Question 1

On August 1, 2018, ABC Company borrowed cash and signed a one-year interest-bearing note
on which both the principal and interest are payable on August 1, 2019. How will the note
payable and the accrued interest be classified in the statement of financial position at December
31, 2018?

Response: Notes Payable and Interest Payable are Current Liabilities

Score: 1 out of 1 Yes

Question 2
The net income of CYAN, Inc. for 2019 before any deduction for bonus and income tax
amounted to P250,000. Under an incentive compensation plan, the general manager is entitled
to a year-end bonus of 10% of the net income before deducting the bonus but after deducting
the income tax. The tax rate is 35%. The manager’s bonus for 2019 was

Response: 25,000

Score: 1 out of 1 Yes

Question 3
Noah Co.’s liabilities at December 31, 2019 were as follows:

Accounts Payable and Accrued Interest - P2,000,000

5-year 10% Notes Payable – due December 31, 2022 - P5,000,000

Part of the loan agreement is for Noah to appropriate a fixed amount out of its accumulated
profits and losses annually until the amount of the appropriation has equalled the face of the
obligation. As of December 31, 2019, Noah has yet to comply with the loan agreement.

In its December 31, 2019 statement of financial position, Noah should report current liabilities of

Response: 2,000,000

Score: 0 out of 1 No

Question 4
An entity has been served a legal notice at year-end by the Department of Environment and
Natural Resources to fit smoke detectors in its factory on or before middle of next year. The cost
of fitting smoke detector can be measured reliably. How should the entity treat this in its financial
statements at year-end?

Response: No provision is recognized at year-end because there is no present obligation for the
future expenditure since the entity can avoid the future expenditure by changing the method of
operations, but disclosure is required.

Score: 1 out of 1 Yes

Question 5
Faith Company operates a retail store and must determine the proper December 31, 2019
year-end accrual for the following expenses:

(1) The store lease calls for fixed rent of P6,000 per month, payable at the beginning of the
month, and an additional rent equal to 6% of net sales over P1,250,000 per calendar year,
payable on January 31 of the following year. Net sales for 2019 were P2,250,000.

(2) An electric bill of P4,250 covering the period December 17, 2019 through January 16,
2020 was received January 23, 2020.

(3) A P2,000 telephone bill was received on January 4, 2020, covering:

(3.1) Service in advance for January 2020 – P750
(3.2) Local and toll calls for December 2019 – P1,250

In its December 31, 2019 statement of financial position, what amount of accrued liabilities
should Faith report?

Response: 63,375

Score: 1 out of 1 Yes

Question 6
Which of the following is a current liability?

Response: A cash dividend payable to preferred shareholders

Score: 1 out of 1 Yes

Question 7
Some liabilities, such as trade payables, accrual for employee and other operating costs, are
expected to be settled in more than twelve months after the reporting period. How will an entity
classify these items in the statement of financial position?

Response: Current.

Score: 1 out of 1 Yes

Question 8
In November and December 2018, AZURE Company received P792,000 for 1,000, 3-year
subscriptions at P264 per issue per year, starting with the January 2019 issue. AZURE elected
to include the entire P792,000 in its 2018 income statement for tax purposes.

What amount should AZURE report in its 2018 statement of financial position as unearned
subscription revenue?

Response: 792,000

Score: 1 out of 1 Yes

Question 9
A cable television company receives deposits from customers, which are refunded when
service is terminated. The average customer stays with the company eight years. How should
these deposits be shown on the financial statements?

Response: Liability

Score: 1 out of 1 Yes

Question 10
Which of the following statements concerning discount on note payable is incorrect?

Response: Amortizing the discount on note payable causes the carrying amount of the liability to
gradually decrease over the life of the note.

Score: 1 out of 1 Yes

Question 11
A debt instrument was designated by the company financial liabilities at fair value through profit
and loss. At the end of the year, its carrying amount is lower compared to its fair value. The
difference is reported as

Response: Loss as part of P&L

Score: 1 out of 1 Yes

Question 12
CRIMSON Company requires refundable advance payments with special orders for machinery
constructed to customer’s specifications. Information for 2018 is as follows:
Customer advances – balance, December 31, 2017- 885,000
Advances received with orders in 2018 - 1,380,000
Advances applied to orders shipped in 2018 - 1,230,000
Advances applicable to orders cancelled in 2018 - 375,000
What amount should CRIMSON report as current liability for customer’s deposits in its
December 31, 2018 statement of financial position?

Response: 1,035,000

Score: 1 out of 1 Yes

Question 13
A company borrowed cash from a bank and issued to the bank a short-term non-interest
bearing note payable. The bank discounted the note at 10% and remitted the proceeds to the
company. The effective interest rate paid by the company in this transaction would be

Response: Less than the stated discount rate of 10%

Score: 0 out of 1 No

Question 14
What is a present obligation?

Response: Both legal and constructive obligation

Score: 1 out of 1 Yes

Question 15
An estimated liability is an obligation that is uncertain as to

Response: amount but not in existence

Score: 1 out of 1 Yes

Question 16
A convertible bond is a non-derivative financial instrument that contains both a liability and
equity component. Such components have to be classified separately as financial liabilities or
equity instrument using

Response: Residual Value Method

Score: 1 out of 1 Yes

Question 17
Under the effective interest method of amortization, the interest expense is equal to

Response: the market rate of interest multiplied by the beginning carrying amount of the bonds.
Score: 1 out of 1 Yes

Question 18
Obligation to transfer an economic resource include the following except

Response: Obligations to issue an equity securities as bonus issue

Score: 1 out of 1 Yes

Question 19
The company issued preference shares that provide for mandatory redemption of the issuer for
a fixed or determinable amount at a fixed or determinable future date. These preference shares
will be recognized in the financial statements as

Response: Liability

Score: 1 out of 1 Yes

Question 20
BLUSH Company sells office equipment contracts agreeing to service equipment for a two-year
period. Cash receipts from contracts are credited to unearned service contract revenue and
service contract costs are charged to service contract expense as incurred. Revenue from
service contract is recognized as earned over the lives of the contracts.

Additional information for the year ended December 31, 2018 is as follows:
Unearned service contract revenue, January 1, 2018 - 600,000
Cash receipts from service contract sold - 980,000
Service contract revenue recognized - 860,000
Service contract expense - 520,000

What amount should BLUSH report as unearned service contract revenue at December 31,
2018?

Response: 720,000

Score: 1 out of 1 Yes

Question 21
The publisher of a popular magazine offers a special discounted price for a three-year
subscription. At the balance sheet date, the revenue, which has already been collected but
pertains to future periods, is best referred to as

Response: Unearned subscription revenue ( a liability account)

Score: 1 out of 1 Yes

Question 22
Which does not belong to the group as regards measurement of liabilities?

Response: Historical Cost

Score: 1 out of 1 Yes

Question 23
Which of the following does not meet the definition of a liability?

Response: An obligation to provide goods or services in the future.

Score: 0 out of 1 No

Question 24
At year-end, an entity was suing a competitor for patent infringement. The award from the
probable favorable outcome could be reasonably estimated. The entity’s financial statements
should report the expected award as

Response: disclosure only.

Score: 1 out of 1 Yes

Question 25
At December 31, 2019, Excel Company had a note payable of P2,500,000, due on April 15,
2020. Excel expects to retire this debt with proceeds from the sale of 100,000 shares of its
ordinary shares. The shares were sold for P15 per share on March 2, 2020 prior to the issuance
of year-end financial statements.

In Excel’s statement of financial position dated December 31, 2019, what amount of notes
payable should be excluded from current liabilities?

Response: 0

Score: 1 out of 1 Yes

Question 26
Bright Company frequently borrows from the bank in order to maintain sufficient operating cash.
The following loans were at 12% interest rate with interest payable at maturity. Bright repaid
each loan on its scheduled maturity.
Loan 1:
Date of Loan – November 1, 2018
Amount – P500,000
Maturity Date – October 30, 2019
Term of Loan – 1 year

Loan 2:
Date of Loan – February 1, 2019
Amount – P1,500,000
Maturity Date – July 31, 2019
Term of Loan – 6 months

Loan 3:
Date of Loan – May 1, 2019
Amount – P800,000
Maturity Date – January 31, 2020
Term of Loan – 9 months

Bright records interest expense when the loans are repaid. As a result, interest expense of
P150,000 was recorded in 2019.

If no correction is made, by what amount would 2019 interest expense be understated?

Response: 72,000

Score: 0 out of 1 No

Question 27
A debt instrument was designated by the company financial liabilities at held for trading. At the
end of the year, its carrying amount is higher compared to its fair value. The difference is
reported as

Response: Gain as part of P&L

Score: 1 out of 1 Yes

Question 28
When the word accrued is used in connection with a current liability, it means

Response: An expense has been incurred, but is unpaid at the financial statement date

Score: 1 out of 1 Yes

Question 29
Included in Hope’s liability account balances at December 31, 2020 were the following:
(1) 14% note payable issued October 1, 2020, maturing September 30, 2021 - P1,275,000
(2) 16% note payable issued April 1, 2018 payable in six annual instalments of P510,000
beginning April 1, 2019.

Hope’s December 31, 2020 financial statements were issued on March 31, 2021. On January
15, 2021, the entire P2,040,000 balance of the 16% note was refinanced by issuance of a long-
term obligation payable in lump sum. In addition, on March 10, 2021, Hope consummated a
non-cancellable agreement with the lender to refinance the 14%, P1,275,000 note on a long-
term basis, on readily determinable terms that have not yet been implemented. Both parties are
financially capable of honouring the agreement and there have been no violations of the
agreement’s provisions.

On December 31, 2020 statement of financial position, the amount of the notes payable that
Hope should classify as current liabilities is

Response: 1,785,000

Score: 1 out of 1 Yes

Question 30
A liability shall be classified as current when it satisfies any of the following criteria, except

Response: The entity has an unconditional right to defer settlement of the liability for at least
twelve months after the date of the statement of financial position

Score: 1 out of 1 Yes

Question 31
LUNTIAN Corporation’s current liabilities at December 31, 2018 totaled P1,500,000 BEFORE
any necessary year-end adjustment relating to the following transaction:
• On December 23, 2018, a vendor authorized LUNTIAN to return for full credit,
merchandise shipped and billed at P45,000 on December 9, 2018. LUNTIAN shipped the
returned items on December 29, 2018. A P45,000 credit memo was received and recorded by
LUNTIAN on January 2, 2019.
• During December 2018, LUNTIAN received P75,000 from PINK, a customer, as an
advance payment for a handicraft that LUNTIAN will make to PINK’s specifications. From this
transaction, LUNTIAN has a P75,000 credit balance in its accounts receivable from PINK at
December 31, 2018.
What amount should LUNTIAN report as current liabilities in its December 31, 2018 statement
of financial position?

Response: 1,530,000

Score: 1 out of 1 Yes

Question 32
An entity operates chemical plants. Its published policies include a commitment to making good
any damage caused to the environment by its operations. It has always honored this
commitment. Which of the following scenarios relating to the entity would give rise to an
environmental provision?

Response: A chemical spill from one of the entity’s plants has caused harm to the surrounding
area and wildlife.

Score: 1 out of 1 Yes

Question 33
A retail store received cash and issued gift certificates that are redeemable in merchandise.
The gift certificates lapse one year after they are issued. How should the deferred revenue
account be affected by each of the following transactions?

Response: Redemption of certificates - decrease; Lapse of certificates - no effect

Score: 0 out of 1 No

Question 34
Noah Co.’s liabilities at December 31, 2019 were as follows:

Accounts Payable and Accrued Interest - P2,000,000

5-year 10% Notes Payable – due December 31, 2022 - P5,000,000

Part of the loan agreement is for Noah to appropriate a fixed amount out of its accumulated
profits and losses annually until the amount of the appropriation has equalled the face of the
obligation. As of December 31, 2019, Noah has yet to comply with the loan agreement.

On December 31, 2019, the lender agreed to provide a grace period of 12 months for the entity
to rectify the breach and assured Noah that o demand of payment is to be made within the
grace period.

In its December 31, 2019 statement of financial position, Noah should report current liabilities of

Response: 7,000,000

Score: 0 out of 1 No

Question 35
Johnson Apparel, Inc. operates a retail store and must determine the proper December 31,
2018 year-end accrual for the following expenses:
The store lease calls for fixed rent of P10,000 per month, payable at the beginning of the month,
and additional rent equal to 6% of net sales over P2,000,000 per calendar year, payable on
January 31 of the following year. Net sales for 2018 are P8,000,000.

Johnson has property subject to a city property tax. The city's fiscal year runs from July 1 to
June 30 and the tax, assessed at 3% of property on hand at April 30, is payable on June 30.
Johnson estimates that its property tax will amount to P60,000 for the fiscal year ending June
30, 2019.

In its December 31, 2018 statement of financial position, how much should Johnson report as
accrued expenses?

Response: 390,000

Score: 1 out of 1 Yes

Question 36
Which is not an essential characteristic of an accounting liability?

Response: The liability is payable to a specifically identifiable payee

Score: 1 out of 1 Yes

Question 37
Statement 1: Only items that meet the definition of a liability are recognised in the statement of
financial position.

Statement 2: Not all items that meet the definition of one of those elements are recognised.

Response: Both statements are correct.

Score: 1 out of 1 Yes

Question 38
How would the proceeds received from an advance sale of non-refundable tickets for a
theatrical performance be reported in the seller’s financial statements before the performance?

Response: Unearned revenue for the entire proceeds

Score: 1 out of 1 Yes

Question 39
GREEN Co.’s accounts payable at December 31, 2018 totaled P1,600,000 before any
necessary year-end adjustments relating to the following transactions:
• On December 27, 2018, GREEN wrote and recorded checks to creditors totaling
P70,000 causing an overdraft of P200,000 in GREEN’s bank account at December 31, 2018.
The checks were mailed out on January 10, 2019.
• On December 28, 2018, GREEN purchased and received goods for P300,000, terms
2/10, n/30. GREEN records purchases and accounts payable at net amounts. The invoice was
recorded and paid January 2, 2019.
• Goods shipped FOB destination on December 20, 2018 from a vendor was received on
January 2, 2019. The invoice prices was P130,000.

At December 31, 2018, what amount should GREEN report as total accounts payable?

Response: 2,594,000

Score: 1 out of 1 Yes

Question 40
For a liability to exist

Response: a past transaction or event must have occurred.

Score: 1 out of 1 Yes

Question 41
An analysis of CREAM Company’s liabilities disclosed the following:
Accounts payable, after deducting debit balances in suppliers’ accounts amounting to P22,500
(accounts payable included non-trade liabilities of P32,500) - 105,000
Accrued expenses - 15,000
Credit balances of customers’ accounts - 13,500
Stock dividends payable - 70,000
Claims for increase in wages and allowances by employees of the company, covered in a
pending lawsuit - 125,000
Estimated liabilities for premiums - 60,000

How much should be presented as total current liabilities in the statement of financial position?

Response: 216,000

Score: 1 out of 1 Yes

Question 42
Included in Light Co.’s liability account balances at December 31, 2019 were the following:

(1) 14% note payable issued October 1, 2018, maturing September 30, 2020 - P1,250,000
(2) 16% note payable issued April 1, 2017, due on April 2020 - P2,000,000

On December 31, 2019, the company expects to refinance the P2,000,000 by the issuance of a
long-term note payable in lump sum. The refinancing of the P2,000,000 is at the discretion of
Light. Light’s December 31, 2019 financial statements were issued on March 31, 2020. On
January 15, 2020, the entire P2,000,000 balance of the 16% note was refinanced by the
issuance of a long-term obligation.

On the December 31, 2019 statement of financial position, what amount of the notes payable
should Light classify as current liabilities?

Response: 3,250,000

Score: 0 out of 1 No

Question 43
Statement 1: An entity’s customary practice, published policy or specific statement gives rise to
a present obligation.

Statement 2: A present obligation can exist even if a transfer of economic resource cannot be
enforced until some point in the future.

Response: Only Statement 2 is correct.

Score: 1 out of 1 Yes

Question 44
MAGENTA Company sells its products in reusable, expensive containers. The customer
charged a deposit for each container delivered and receives a refund for each container
returned within two years after the year of delivery. Inter accounts for the containers not
returned within the time limit as being retired by sale at the deposit amount. Information for 2018
is as follows:
Deposits for containers at December 31, 2017 from deliveries in
2016 150,000
2017 430,000
Deposits for containers delivered in 2018 780,000
Deposits for containers returned in 2018 from deliveries in
2016 90,000
2017 250,000
2018 286,000

What amount should MAGENTA report as a liability for deposits on returnable containers at
December 31, 2018?
Response: 494,000

Score: 1 out of 1 Yes

Question 45
The measurement basis often used to report a long-term payable requiring a commitment to
pay money at a determinable future date is

Response: Present value of future cash flows

Score: 1 out of 1 Yes

Question 46
. NAVY Co. guarantee a loan of P200,000 granted to BLUE. At the time when the financial
statements of NAVY are being finished, it is clear that BLUE is in financial difficulties and it is
probable NAVY will meet the guarantee.

In the financial statements, NAVY should

Response: Recognize a provision for liability of P200,000 and also disclose in the notes to
financial statements

Score: 1 out of 1 Yes

Question 47
The simultaneous recognition of income and related expenses is sometimes referred to as the

Response: matching of costs with income

Score: 1 out of 1 Yes

Question 48
Statement 1: If new legislation is enacted, a present obligation arises only when, as a
consequence of obtaining economic benefits or taking an action to which that legislation applies,
an entity will or may have to transfer an economic resource that it would not otherwise have had
to transfer.

Statement 2: The enactment of legislation is in itself sufficient to give an entity a present

obligation.

Response: Only Statement 1 is correct.

Score: 1 out of 1 Yes

Question 49
Contingent liability will or will not become actual liabilities depending on

Response: the outcome of future event.

Score: 1 out of 1 Yes

Question 50
CHARTREUSE Store sells gift certificates, redeemable for store merchandise that expires one
year after their issuance. CHARTREUSE has the following information pertaining to its gift
certificate sales and redemptions:
Unearned at December 31, 2017 600,000
2018 sales 2,000,000
2018 redemptions of prior year sales 200,000
2018 redemptions of current years sales 1,400,000

CHARTREUSE’ experience indicates that 10% of gift certificates sold will not be redeemed.

In its December 31, 2018 statement of financial position, what amount should CHARTREUSE
report as unearned revenue?

Response: 800,000

Score: 0 out of 1 No