IA2 Examination 1 Theories (Liabilities and Provisions)

Financial Accounting 1 (ACT 101)

Examination 1: Liabilities & Provisions

Theories

1. An entity received notification of legal action against the entity. The attorneys
determine that it is probable the entity will lose the suit and the loss can be
estimated reliably. How should the estimated loss be reported?
a. As a loss recorded in other comprehensive income.
b. As a contingent liability reported in the statement of financial position and
a loss in the income statement.
c. As a provision for loss reported in the statement of financial position and a
loss in the income statement.
d. In the notes to financial statements as a contingency.
2. It is a marketing scheme whereby an entity grants award credits to customers
and the entity can redeem the award credits in exchange for free or discounted
goods or services.
a. Premium plan
b. Customer loyalty program
c. Marketing program
d. Loyalty award
3. Among the short-term obligations of Jess Corp. at year-end, the balance sheet
date, are notes payable totaling P350,000 with the BPI. These are 90-day notes
renewable for another 90-day period. These notes should be classified on the
balance sheet of Jess Corp. as?
a. Current liability
b. Deferred credit
c. Noncurrent liability
d. Intermediate debt
4. Which of the following is not an essential characteristic of a liability?
a. A liability is a present obligation of an entity.
b. A liability arises from past transaction or event.
c. A liability is payable to a specific party.
d. The settlement of a liability will result to outflow of entity’s resources
embodying economic benefits.
5. Current liabilities include:
a. Only obligations which are expected to be settled within the normal
operating cycle.
b. Only obligations which are due to be settled within one year from balance
sheet date.
c. Obligations which are expected to be settled within the normal operating
cycle and obligations which are due to be settled within one year from
balance sheet date.
d. Refinanced long-term debt falling due within one year from balance sheet.
6. When an entity has a continuing policy of guaranteeing new products against
defects for three years, the liability arising from the warranty
a. Should be reported as noncurrent.
b. Should be reported as current.

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 c. Should be reported as part of current and part noncurrent.
d. Need not be disclosed.
7. If the present obligation is not probable or measurable, it is considered as:
a. Contingent liability
b. Provision
c. Contingent asset
d. Noncurrent liability
8. Which of the following best describes the accrual approach of accounting for
warranty cost?
a. Expensed when incurred.
b. Expensed when paid.
c. Expensed when warranty claims are certain.
d. Expensed based on estimate in year of sale.
9. In calculating present value in a situation with a range of possible outcomes all
discounted using the same interest rate, the expected present value would be?
a. The most-likely outcome
b. The maximum outcome
c. The minimum outcome
d. The sum of probability-weighted present values
10.For a liability to exist:
a. The identity of the party owed must be known.
b. The exact amount must be known.
c. A past transaction or event must have occurred.
d. An obligation to pay cash in the future must exist.
a. P544,000
11. Which obligations are classified as current liabilities even if they are due to be
settled after more than twelve months from the statement of financial position
date?
a. Trade payables and accruals from employee and other operating cost.
b. Current portion of noncurrent financial liabilities.
c. Bank overdrafts
d. Dividend payable
12.An accrued expense can be best described as an amount:
a. Paid and currently matched with earnings.
b. Paid and not currently matched with earnings.
c. Not paid and not currently matched with earnings.
d. Not paid and currently matched with earnings.
13.Estimated liabilities are disclosed in financial statements by:
a. Footnote to the financial statements.
b. Showing the amount among the liabilities but not extending to the liability
total.
c. An appropriation of retained earnings.
d. Appropriately classifying them as regular liabilities in the balance sheet.
14.The accounting concept that requires recognition of a liability for customer
premium offer is?
a. Time period

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 b. Prudence
c. Historical cost
d. Matching principle
15.Among the short-term obligations at year-end are 105-day notes, renewable for
another 105-day period. What is the classification of the notes payable?
a. Current liabilities
b. Noncurrent liabilities
c. Intermediate debt
d. Deferred credits
16.Covenants are often attached to long-term borrowing agreements which
represent undertakings by the borrower. Under these covenants, if certain,
conditions related to the borrower’s financial position are breached, the liability
becomes payable on demand. This liability can still be classified as noncurrent:
a. When the lender has agreed, prior to the issuance of the statements, not
to demand payment.
b. When it is probable that further breaches or violations will not occur within
one year from balance sheet date.
c. When the lender has agreed prior to the issuance of the statements not to
demand payment and it is probable that further breaches will not occur
within one year from balance sheet date.
d. With no conditions.
17.Bri Company is involved in litigation regarding a faulty product sold in a prior
year. The entity has consulted with an attorney and determined that there is a
50% chance of losing. The attorney estimated that the amount of any payment
would be between P500,000 and P800,000 with P500,000 as the best estimate.
What is the required journal entry as a result of this litigation?
a. No journal entry is required.
b. Debit litigation expense and credit litigation liability P250,000.
c. Debit litigation expense and credit litigation liability P500,000.
d. Debit litigation expense and credit litigation liability P660,000.
18.A manufacturer of household appliances has potential costs due to the discovery
of a defect in one of its products. The occurrence of the loss is probable and the
costs can be reasonably estimated. This present obligation should be:
a. Accrued and disclosed as a liability.
b. Neither accrued nor disclosed as a liability.
c. Accrued as a liability but not disclosed.
d. Disclosed but not accrued as a liability.

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