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COVERAGE:
PAS 1: Presentation of Financial Statements
IFRIC 13: Credit Points
IFRIC 19: Equity Swap
PAS 39: Financial Instruments: Recognition and Measurement
PAS 37: Provision, Contingent Assets and Contingent Liabilities
Current Liabilities and Noncurrent Liabilities
Debt Restructuring

Direction: Read and select the best answer for the following questions.

1. Based on the definition of liability in the Framework for the Preparation and Presentation of Financial Statements, the following are the
essential characteristics of liability, except
a. The liability is the present obligation of a particular entity.
b. The liability arises from past transaction or event.
c. The liability should be settled using current assets.
d. The settlement of the liability requires an outflow of resources embodying economic benefits.

2. The following transactions or events will result to a liability, except

a. Receipt of cash advance or deposit from a customer.
b. Declaration of share dividends to stockholders.
c. Acquisition of merchandise inventory on account.
d. Overdraft in cash in bank.

3. PAS 39 provides that an entity shall recognize initially a financial liability at

a. Amortized cost
b. Fair value plus transaction cost that are directly attributable to the issue of the financial liability
c. Amortized cost
d. Face value

4. After initial recognition, PAS 39 provides that an entity shall measure financial liability at
a. Amortized cost
b. Fair value plus transaction cost that are directly attributable to the issue of the financial liability
c. Amortized cost
d. Face value

5. The following statements pertaining to measurement of liabilities are correct, except

a. Interest-bearing noncurrent liability shall be measured at face value.
b. Non-interest-bearing noncurrent liability shall be measured at present value or amortized cost.
c. Current liabilities are discounted and measured at present value or amortized cost.
d. Current liabilities are recorded and reported at their face amount.

6. PAS 1, par. 69, provides that an entity shall classify a liability as current, when, except
a. The entity has an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.
b. The liability is due to be settled within twelve months after the reporting period.
c. The entity holds the liability primarily for the purpose of trading.
d. The entity expects to settle the liability within the entity’s operating cycle.

7. The following are examples of current liabilities, except

a. Income taxes payable
b. Deferred tax liability
c. Financial liabilities held for trading
d. Dividends payable

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8. PAS 1 provides that a liability which is due to be settled within twelve months after the reporting period is classified as current, even if
a. The original term was for a period longer than twelve months.
b. An agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting period and before the
financial statements are authorized for issue.
c. The entity has the discretion to refinance or roll over an obligation for at least twelve months after the reporting period under an
existing loan facility..
d. A liability in which its conditions are breached and the lender has agreed, after the reporting period and before the statements
are authorized for issue, not to demand payment as a consequence of the breach.

9. Under par. 54 of PAS 1, as a minimum, the face of the Statement of Financial Position shall include the following line items for current
liabilities, except
a. Trade and other payables
b. Contingent Liabilities
c. Current tax liability
d. Short-term borrowings
e. Current provisions
f. Current portion of long-term debt

10. They are obligations which exist at the end of reporting period although the amount is not definite.
a. Estimated liabilities
b. Current liabilities
c. Contingent liabilities
d. Secret liabilities

11. As a general rule, the following are considered current liabilities, except
a. Estimated premium liability
b. Valued Added Tax Payable
c. Total Finance Lease Liability
d. Payroll Liability

12. Under generally accepted accounting principles, premium expense shall be recorded
a. On the year the premium inventory is purchased.
b. On the year the sales revenue is recorded.
c. On the year the coupons are redeemed.
d. On the year the premium inventory is distributed to customers.

13. Under IFRIC 13, an entity shall account for the award credits such as “Advantage Points” as
a. A separately component of the initial sale transaction.
b. Part of the sales revenue.
c. A disclosure in the notes to financial statements.
d. An equity component.

14. Under IFIRC 13, award credits shall be measured at

a. Historical cost
b. Present value
c. Fair value → The amount of proceeds allocated to the award credits is measured by reference to their fair value, that is, the
amount for which the award credits could have been sold separately.
d. Face value

15. How shall the award credits recognized as deferred revenue be realized into revenue?
a. Retrospectively by adjusting to retained earnings.
b. Prospectively based on the number of award credits that have been redeemed relative to the total number expected to be
redeemed.
c. Retrospectively based on the number of award credits that have been redeemed relative to the total number expected to be
redeemed.
d. Prospectively based on the number of award credits that have been redeemed relative to the total number of award credits
received.

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16. Under generally accepted accounting principles, warranty expense shall be recorded on
a. The year the warranty is performed.
b. The year the professional who will perform the repair is called.
c. The year the warranty is paid.
d. The year the sales revenue is recorded.

17. Accounting changes pertaining to warranty and premium liability shall be treated as
a. Prospectively as a change in accounting policy
b. Retrospectively as a change in accounting policy
c. Retrospectively as a prior period error
d. Prospectively as a change in accounting estimate

18. PAS 37 defines it as an existing liability of uncertain timing or uncertain amount.

a. Contingent liability
b. Estimated liability
c. Contingent asset
d. Provision

19. PAS 37, par. 11, states that a provision can be distinguished from other liabilities in
a. Its presentation as current liability.
b. Its measurement at amortized cost
c. The sense that there is uncertainty about the timing or amount of the future expenditure required for settlement.
d. The sense that it is a probable obligation of an entity.

20. PAS 37, par. 14, provides that a provision shall be recognized as a liability in the financial statements under the following conditions,
except
a. The entity has a present obligation, legal or constructive, as a result of a past event.
b. It is an existing liability of uncertain timing and uncertain amount.
c. It is probable that an outflow of resources embodying economic benefits would be required to settle the obligation.
d. The amount of the obligation can be measured reliably.

21. It is an obligation arising from a contract, legislation or other operation of law.

a. Constructive obligation
b. Contractual obligation
c. Legal obligation
d. Legislative obligation

22. A constructive obligation is an obligation that is derived from an entity’s actions where:
I. The entity has indicated to other parties that it will accept certain responsibilities by reason of an established pattern of past practice,
published policy, or a sufficiently specific current statement.
II. The entity has created a valid expectation on the part of other parties that it will discharge those responsibilities.
a. I only
b. II only
c. Either I or II
d. Both I and II

23. It is an event that creates a legal or constructive obligation because the entity has no realistic alternative but to settle the obligation created
by the event.
a. Constructive event
b. Legal event
c. Future event
d. Obligating event

24. When is at outflow of resources considered “probable”?

a. When the event is unlikely to occur.
b. When the event is more likely than not to occur.
c. When the possibility of occurrence is 50%.
d. When it is certain that the event will occur.

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25. PAS 37, par. 25, provides that the use of estimates is an essential part of the preparation of financial statements and does not undermine
their reliability. In the case of provision, what amount shall be recognized?
a. The worst estimate of the expenditure required to settle the present obligation at the end of reporting period.
b. The amount that an entity would rationally pay to settle the obligation at the end of reporting period or to transfer it to a third party
at that time.
c. The estimates of outcome are determined by the provisions of PAS 37.
d. The estimates of outcome cannot use the judgment of management of the entity even if supplemented by experience of similar
transactions and reports from independent experts.

26. When there is a continuous range of possible outcomes and each point in that range is as likely as any other, what point of the range is
used as amount of the provision?
a. Any point in the range
b. Highest point in the range
c. Lowest point in the range
d. Mid-point in the range

27. It is statistical method of estimation wherein the obligation is estimated by weighing all possible outcomes by their associated possibilities.
a. Sample method
b. Expected value method
c. Mathematical method
d. Percentage method

28. The following items shall be taken account in measuring a provision, except
a. Risks and uncertainties that inevitably surround events and circumstances.
b. Future events where there is a sufficient evidence that they will occur.
c. Discounting of a provision when the effect is material.
d. Gains from expected disposal of assets.

29. Provisions shall be reviewed at every end of the reporting period and adjusted to reflect the current best estimate. The change shall be
treated
a. Retroactively as a prior-period adjustment
b. Prospectively as a change in accounting policy
c. Retrospectively as a change in accounting estimate
d. Prospectively as a change in accounting estimate

30. The following statements concerning the measurement of a provision are correct, except
a. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the
reimbursement shall be recognized when it is virtually certain that reimbursement would be received if the entity settles the
obligation.
b. A provision shall be used only for expenditures for which the provision was originally recognized.
c. Provision shall be recognized for future operating losses.
d. Cash inflows from the expected disposal of assets are treated separately from the measurement of the provision.

31. Under PAS 37, it is a contract in which the unavoidable costs of meeting the obligation under the contract exceed the economic benefits
expected to be received under it.
a. Bilateral contract
b. Commutative contract
c. Preparatory contract
d. Bilateral contract

32. If an entity has an onerous contract, the present obligation under the contract shall be recognized and measured as a provision. PAS 37
mandates that unavoidable costs under a contract represent the “least net cost of exiting from the contract” which is the
a. Cost of fulfilling the contract.
b. Compensation or penalty arising from the failure to full the contract.
c. Lower between the cost of fulfilling the contract and the compensation or penalty arising from failure to fulfill the contract.
d. Higher between the cost of fulfilling the contract and the compensation or penalty arising from failure to fulfill the contract.

33. The following are examples of a provision, except

a. Provision for environmental contamination
b. Provision for lawsuit

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 c. Provision for guarantee
d. Provision for goodwill

34. It refers to an obligation to dismantle, remove or restore an item of property, plant and equipment as required by law or contract.
a. Provision for lawsuit
b. Provision for decommissioning or abandoning cost
c. Provision for guarantee
d. Provision for environmental contamination

35. Under IFRIC 1, changes in the measurement of an existing decommissioning liability shall be accounted for as follows:
I. A decrease in the liability is deducted from the cost of the asset. If the decrease in liability exceeds the carrying amount, the excess is
recognized in profit or loss.
II. An increase in liability is added to the cost of the asset. However, the entity shall consider whether this is an indication that the
carrying amount of the asset may not be fully recoverable. If there is such an indication, the asset should be tested for impairment.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

36. PAS 37 defines it as a “program that is planned and controlled by management and materially changes either the scope of a business of
an entity or the manner in which that business is conducted.”
a. Retrenchment
b. Restructuring
c. Reorganization
d. Relocation

37. The following are events that may qualify as restructuring, except
a. Sale or termination of a line of business.
b. Closure of business location in a region or relocation of business activities from one location to another or relocation of
headquarters from one country to another.
c. Change in management structure, such as elimination of a layer of management or making all functional units autonomous.
d. Fundamental reorganization of an entity that has a material and significant impact on its operations.
e. Extinguishment of Bonds Payable using cash and cash equivalents.

38. A constructive obligation for restructuring shall be recognized when:

I. The entity has a detailed formal plan for the restructuring outlining at least the business or part of the business being restructured.
II. The entity has raised valid expectation in the minds of those affected that the entity will carry out the restructuring by starting to
implement the plan and announcing its main features to those affected by it.
a. I only
b. II only
c. Either I or II
d. Both I and II

39. A restructuring provision shall include the following, except

a. Direct expenditures arising from restructuring
b. Salaries of employees to be incurred after operations cease
c. Employee benefits associated with the closure of operations
d. Future operating losses

40. PAS 37 specifically excludes the following expenditures from restructuring provision, except
a. Expenditures that are necessarily incurred for restructuring
b. Cost of retraining or relocating continuing staff
c. Marketing or advertising program to promote the new company image
d. Investment in new system and distribution network

41. PAS 37, par. 10, defines a contingent liability as

I. It is a probable obligation that arises from past event and whose existence will be confirmed only by the occurrence or nonoccurrence
of one or more uncertain future events not wholly within the control of the entity.

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II. It is a present obligation that arises from past event but is not recognized because it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured reliably.
a. I only
b. II only
c. Either I or II
d. Neither I nor II

42. A contingent liability shall not be recognized in the financial statements but shall be disclosed only. The required disclosures for contingent
liability under PAS 37 are, except
a. Brief description of the nature of the contingent liability
b. An estimate of its financial effects and indication of the uncertainties that exist
c. Possibility of any reimbursement
d. Amount recognized and presented in the statement of financial position

43. Which of the following statements concerning the recognition of liability is incorrect?
a. When the outcome is probable, the entity shall accrue the liability.
b. When the outcome is reasonably possible, the entity shall disclose the liability.
c. When the outcome is remote, the entity shall not accrue nor disclose the liability.
d. When the outcome is reasonably possible, it is a provision and not contingent liability.

44. Which of the following statements concerning the recognition of asset is incorrect?
a. When the outcome is probable, the entity shall disclose the asset.
b. When the outcome is virtually certain, the entity shall accrue the asset.
c. When the outcome is reasonably possible, the entity shall disclose the asset.
d. When the outcome is remote, the entity shall not accrue nor disclose the asset.

45. PAS 37, par. 10, defines it as a possible asset that arises from past event and whose existence will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future events not wholly within the control of the entity.
a. Probable asset
b. Accrued asset
c. Contingent asset
d. Virtual asset

46. It is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.
a. Bill of exchange
b. Promissory note
c. Check
d. Negotiable instrument

47. It is a situation where the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants to the debtor concession
that would not be granted in a normal business relationship.
a. Debt conversion
b. Debt extinguishment
c. Debt restructuring
d. Debt liquidation

48. The following are types of debt restructuring, except

a. Liability swap
b. Asset swap
c. Equity swap
d. Modification of terms
49. It is the transfer by the debtor to the creditor of any asset, such as real estate, inventory, receivables and investment, in full payment of an
obligation.
a. Liability swap
b. Asset swap
c. Equity swap
d. Modification of terms

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50. PAS 39, par. 41, provides that the gain or loss on debt restructuring through asset swap shall be presented in the profit or loss. How shall
the gain or loss be computed?
a. Carrying amount of the financial liability less fair value of the asset.
b. Carrying amount of the financial liability less fair value of the liability.
c. Carrying amount of the asset less fair value of the asset.
d. Carrying amount of the financial liability less carrying amount of the asset.

51. It is a transaction whereby a debtor and creditor may renegotiate the terms of a financial liability with the result that the liability is fully or
partially extinguished by the debtor issuing equity instruments to the creditor.
a. Liability swap
b. Asset swap
c. Equity swap
d. Modification of terms

52. IFRIC 19 provides that when equity instruments issued to extinguish all or part of a financial liability are recognized initially, an entity shall
measure the equity instrument in what order of priority?
I. Fair value of the financial liability
II. Carrying value of the financial liability
III. Fair value of the equity instrument
a. I-II-III
b. III-I-II
c. II-III-I
d. I-III-II

53. The difference between the carrying amount of the financial liability and the initial measurement of the equity instrument under equity swap
shall be recognized in
a. Profit or loss
b. Share premium
c. Share capital
d. Retained earnings

54. Under equity swap, which of the following statements is false?

a. Share premium will be credited.
b. Gain or loss on debt extinguishment will never arise.
c. Share capital will be credited.
d. The liability account will be debited.

55. PAS 39 provides that a substantial modification of terms of an existing financial liability shall be accounted for as an extinguishment of the
old financial liability and the recognition of a new financial liability. Under Application Guidance 62 of PAS 39, there is substantial
modification of terms if the gain or loss on extinguishment is
a. At least 5% of the old financial liability
b. At least 20% of the new financial liability
c. At least 10% of the old financial liability
d. At least 10% of the new financial liability

56. In discounting the cash flows of the new financial liability in case of substantial modification of terms, what rate shall be used?
a. Original nominal rate
b. Prevailing effective interest rate
c. New nominal rate
d. Original effective interest rate

57. In case there is no substantial modification of terms, the entity

a. Shall recognize gain on debt extinguishment.
b. A new liability is assumed by the entity.
c. The old liability is simply continued but with modified interest charges.
d. The difference between the old and new liability shall be credited to retained earnings.

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