount and fair value less cost to distribute

b. Total shareholders' equity decreases. d. Fair value

c. The current ratio increases. Problem 23-24 Multiple choice (IAA)

d. The amount of working capital decreases. 1.A retained earnings appropriation is used to

Problem 22-35 Multiple choice (IFRIC 17) a. Absorb a fire loss when an entity is self-insured.

1. An entity shall measure a liability to distribute noncash asset as dividend to the b. Provide for a contingent loss that is probable and measurable.
owners at
c. Smooth periodic income.
a. Carrying amount of the asset distributed
d. Restrict earnings available for dividends.
b. Fair value of the asset distributed
2. An appropriation of retained earnings for future plant expansion will result in
c. Either the carrying amount or fair value of the asset
a. The establishment of a fund to finance the future plant expansion.
d. Neither the carrying amount nor fair value
b. The setting aside of cash to be used for future plant expansion.
2. An entity shall review and adjust the carrying amount of the dividend payable at
the end of each reporting period and at the date of settlement with any changes in c. A decrease in cash with an equal increase in investment in fund.
the carrying amount of the dividend payable recognized d. The disclosure that management does not intend to distribute in the
a. In equity as adjustment to the amount of distribution form of dividends assets equal to the amount of appropriation.

b. In profit or loss 3.The retained earnings appropriated account is created for the purpose of

c. As adjustment of share premium a. Earmarking cash to be used for particular purposes

d. As component of other comprehensive income b. Insuring the payment of dividends

3. When an entity settles the property dividend payable, it shall recognize the differ- c. Protecting the working capital position '
ence between the carrying amount of the asset distributed and the carrying amount d. Preventing losses from contingencies
of the dividend payable in
4. A restriction of retained earnings is most likely to be required by
a. Incurring a net loss in the current year.
b. Incurring a net loss in the prior year.
C. Purchasing treasury shares.
d. Reissuing treasury shares.
5.Which of the following is most likely to be found in corporate laws regarding pay-
ment of dividends?
a. Dividends may be paid from legal capital.
b. Retained earnings are available for dividends unless restricted by con-
tract or by statute.
c. Unrealized capital is available for any type of dividend.
d. Capital from donated assets is available for dividends.
6.For which of the following purposes should an appropriation for possible loss con -
tingencies be established?
a. To match applicable costs with current revenue.
b. To reduce fluctuations in net income in order to lend stability of the en -
tity.
c. To charge operations in periods of rising prices for the losses which may
otherwise be absorbed in periods of falling prices.
d. To inform shareholders that a portion of retained earnings should be set
aside from amounts available for dividends because of such contingencies.
7. Which statement is incorrect concerning appropriations of retained earnings?
a. Appropriations of retained earnings do not change the total amount of
shareholders' equity.
b. Appropriations of retained earnings reflect funds set aside for a desig-
nated purpose, such as plant expansion.
C. Appropriations of retained earnings can be made as a result of contrac-
tual requirements.
d. Appropriations of retained earnings can be made at the discretion of the
board of directors.
8.Which statement is incorrect concerning appropriations of retained earnings?
a. Appropriations do not reduce total retained earnings.
b. The only proper way to eliminate an appropriation of retained earnings
after it has served its purpose is to revert to the unappropriated retained
earnings.
c. An appropriation of retained earnings does not mean that assets are seg-
regated for a specific purpose.
d. When treasury shares are purchased, retained earnings must be appro-
priated equal to the par or stated value of thé treasury shares.
9. Which of the following is not a legal restriction related to profit distribution?
a. The amount distributed must be in compliance with the laws governing
corporations.
b. The amount distributed can never exceed the net income for the current
year.
C. Profit distribution must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital contracts as to
preferences.
10.The use of equity reserves under international accounting standards
a. Is strictly voluntary on the part of the management of an entity.
b. Is based on whether a reserve is part of distributable or nondistributable
equity.
c. Is primarily for the benefit of shareholders rather than creditors.
d. Results in the elimination of retained earnings from d. the total share -
holders' equity.
Problem 23-25 Multiple choice (AICPA Adapted)
1.The primary purpose of quasi-reorganization is to give an entity the opportunity
to
a. Obtain relief from creditors
b. Revalue understated assets to fair value
c. Eliminate a deficit in retained earnings
d. Form a new corporation
2. When an entity goes through a quasi-reorganization, the carrying amounts are c. Equity payment transactions
stated at
d. Cash payment transactions
a. Original cost
2. The total compensation expense in a share option plan normally is measured at
b. Replacement cost
a. Fair value of share options on date of grant
c. Fair value
b. Fair value of share options on date of exercise
d. Original carrying amount
C. Intrinsic value of share options on date of grant
3. Immediately after a quasi-reorganization, the retained earnings account
d. Intrinsic value of share options on date of exercise
a. Has a zero balance
3.It is the difference between the fair value of the shares to be subscribed and the
b. Remains the same price required to be paid for those shares.

c. Frozen and dated a. Fair value

d. Has a debit balance b. Intrinsic value

4.The accounting for a quasi-reorganization usually includes c. Market value

a. Writeup of assets and writedown of retained earnings d. Book value

b. Writedown of both assets and retained earnings 4.The date on which total compensation expense is computed in a share option
plan is
C. Writedown of assets and elimination of a deficit
a. Date of grant
d. Writeup of assets and elimination of a deficit
b. Date of exercise
5. An entity with a substantial deficit undertakes a quasi-reorganization. Certain as -
sets will be written down to fair value. Liabilities will remain the same. How would C. Date when the option price exceeds the market price
the entries to record the quasi-reorganization affect share capital and retained
earnings, respectively? d. Date when the market price exceeds the option price

a. Increase and Decrease 5. When issuing share options, which of the following factors is most relevant in de -
termining the accounting treatment?
b. Decrease and No effect
a. The par value of the shares issued
c. Decrease and Increase
b. The market value of the shares issued
d. No effect and Increase
c. The authorized number of shares
Problem 24-31 Multiple choice (PFRS 2)
d. Whether the share options are issued in lieu of salary
1. These are transactions in which the entity receives goods or services as consider-
ation for equity instruments. 6.For transactions with employees, the fair value of the equity instrument granted
is measured on
a. Equity settled share-based payment transactions
a. Exercise date
b. Cash settled share-based payment transactions
 b. Grant date. 1. How is compensation expense measured for equity settled share-based payment
transaction?
c. End of reporting period
a. Use the normal hourly rate of employees.
d. Beginning of the year of grant
b. Measure the intrinsic value of share options.
7. It is a contract that gives the holder the right, but not the obligation, to subscribe
to the entity's shares at a fixed or determinable price for a specified period of time. C. Measure the fair value of share options using an option pricing model.

a. Share option d. Measure the difference between the market price and the fair value of
share options.
b. Share warrant
2. Which option valuation technique should not be used as a measure of fair value
c. Share appreciation right in the first instance?
d. Share split a. Black-Scholes model
8.In what circumstances is compensation expense immediately recognized under a b. Binomial model
share option plan?
C. Monte-Carlo model
a. In all circumstances
d. Intrinsic value
b. In circumstances when the options are exercisable within two years for
services rendered. 3.Share options are what type of share-based payment transaction?

c. In circumstances when the options are immediately exercisable. a. Asset-settled share-based payment transaction

d. In no circumstances. b. Equity-settled share-based payment transaction

9.Compensation expense from a share option is generally C. Cash-settled share-based payment transaction

a. Recognized in the period of exercise. d. Liability-settled share-based payment transaction

b. Recognized in the period of the grant. 4. Which statement is true in relation to share options?

C. Allocated to the periods benefited by the employee's required service.
d. Allocated over the periods of the employee's service life to retirement.
10. If there is an acceleration of vesting, any payment made to the employees on
the settlement of the grant shall be
a. The services received shall be measured at the fair value of the employ-
ees' services.
b. Fair value shall be measured at the date of vesting.
C. Fair value shall be measured at the date of exercise.

a. Accounted for as repurchase of equity interest. d. All of these statements are not true.

b. Recognized in retained earnings.
c. Recognized as other comprehensive income.
d. Accounted for as repurchase of equity interest and any excess payment
over the fair value of share options shall be recognized as expense.
5. What interest rate is used to discount both the exercise price. of the option and
the future dividend stream?
a. The entity's known incremental borrowing rate
b. The current market rate in the industry

Problem 24-32 Multiple choice (IFRS) c. The risk-free interest rate

 d. Any rate that entities can justify as being reasonable
Problem 24-33 Multiple choice (IAA)
1. The compensation associated with share option plan ia
a. The book value of a share times the number of options
b. The estimated fair value of the options
c. Allocated to expense upon expiration
d. Recorded as expense on the date of grant
2. The most important objective for share options is
a. Measuring the compensation expense during the service period.
b. Measuring the fair value.
C. Disclosing increases or decreases in the share options.
d. Recognition of services rendered.
3. Share options should be reported as expense
a. Using the intrinsic value method
b. Using the fair value method
c. Using the fair value or the intrinsic value method
d. Only on rare occasions
4. When recognizing compensation under a share option plan, unanticipated forfei-
tures are treated as
a. A change in accounting policy
b. A loss
c. An income item
d. A change in accounting estimate
5. Which statement is true about share options?
a. IFRS requires using, the intrinsic value method.
b. If previous experience indicates that share options shall be forfeited be-
fore vesting, the fair value estimate on grant date should be adjusted.
c. Compensation expense must be adjusted during the service period to re-
flect changes in the market price of underlying shares.
d. All of these statements are true about share options.
Problem 24-34 Multiple choice (IFRS)
1. An entity shall recognize the goods or services received in a share-based payment
transaction
a. Only when the share-based payment is cash-settled.
b. When the entity receives the goods or services.
c. Only when the vesting period ends.
d. Only on the date that the equity instruments are granted.
2. If share options granted to employees under a share-based payment transaction
vest immediately
a. The entity should defer recognition of the services rendered by the em-
ployees.
b. The entity should record a liability.
C. The employees are unconditionally entitled to the share-based pay-
ments.
d. The entity should account for the services when these are rendered by
the employees during the vesting period.
3. For equity-settled share-based payment transactions, an entity shall measure the
goods or services received
a. Always at the fair value of goods and services received.
b. Always at the fair value of the equity instruments issued.
C. At the cost of goods and services provided by employees.
d. At the fair value of the goods or services received unless that fair value
cannot be estimated reliably.
4. For transactions for employee services as in share options, the fair value of the
equity instruments is measured
a. On the grant date.
b. On the exercise date.
 c. At the end of the vesting period or exercise period, whichever is later.
d. At the date when the entity knows how many instruments will vest.
5.For transactions with parties other than employees, the measurement date is
a. The grant date.
b. The exercise date.
C. When the entity obtains the goods or the counterparty renders service.
d. When the warranty period for the goods or services expires.
6. On vesting date, the entity should
a. Never adjust the number of equity instruments that ultimately vest.
b. Revise the estimate to equal the number of equity instruments that ulti-
mately vest for vesting conditions based on employee service and based on
nonmarket performance.
C. Revise the estimate to equal the number of equity instruments that ulti-
mately vest for vesting conditions based on employee service and based on
market performance.
d. Revise the estimate to equal the number of equity instruments that ulti-
mately vest for all vesting conditions.
7. For share-based payment transaction offering a choice of settling the transaction
in cash or by transfer of equity instrument, the entity should account for the trans -
action as
a. Cash-settled share-based payment.
b. Cash-settled share-based payment unless the entity has a past practice
of settling by issuing equity instrument.
c. Cash-settled share-based payment transaction unless the option to settle
in cash has no commercial substance.
d. Cash-settled share-based payment transaction unless the entity has a
past practice of settling by issuing equity instrument or the option to settle
in cash has no commercial substance.
8.In measuring the fair value of shares and the related goods or services received an
entity
a. Must always use observable market price of the entity's own shares.
b. Uses observable market price but only for nonemployee share-based
transaction.
c. Uses price established by the board of directors for that type of share-
based transaction.
d. Uses observable market price and other measures according to a mea-
surement hierarchy.
9. For modification of vesting condition in an equity-settled share-based payment
transaction for employee services, the entity should
a. Recognize the increase in fair value over the remaining vesting period
from the date of the modification.
b. Take the modified vesting condition into account only if it is beneficial to
employees and recognize the increase in fair value over the original vesting
period.
c. Take the modified vesting condition into account only if it is beneficial to
employees and recognize the increase in fair value over the remaining
vesting period from date of the modification.
d. Make no adjustment for compensation expense.
10.For a cash-settled share-based payment transaction for employee services, the
entity should
a. Recognize in profit or loss the cash paid out to the employees in the final
year.
b. Recognize in profit or loss the cash paid out to the employees over the
vesting period.
C. Recognize in profit or loss the estimate of the cash to be paid out to the
employees over the vesting period.
d. Recognize in profit or loss the grant date fair value of the liability over
the vesting period.
Problem 25-20 Multiple choice (IFRS)
1. The payment for services in cash and based on the price of the entity's ordinary
shares is what type of share-based payment transaction?
a. Asset-settled share-based payment transaction
b. Liability-settled share-based payment transaction
c. Cash-settled share-based payment transaction
 d. Equity-settled share-based payment transaction d. Recognized on the date of exercise

2. A cash-settled share-based payment transaction increases 7.Which statement is true regarding share appreciation right?

a. A current asset a. Any change in estimated total compensation is recorded as a prior pe-
riod error.
b. A noncurrent asset
b. The total amount of compensation is not known until the date the share
c. Equity appreciation right is exercised.
d. A liability c. The liability is adjusted only to reflect each additional year of service.
3. Compensation cost for a share-based payment to employees that is classified as d. The share appreciation right is not recognized.
liability is measured at
8.For cash settled share-based payment transaction, any change in fair value of lia-
a. The change in fair value for each reporting period bility is
b. The total fair value at grant date a. Included in profit or loss
c. The present value of cash payment b. Included in retained earnings
d. The total cash outlay for the period c. Treated as component of other comprehensive income
4. What is the measurement date for share-based payment to employees that is d. Not recognized
classified as liability?
9. If share-based payment transaction provides that the employees have the right
a. The service inception date to choose the settlement whether in cash or shares, the entity is deemed to have is-
b. The grant date sued

c. The settlement date a. A compound financial instrument

d. The end of reporting period b. An equity instrument

5. For share appreciation rights, the measurement date for computing compensa- C. A liability instrument
tion is the d. Either an equity instrument or a liability instrument but not both
a. Date the rights mature 10.If the entity has the choice of settlement in a cash and share alternative, the en -
b. Date the share reaches a predetermined amount tity shall account for the instrument initially as

Date of grant a. Equity only

d. Date of exercise b.. Liability only

6.In accounting for share appreciation right, compensation expense is generally c. Partly equity and partly liability

a. Not recognized d. Either equity or liability but not both

b. Recognized on the date of grant

C. Allocated over the service period of employees