Since 1977
FAR
FAR.2936 – Non-financial Liabilities Summary (DIY)
1. Which of the following is not a characteristic of a
liability?
a. It represents a probable, future sacrifice of
economic benefits.
b. It arises from present obligations to other entities.
c. It results from past transactions or events.
d. It must be payable in cash.
2. 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.
3. An entity made an unusually high profit for the current
year because it negotiated a significantly lower cost
price for its main raw material at a time when the
selling price of its products was rising sharply.
Management does not want to make public the
unusually high profit because they believe that
knowledge of the entity’s profitability would result in
their customers seeking to negotiate lower selling
prices when purchasing goods from the entity.
Consequently, management would like to decrease
profit for the year by recognizing a provision for
unforeseen possible expenses.
a. Because creation of the provision is prudent, it is
acceptable accounting.
b. Because creation of the provision is common
practice in the jurisdiction in which the entity
operates, it is acceptable accounting.
c. Because they do not satisfy the definition of a
liability, the entity cannot create a provision for
unforeseen possible expenses.
d. Provided the reason for creating the provision is
explained in the notes, it is acceptable accounting.
4. Which of the following is a situation that would
normally lead to a lease being classified as a finance
lease?
a. The lease assets are of a specialized nature such
that only the lessee can use them without major
modifications being made.
b. If the lessee is entitled to cancel the lease, the
lessor's losses associated with the cancellation are
borne by the lessee.
c. Gains or losses from fluctuations in the fair value
of the residual fall to the lessee (for example, by
means of a rebate of lease payments).
d. The lessee has the ability to continue to lease for a
secondary period at a rent that is substantially
lower than market rent.
5. Which of the following statements is true?
a. In a finance lease, the lessee, but not the lessor,
should use present value computations in
recording and reporting the lease results.
b. Accounting symmetry is said to exist in accounting
for leases when the lessor and lessee record the
same amounts but the accounts and the
debits/credits are reciprocal.
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OCAMPO/SOLIMAN/OCAMPO
OCTOBER 2020
c. There is always "accounting symmetry" for
recording and reporting leases between the lessor
and lessee.
d. A finance lease does not transfer substantially all
of the risks and rewards of ownership from the
lessor to the lessee, whereas an operating lease
does.
6. Which statement is correct?
a. The distinction between a direct-financing lease
and a sales-type lease is the presence or absence
of a transfer of title.
b. Lessors classify and account for all leases that
don’t qualify as sales-type leases as operating
leases.
c. Only the lessee makes the distinction of classifying
leases as operating or finance leases.
d. Lessors classify and account for all leases that do
not qualify as direct-financing or sales-type leases
as operating leases.
7. Inrelation to leases, initial direct costs exclude
a. Commissions
b. Legal fees
c. Internal costs that are incremental and directly
attributable to negotiating and arranging a lease
d. General overheads such as those incurred by a
sales and marketing team
8. 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. Recognize all finance
payments in statement of comprehensive income.
b. Treat as a receivable equal to gross amount
receivable on lease. Recognize finance payments in
cash and by reducing debtor.
c. Treat as a receivable equal to net investment in
the lease. Recognize finance payment by reducing
debtor and taking interest to statement of
comprehensive income.
d. Treat as a receivable equal to net investment in
the lease. Recognize finance payments in cash and
by reduction of debtor.
9. Lessors should show assets that are out on operating
leases and income from there as follows:
a. The asset should be shown in the statement of
financial position according to its nature with the
lease income going to the statement of
comprehensive income.
b. The asset should be kept off the statement of
financial position and the lease income should go
to reserves.
c. The asset should be kept off the statement of
financial position and the lease income should go
to the statement of comprehensive income.
d. The asset should be shown in the statement of
financial position according to its nature and the
lease income should go to reserves.
FAR.2936
EXCEL PROFESSIONAL SERVICES, INC.
10. Which statement is incorrect regarding measurement
of lease liabilities in accordance with PFRS 16?
a. A company measures lease liabilities at the present
value of future lease payments.
b. Lease liabilities include only economically
unavoidable payments.
c. Lease liabilities include fixed payments (including
inflation-linked payments) and only those optional
payments that the company is reasonably certain
to make.
d. Lease liabilities include variable lease payments
linked to future use or sales.
11. Lease liabilities do not include
a. Fixed payments
b. Inflation-linked payments
c. Optional payments that the company is reasonably
certain to make
d. Variable lease payments linked to future use or
sales
12. Which of the following is most likely an effect of PFRS
16 on lessor’s financial statements?
a. Increase in finance lease receivables.
b. Increase in finance income
c. Increase in asset turnover.
d. None of the above.
13. An entity contributes to an industrial pension plan that
provides a pension arrangement for its employees. A
large number of other employers also contribute to the
pension plan, and the entity makes contributions in
respect of each employee. These contributions are kept
separate from corporate assets and are used together
with any investment income to purchase annuities for
retired employees. The only obligation of the entity is
to pay the annual contributions. This pension scheme
is a
a. Multiemployer plan and a defined contribution
scheme
b. Multiemployer plan and a defined benefit scheme
c. Defined contribution plan only
d. Defined benefit plan only
14. Visor Co. maintains a defined benefit pension plan for
its employees. The service cost component of Visor’s
net periodic pension cost is measured using the
a. Unfunded accumulated benefit obligation.
b. Unfunded vested benefit obligation.
c. Projected benefit obligation.
d. Expected return on plan assets.
15. Service cost excludes
a. Current service cost
b. Past service cost
c. Gain or loss on settlement
d. Actuarial gains and losses
16. Current service cost is
a. The increase in the present value of the defined
benefit obligation resulting from employee service
in the current period.
b. The change in the present value of the defined
benefit obligation for employee service in prior
periods.
c. The difference between the present value of the
defined benefit obligation being settled, as
determined on the date of settlement and the
settlement price, including any plan assets
transferred and any payments made directly by the
entity in connection with the settlement.
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d. The change during the period in the net defined
benefit liability (asset) that arises from the
passage of time.
17. Which of these events will cause a change in a defined
benefit obligation?
I. Changes in mortality rates or the proportion of
employees taking early retirement.
II. Changes in the estimated salaries or benefits that
will occur in the future.
III. Changes in the estimate employee turnover.
IV. Changes on the discounted rate used to calculate
defined benefit liabilities and the value of assets.
a. I, II, III and IV c. I, II and IV
b. II and III d. II, III and IV
18. Which of these elements are taken into account when
determining the discount rate to be used?
a. Markets yields at the balance sheets dates on high-
quality corporate bonds
b. Investment or actuarial risk
c. Specific risk associated with the entity's business
d. Risk that future experiences may differ from
actuarial assumptions
19. In accordance with PAS 19, the discount rate used to
determine defined benefit cost reflects
a. Time value of money
b. Actuarial risk
c. Investment risk.
d. All of the above
20. The return on plan assets is interest, dividends and
other income derived from the plan assets, together
with realized and unrealized gains or losses on the plan
assets, less:
a. Any costs of managing plan assets.
b. Any tax payable by the plan itself, other than tax
included in the actuarial assumptions used to
measure the present value of the defined benefit
obligation.
c. Both a and b.
d. Neither a nor b.
21. In accordance with the revised PAS 19, which of the
following can be deferred?
a. Actuarial gains and losses
b. Past service cost if not yet vested
c. Both a and b
d. Neither a nor b
22. In determining the present value of the prospective
benefits (often referred to as the defined benefit
obligation), the following are considered by the
actuary:
a. Retirement and mortality rate.
b. Interest rates.
c. Benefit provisions of the plan.
d. All of these factors.
23. An entity has decided to improve its defined benefit
pension scheme. The benefit payable will be
determined by reference to 60 years service rather
than 80 years service. As a result, the defined benefit
pension liability will increase by P10 million. The
average remaining service lives of the employees is 10
years. How should the increase in the pension liability
by P10 million be treated in the financial statements?
a. The past service cost should be charged against
retained profit
b. The past service cost should be charged against
profit or loss for the year
FAR.2936
EXCEL PROFESSIONAL SERVICES, INC.
c. The past service cost should be spread over the
remaining working lives of the employees
d. The past service cost should not be recognized
24. An entity changes its defined benefit pension plan to a
defined contribution plan. The entity agrees with the
employees to pay them P9 million in total on the
introduction of a defined contribution plan. The
employees forfeit any pension entitlement for the
defined benefit plan. The pension liability recognized in
the balance sheet was P10 million. How should this
curtailment be accounted?
a. A settlement gain of P1 million should be shown
b. The pension liability should be credited to reserves
and a cash payment of P9 million should be shown
in expense in the income statement
c. The cash payment should go to reserves and the
pension liability should be shown as a credit to the
income statement
d. A credit to reserves should be made of P1 million
25. When an employee has rendered service to an entity
during an accounting period, the entity shall recognize
the undiscounted amount of short-term employee
benefits expected to be paid in exchange for that
service:
a. As a liability, after deducting any amount already
paid.
b. As an expense, unless another PFRS requires or
permits the inclusion of the benefits in the cost of
an asset.
c. Both a and b
d. Neither a nor b
26. Which one of the following factors will be reflected in
the amount of a short-term employee benefit
obligation measured in accordance with PAS 19
Employee Benefits?
a. The risk-free interest rate
b. Salary rates current at reporting date
c. Salary rates that reflect the future sacrifice
d. Interest rates on high-quality corporate bonds
27. On June 1, 20X4, an entity offered its employees share
options subject to the award being ratified in a general
meeting of the shareholders. The award was approved
by a meeting on September 5, 20X4. The entity's year-
end is June 30. The employees were to receive the
share options on June 30, 20X6. At which date should
the fair value of the share options be valued for the
purposes of PFRS 2?
a. June 1, 20X4. c. September 5, 20X4.
b. June 30,20X4. d. June 30, 20X6.
28. The entity has issued a range of share options to
employees. What type of share-based payment does
this represent?
a. Asset settled share-based payment.
b. Cash settled share-based payment.
c. Equity settled share-based payment.
d. Liability settled share-based payment.
29. In accounting for share-based compensation under
PFRS 2, what interest rate is used to discount both the
exercise price of the option and the future dividend
stream?
a. The risk-free interest rate.
b. The firm’s known incremental borrowing rate.
c. Any rate that firms can justify as being reasonable.
d. The current market rate that firms in that
particular industry use to discount cash flows.
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30. Under PFRS2 Share-based payment, in which ONE of the
following will a cash-settled share-based payment give
rise to an increase?
a. A current asset c. Equity
b. A non-current asset d. A liability
31. In accordance with PFRS2 Share-based payment, how,
if at all, should an entity recognize the change in the fair
value of the liability in respect of a cash-settled share-
based payment transaction?
a. Should not recognize in the financial statements but
disclose in the notes thereto
b. Should recognize in the statement of changes in
equity
c. Should recognize in other comprehensive income
d. Should recognize in profit or loss
32. In relation to provisions, for a present obligation to
exist, which one of the following factors must be
present?
a. The obligation must be capable of being reliably
measured.
b. The entity must have a legal obligation that can be
enforced by law.
c. The entity must have no realistic alternative to
settling the obligation.
d. It must be more likely than less likely that there
will be a future flow of economic benefits.
33. In accordance with the requirements of PAS 37
Provisions, Contingent Liabilities and Contingent
Assets, where measurement uncertainty exists, which
one of the following methods is not an appropriate
valuation for a provision based on accounting
standards?
a. The mid-point of a range of equally likely outcomes
of expenditure.
b. No provision should be recognized where
measurement uncertainty exists.
c. The minimum amount expected to represent a best
estimate, where the other option is omission.
d. The most likely amount expected to represent a
best estimate, where there is a single obligation.
34. Which statement is incorrect regarding distinction
between provisions and accruals?
a. Provisions can be distinguished from accruals
because there is uncertainty about the timing or
amount of the future expenditure required in
settlement.
b. Accruals are liabilities to pay for goods or services
that have been received or supplied but have not
been paid, invoiced or formally agreed with the
supplier, including amounts due to employees.
c. Although it is sometimes necessary to estimate the
amount or timing of accruals, the uncertainty is
generally much less than for provisions.
d. Accruals and provisions are often reported as part
of trade and other payables.
35. A contingent liability
a. Definitely exists as a liability but its amount and
due date are indeterminable.
b. Is accrued even though not reasonably estimated.
c. Is the result of a loss contingency.
d. Is not recognized in the financial statements.
36. Which of the following is the proper way to report a
probable contingent asset?
a. As an accrued amount.
b. As deferred revenue.
FAR.2936
EXCEL PROFESSIONAL SERVICES, INC.
c. As an account receivable with additional disclosure
explaining the nature of the contingency.
d. As a disclosure only.
37. Ortiz Corporation, a manufacturer of household paints,
is preparing annual financial statements at December
31. Because of a recently proven health hazard in one
of its paints, the government has clearly indicated its
intention of having Ortiz recall all cans of this paint
sold in the last six months. The management of Ortiz
estimates that this recall would cost P800,000. What
accounting recognition, if any, should be accorded this
situation?
a. No recognition
b. Note disclosure only
c. Operating expense of P800,000 and liability of
P800,000
d. Appropriation of retained earnings of P800,000
38. Information available prior to the issuance of the
financial statements indicates that it is probable that, at
the date of the financial statements, a company has a
present obligation related to product warranties. The
amount of the expense involved can be reasonably
estimated. Based on the above facts, the estimated
warranty expense should be
a. Accrued.
b. Disclosed but not accrued.
c. Neither accrued nor disclosed.
d. Classified as an appropriation of retained earnings.
39. Which of the following is not considered when
evaluating whether or not to record a liability for
pending litigation?
a. Time period in which the underlying cause of action
occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the
amount of the loss.
40. A competitor has sued an entity for unauthorized use
of its patented technology. The amount that the entity
may be required to pay to the competitor if the
competitor succeeds in the lawsuit is determinable with
reliability, and according to the legal counsel it is less
than probable (but more than remote) that an outflow
of the resources would be needed to meet the
obligation. The entity that was sued should at year-
ended:
a. Recognize a provision for this possible obligation.
b. Make a disclosure of the possible obligation in
footnotes to the financial statements.
c. Make no provision or disclosure and wait until the
lawsuit is finally decided and then expense the
amount paid on settlement, if any.
d. Set aside, as an appropriation, a contingency
reserve, an amount based on the best estimate of
the possible liability.
41. What condition is necessary to recognize an
environmental liability?
a. Company has an existing legal obligation and can
reasonably estimate the amount of the liability
b. Company can reasonably estimate the amount of
the liability
c. Company has an existing legal obligation
d. Obligation event has occurred
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42. A company is legally obligated for the costs associated
with the retirement of a long-lived asset
a. Only when it hires another party to perform the
retirement activities.
b. Only if it performs the activities with its own
workforce and equipment.
c. Whether it hires another party to perform the
retirement activities or performs the activities
itself.
d. When it is probable the asset will be retired.
43. To record an environmental liability, the cost
associated with the liability is:
a. Included in the carrying amount of the related
long-lived asset
b. Expressed
c. Included in a separate account
d. None of these answer choices are correct
44. Which of the following is a contingency that should be
accrued?
a. The company is being sued and a loss is
reasonably possible and reasonably estimable.
b. The company deducts life insurance premiums
from employees' paychecks.
c. The company offers a two-year warranty and the
expenses can be reasonably estimated.
d. It is probable that the company will receive
P1,000,000 in settlement of a lawsuit.
45. All of the following are examples of provision, EXCEPT
a. Advanced receipt of subscription
b. Environmental contamination
c. Warranty and guarantee
d. Pending court case
46. A restructuring is a programme that is planned and
controlled by management, and materially changes:
a. The scope of a business undertaken by an entity
b. The manner in which that business is conducted
c. Either a or b
d. Neither a nor b
47. The board of directors of ABC Inc. decided on
December 15, to wind up international operations in
the Middle East and move them to China. The decision
was based on a detailed formal plan of restructuring.
This decision was conveyed to all workers and
management personnel at the headquarters in Manila.
How should ABC Inc. treat this restructuring in its
financial statements for the year-end December 31?
a. Because ABC Inc. has not announced the
restructuring to those affected by the decision and
thus has not raised an expectation that ABC Inc.
will actually carry out the restructuring (and as no
constructive obligation has arisen) only disclose
the restructuring decision and the cost of
restructuring in footnotes to the financial
statements.
b. Recognize a provision for restructuring since the
board of directors has approved it and it has been
announced in the headquarters of ABC Inc. in
Manila.
c. Mention the decision to restructure and the cost
involved in the chairman's statement in the annual
report since it is a decision of the board of
directors.
d. Do nothing in this year's financial statements.
FAR.2936
EXCEL PROFESSIONAL SERVICES, INC.

48. The rationale for inter-period income tax allocation is
to
a. Recognize a tax asset or liability for the tax
consequences of temporary differences that exist
at the balance sheet date.
b. Recognize a distribution of earnings to the taxing
agency.
c. Reconcile the tax consequences of permanent and
temporary differences appearing on the current
year's financial statements.
d. Adjust income tax expense on the income
statement to be in agreement with income taxes
payable on the balance sheet.
49. Which of the following examples would not give rise to
a temporary difference?
a. Revenue from installment sales recognized under
the installment method for taxation.
b. Straight-line depreciation used for accounting
purposes while an accelerated method is used for
tax purposes.
c. Warranty costs recognized for accounting purposes
but not recognized for tax purposes until paid.
d. Recognition of goodwill in a business combination.
50. Which of the following differences would result in
future taxable amounts?
a. Expenses or losses that are tax deductible after
they are recognized in financial income.
b. Revenues or gains that are taxable before they are
recognized in financial income.
c. Revenues or gains that are recognized in financial
income but are never included in taxable income.
d. Expenses or losses that are tax deductible before
they are recognized in financial income.
51. The deferred tax expense is the
a. Increase in balance of deferred tax asset minus the
increase in balance of deferred tax liability.
b. Increase in balance of deferred tax liability minus
the increase in balance of deferred tax asset.
c. Increase in balance of deferred tax asset plus the
increase in balance of deferred tax liability.
d. Decrease in balance of deferred tax asset minus
the increase in balance of deferred tax liability.
52. Under PAS 12, deferred tax assets and liabilities are
measured at the tax rates that:
a. Are expected to apply when the asset is recovered
or the liability is settled.
b. Applied at the beginning of the reporting period.
c. At the end of the reporting period.
d. At the rates that prevail at the reporting date.
53. Which statement is correct regarding recovery of
underlying asset in PAS 12?
a. PAS 12 requires an entity to measure deferred tax
relating to an asset on a sale basis.
b. Deferred tax on investment property measured at
fair value is always required to be determined
using the presumption that the carrying amount of
the underlying asset will be recovered through sale
c. Deferred tax on non-depreciable assets measured
using the revaluation model in PAS 16 will always
be determined on a sale basis.
d. All of the above.
54. At the December 31, 20X1 statement of financial
position date, Unruh Corporation reports an accrued
receivable for financial reporting purposes but not for
tax purposes. When this asset is recovered in 20X2, a
future taxable amount will occur and
a. Pretax financial income will exceed taxable income
in 20X2.
b. Total income tax expense for 20X2 will exceed
current tax expense for 20X2.
c. Unruh will record an increase in a deferred tax
asset in 20X2.
d. Unruh will record a decrease in a deferred tax
liability in 20X2.
55. The tax expense related to profit or loss of the period
is required to be presented:
a. On the face of the statement of financial position
b. On the face of the statement of profit or loss
c. In the statement of cash flows
d. In the statement of changes in equity
J - end of FAR.2936 - J

SUGGESTED ANSWERS
1. D 11. D 21. D 31. D 41. A 51. B
2. D 12. D 22. D 32. C 42. C 52. A
3. C 13. A 23. B 33. B 43. A 53. C
4. A 14. C 24. A 34. D 44. C 54. D
5. B 15. D 25. C 35. D 45. A 55. B
6. D 16. A 26. C 36. D 46. C
7. D 17. A 27. C 37. C 47. A
8. C 18. A 28. C 38. A 48. A
9. A 19. A 29. A 39. B 49. D
10. D 20. C 30. D 40. B 50. D
1.

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