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1. An entity shall measure initially a financial liability not designated at fair value
through profit or loss at
a. Fair value
b. Fair value plus direct attributable transaction costs
c. Fair value minus direct attributable transaction costs
d. Face amount
2. Transaction costs direct attributable to the issue of a financial liability include all of
the following, except
a. Fees and commissions paid to agents
b. Levies by regulatory agencies
c. Transfer taxes and duties
d. Financing costs
5. Which of the following statements is true in relation to the fair value option of
measuring a financial liability?
I. At initial recognition, an entity may irrevocably designate a financial liability
at fair value through profit or loss.
II. The financial liability is measured at every year-end and any changes in fair
value are recognized in profit or loss.
III.The interest expense on the financial liability is recognized using nominal
interest rate.
a. I and II only
b. I and III only
c. II and III only
d. I, II and III
2. Which of the following liabilities that are not part of the normal operating cycle
of an entity should be classified as noncurrent?
a. Financial liabilities classified as held for trading
b. Bank overdrafts
c. Current portion of noncurrent financial liabilities
d. Financial liabilities that provide financing but are not due for settlement within
twelve months after the reporting period
3. With respect to loans classified as current liabilities, all of the following events that
occur between the end of the reporting period and the date the financial statements
are authorized for issue are disclosed as nonadjusting events, except
a. Refinancing on a long term basis
b. The entity has the discretion to refinance an obligation for a shorter period
c. Rectification of a breach of a long-term loan arrangement
d. The granting by the lender of a period to rectify breach of a long-term loan
arrangement ending at least twelve months after the reporting period.
3. A long-term debt which is due to be settled within twelve months after the reporting
period is classified as noncurrent when
I. An agreement to refinance or to reschedule payments on a long-term basis is
completed on or before the end of the reporting period and before the financial
statements are authorized for issue
II. The entity has the discretion to refinance or roll over the obligation for at least
twelve months after the reporting period under an existing loan facility.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
4. Which obligations are classified as current even if they are expected to be settled
after more than twelve months from the end of reporting period?
a. Trade payables and accruals for employee and other operating costs
b. Bank overdrafts
c. Dividends payable
d. Income taxes payable
5. Some borrowing agreements incorporate covenants which have the effect that the
liability becomes payable on demand if certain conditions related to the covenants
are breached. In such a case, the liability is classified as
I. Current even if 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.
II. Noncurrent when the lender has agreed on or before the end of the reporting
period to provide a period of grace ending at least twelve months after that date.
a. I only
b. II only
c. Either I or II
d. Neither I nor II
5. Note disclosure for long-term debt generally include all of the following, except
a. Asset pledged as security
b. Call provision
c. Restriction imposed by creditor
d. Name of Creditor
2. At year-end, an entity has 120-day note payable outstanding. The entity has
followed 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
indefinitely, and the arrangement is acceptable to the bank to which the note was
issued. What is the proper classification of the note in the year-end statement of
financial position?
a. Dependent on the intention of management
b. Dependent on the actual ability to refinance
c. Current liability, unless specific refinancing criteria are met
d. Noncurrent liability
3. An entity had a note payable due next year. After the end of reporting period and
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 due. How should the entity classify the note payable at current year-end?
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
loan. In which section of the statement of financial position should this loan be
presented?
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Noncurrent assets
3. What is the relationship between the current liabilities and an operating cycle?
a. Liquidation of current liabilities is reasonably expected within the operating
cycle or one year, whichever is higher.
b. Current liabilities aren the result of operating transactions.
c. Current liabilities cannot exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.
4. What is the relationship between present value and the concept of 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 only used to measure noncurrent liabilities.
4. Which of the following statements is not true regarding the presentation of current
liabilities in accordance with IFRS?
a. The noncurrent liabilities follow the current liabilities.
b. Current liabilities may be listed in `the order of maturity, in descending order of
magnitude or in the order of liquidity preference.
c. Current liabilities are generally recorded at face amount.
d. Current liabilities should not be offset against the assets used for liquidation.
2. The award credits granted to customers under a customer loyalty program is often
described as
a. Points
b. Awards
c. Credits
d. Royalty
4. Under a customer loyalty program, if the entity supplies the award itself, the
consideration allocated to the award credits
a. Shall be recognized as revenue immediately
b. Shall not be accounted for as revenue separately
c. Shall be recognized as deferred revenue and amortized as revenue over a
reasonable period not exceeding 5 years
d. Shall be recognized initially as deferred revenue and subsequently recognized as
revenue upon the redemption of the award credits
5. Under a customer loyalty program, if a third party supplies the award and the entity
is
collecting the consideration for the award credits as principal in the transaction
a. The entity shall not recognize revenue from the award credits
b. The entity shall recognize initially a deferred revenue equal to the gross
consideration allocated to the award credits
c. The entity shall recognize initially a deferred revenue equal to the difference
between the consideration for the award credits and the amount paid by the
entity to the third party
d. The entity shall recognize immediately revenue equal to the gross consideration
allocated to the award credits
2. Which of the following best describes the accrual approach of accounting for
warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year sale
d.Expensed when incurred
4. An entity has a continuing policy of guaranteeing now products against defects for
5. Which of the following is a characteristic of the accrual of warranty but not the sale
of warranty?
a. Warranty liability
b. Warranty expense
c. Unearned warranty revenue
d. Warranty revenue
2. 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. Deferred revenue account should be increased.
c. Revenue account should be decreased.
d. Revenue account should be increased.
3. An entity received an advance payment for special order goods that are to be
manufactured and delivered within six months. The advance payment is reported in
the statement of financial position as
a. Deferred charge
5. At the end of the current year, an entity received an advance payment of 60% of the
sales price for special order goods to be manufactures and delivered within five
months. At the same time, the entity subcontracted for production of the special
order
goods at a price equal to 40% of the main contract price. What liabilities should be
reported in the year-end statement of financial position?
a. None
b. Deferred revenue equal to 60% of the main contract price and payable to
subcontractor equal to 40% of the main contract price.
c. Deferred revenue equal to 60% of the main contract price and no payable to
subcontractor.
d. No deferred revenue but payable to subcontractor is reported at 40% of the main
contract price.
6. In June of the current year, an entity sold refundable merchandise coupons. The
entity receives a certain amount for each coupon redeemable from July 1 to
December 31 of the current year, for merchandise with a certain retail price. At June
30 of the current year, how should be the entity report these coupon transaction?
a. Unearned revenue at the merchandises retail price
b. Unearned revenue at the cash received
c. Revenue at the merchandises price
d. Revenue at the cash received.
7. How would the proceeds received from the advance sale of nonrefundable tickets
for
9. Under a royalty agreement, an entity will receive royalties from the assignment of a
patent for four years. The royalties received in advance should be recognized as
revenue
a. In the period received
b. In the period earned
c. Evenly over the life of the royalty agreement
d. At the date of the royalty agreement
10. Unearned rent revenue would normally appear in the statement of financial
position
as
a. Plant asset
b. Current liability
c. Noncurrent liability
d. Current asset
4. It is an event that creates a legal or constructive obligation because that entity has
no other realistic alternative but to settle the obligation.
a. Obligating event
b. Past event
c. Subsequent event
d. Current event
5. An outflow of resources embodying economic benefits
a. The probability that the event will occur is greater than the probability at the
event will not occur.
b. The probability that the event will not occur is greater than the probability that
the event will occur.
c. The probability that the event will not 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 continuous range of possible outcomes , and each point in that range
as likely as any other, the range to be used is the:
a. Minimum
b. Maximum
c. Midpoint
d. Summation of Maximum and Minimum.
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
probabilities.
b. Is determined as the individual most likely outcome.
c. May be the individual most likely outcome.
d. May be the individual most likely outcome.
9. When the provision arises from a single obligation, the estimate of the amount
a. Reflects him weighting of all possible outcomes by their associated
probabilities.
b. Is determined as the individual most likely outcome.
c. Is the individual most likely outcome adjusted for the effect of other possible
outcomes?
d. Midpoint of the possible outcomes.
10. Which of the following statements is incorrect where some or all of the
expenditure required to settle a provision 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 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.
ANSWERS:
1.
2.
3.
4.
5.
B
D
C
A
A
6. A
7. C
8. A
9. C
10. C
ANSWERS:
1. C
2. D
3. C
4. C
5. D
provision?
a. Provisions shall be reviewed at the end of each reporting period and adjusted to
reflect the current best estimate.
b. A provision shall be used only for expenditures for which the provision was
originally recognized.
c. A provisions shall be recognized for future operating losses.
d. If an entity has an onerous contract, the present obligation under the contract
shall be recognized and measured as a provision.
4. It is a contract in which the unavoidable costs of meeting the obligation under the
contract exceed the economic benefits to be received under the contract.
a. Onerous contract
b. Executory contract
c. Executed contract
d. Sale contract
5. The unavoidable costs under an onerous contract represent the least net cost of
exiting from the contract, which is equal to
a. Cost of fulfilling the contract
b. Penalty arising from failure to fulfil the contract
c. Lower of the cost of fulfilling the contract or the penalty arising from failure to
fulfil the contract
d. Higher of the cost of fulfilling the contract or the penalty arising from failure to
fulfil the contract.
ANSWERS:
1.
2.
3.
4.
5.
C
A
C
A
C
a. Restructuring
b. Liquidation
c. Recapitalization
d. Corporate revamp
2. Examples of events that qualify as restructuring include all of the following, except
a. Sale or termination of business
b. Closure of business location in a region or relocation of business from one
location to another.
c. Change in management structure such as elimination of a layer of management
d.Fundamental reorganization of an entity that has an immaterial and
insignificant impact on its operations
ANSWERS:
1. A
2. D
3. D
4. A
5. C
ANSWERS:
1. D
2. D
3. D
4. C
5. D
2. 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
shall at year-end
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
3. A factory owned by an entity was destroyed by fire. The entity lodged an insurance
claim for the value of the factory building and plant, and an amount equal to one
years net profit. During the year, there were a number of meetings with th
representatives of the insurance company. Finally, before year end, it was decided
that the entity would receive compensation for 90 % of its claim. The entity
received a letter that the settlement check for that amount had been mailed but it
was not received before yer-end. How should the entity treat this in the financial
statements?
a. Disclose the contingent asset in the footnotes
b. Wait until next year when the settlement check is actually received and not
recognize this receivable at all since at year-end it is a contingent asset
c. Record 90% of the claim as a receivable as it is virtually certain that the
contingent asset will be received.
d. Record 100% of the claim as a receivable at year-end as it is virtually certain
that the contingent asset will be received, and adjust the 10% next year when
5. The board of directors of an entity decided in the latter part of the current year o
wind up international operations in the Far East and move them to Australia. The
decision was based on a detailed formal plan of restructuring as required by PAS
37.This decision was conveyed to all workers and management personnel at the
headquarters in Europe. The cost of this restructuring plan can be measured
reliably, how should the entity treat this restructuring in the financial statements for
the current year-end?
a. Disclose only the restructuring decision and the cost of restructuring because
the entity has not announced the restructuring to those affected by the decision
and thus has not raised an expectation that the entity would actually carry out
the restructuring.
b. Recognize a provision for restructuring since the board of directors has
approved it and it has been announced in the headquarters of the entity in
Europe.
c. Mention the decision to restructure and the cost involved in the chirmas
statement in the annual report since it is a decision of the board of directors.
d. Because the restructuring has not commenced before year-end, based on
prudence, wait until next year and do nothing in this years financial statements
ANSWERS:
1. B
2. B
3. C
4. C
5. A
2. A contingent liability is a
I. Possible obligation that arises from past event and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more future
uncertain events not wholly within the control of the entity
II. Present obligation that arises from past event and it is not probavle 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. Both I and II
d. Neither I nor II
a. I only
b. II only
c. Both I and II
d. Neither I nor II
4. It is possible asset that arises from past event and whose existence will be
confirmed occurrence or non-occurrence of one more uncertain future events not
3. A present obligation that is probable and for which the amount can be reliably
estimated shall
a. Not be accrued but shall be disclose in the notes of financial statement
b. Be accrued by debiting an appropriated retained earnings account and crediting
a liability account
c. Be accrued by debiting an expense account and crediting an appropriated
retained earnings account
d. Be accrued by debiting an expense accounting and crediting a liability account
4. An entity has self-insurance plan. Each year, the entity appropriated retained
earnings for contingencies in amount equal to insurance premiums saved less
recognized losses from lawsuits and other claims. As a result of an accident in the
current year, the entity is a defendant in a lawsuit in which it will probably have to
pay amount measurable damages. What are the effects of this lawsuits probable
outcome on the entitys financial statement for the current year?
a. An increase in expenses and no effect on liabilities
b. An increase in both expense and liabilities
c. No effect on expenses and increase in liabilities
d. No effect on either expenses or liabilities
6. Which of the following is the proper way to report a contingent asset, receipt of
which is certain?
a. As an asset
b. As a unearned revenue
c. As a disclosure only
d. No disclosure and no accrual
8. When the occurrence of a contingent asset is probable and the amount can be
reasonably estimated, the contingent asset should
a. Recognized in the statement of financial position and disclosed
b. Classified as an appropriation of retained earnings
c. Disclosed but not recognized in the statement of financial position
d. Neither recognized in the statement of financial position nor disclosed
9. An entity operates a plant in a foreign country. It is probable that the plant will be
expropriated. However, the foreign government has indicated that the entity will
received definite amount of compensation for the plant. The amount of
compensation is less than the fair value but exceeds the carrying amount of the
plant. The contingent should reported
a. As a valuation allowance as part of the shareholders equity
b. As a fixed asset valuation allowance account
c. In the notes to the financial statement
d. In the statement of financial position
10. At year end, an entity was suing a competitor for a patent infringement. The award
from the probable favourable outcome could be reasonably estimated. The entitys
financial statements should report the expected award as
ANSWERS:
1. D
6. C
2. B
3. D
4. B
5. A
7. D
8. C
9. C
10. D
9. A contingent liability
a. Definitely exists as a liability but the 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.
ANSWERS:
1. D
6. A
2. D
7. B
3. C
8. D
4. D
9. D
5. B
10. C
3. Which of the following is required to disclose regarding risk and uncertainties that
exist?
a. Factor causing an estimate to be sensitive.
b. The potential impact of estimate when it is reasonably possible that the estimate
will change in the future.
c. The potential impact of estimate when it is remotely possible that the estimate
will change in the future.
4. A contingent liability is
a. An estimated liability.
b. An event which is not recognized because it is not probable that an outflow will
be required or the amount cannot be reliably estimated.
c. A potential large liability.
d. A potential small liability.
d. Face amount
4. Under the fair value option, bonds payable shall be measured initially at
a. Fair value
b. Fair value plus bond issue cost
c. Fair value minus bond issue cost
d. Face amount
5. Which of the following statement is true in relation to the fair value option of
measuring a bonds payable?
I. At initial recognition an entity may revocably designate a bond payable at fair
value through profit or loss.
II. The bond payable is remeasured at every year-end at fair value and any changes
in fair value and any changes in fair value are recognized in other comprehensive
income.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
ANSWERS:
1. C
2. C
3. D
4. A
5. D
3. Costs incurred in connection with the issuance of ten-year bonds which sold at a
slight premium shall be
a. Charged to retained earnings when the bonds are issued
b. Expensed in the year in which incurred
c. Capitalized as organization cost
d. reported in the statement of financial position as a deduction from bonds payable
and amortized over the ten-year bond term
4. 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
a. Decreased by accrued interest from June 1 to November 1
6. D
7. C
8. D
9. A
10. A
2. If bonds are issued between interest dates, the entry of the issuer could include a
a. Debit to interest payable
b. Credit to interest receivable
c. Credit to interest expense
d. Credit to unearned interest
3. Which of the following statements is true regarding accrued interest on bonds that
are 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
8. When bonds are retired prior to maturity with proceeds from a new bond issue, any
gain or loss from the early extinguishment of debt 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
d. Recognized in income from continuing operations
10. An entity neglected to amortize the premium on outstanding bonds payable. What
is the effect of the failure to record premium amortization on interest expense and
bond carrying amount, respectively?
a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated
ANSWERS:
1. A
2. C
3. D
4. D
5. B
6. D
7. B
8. D
9. A
10. C
c. Register bond
d. Bond coupon
2. Bonds for which the bondholders names are not registered with the issuer are
called
a. Bearer bonds
b. Term bonds
c. Debenture bonds
d. Serial bonds
3. Bonds that pay no interest unless the issuer is profitable are known as
a. Registered bonds
b. Junk bonds
c. Mortgage bonds
d. Income bonds
3. When interest expense for the current year is more than interest paid, the bonds
were issued at
a. A discount
b. A premium
c. Face amount
d. Cannot be determined
a. I, II and III
b. II and III only
c. I and III only
d. I and II only
ANSWERS:
1. B
2. A
3. B
4. C
5. D
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
7. The market price of a bond issued at a discount is the present value of the principal
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 interest
stated on the bond
c. Plus the present value of all future interest payments at the market of interest
d. Plus the present value of all the future interest payments at the rate of interest
stated on the bond
9. A five-year term bond was issued by an entity on January 1, 2014 at a discount. The
carrying amount of the bond on December 31, 2015 would be
a. Higher than the carrying amount on December 31, 2014
b. Lower than the carrying amount on December 31, 20114
c. The same as the carrying as the carrying amount on December 31, 2014
d. Higher than the carrying amount on December 31, 2016
10. Under international accounting, the valuation method used for bond payable
a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at a yield rate at issuance
ANSWERS:
1. C
2. C
3. C
4. B
5. A
6. B
7. B
8. C
9. A
10. D
3. When the effective interest method is used, the periodic amortization would
a. Increase if the bonds were issued at a discount.
b. Decrease if the bonds were issued at a premium.
c. Increase if the bonds were issued at a premium.
d. Increase if the bonds were issued at either a discount or a premium.
5. An entity issued a bond with a stated rate of interest that is less than the
effective interest rate. The bond was issued on one of the interest payment dates.
What should the entity report on the first interest payment date?
a. An interest expense that is less than the cash payment made to bondholders.
b. An interest expense that is greater than the cash payment made to bondholders.
c. a debit to discount on bond payable.
d. A debit to premium on bond payable.
ANSWERS:
1. B
2. C
3. D
4. C
5. D
3. It is any contract that evidences residual interest in the assets of an entity after
deducting all of its liabilities.
a. Equity instrument
b. Debt instrument
c. Loan receivable
d. Financial asset with indeterminable fair value.
ordinary shares of the issuing entity in exchange for a fixed amount of cash.
d. Corporate bonds and other debt instruments issued by the entity.
10. How are the proceeds from issuing a compound financial instrument allocated
between the liability and equity components?
a. First, the liability component is measured at fair value, and then the remainder
of the proceeds is allocated to the equity conponent
b. First, the equity component is measured at fair value, and then the remainder
of the proceeds is allocated to the liability component
c. First, the fair values of both the equity component and the liability component
are estimated. Then, the proceeds are allocated to the liability and equity
components based on the relation between the estimated fair value.
d. The equity component is measured at its intrinsic value. The liability
component is measured at the face amount less the intrinsic value of the equity
component.
ANSWERS:
1. A
2. C
3. A
4. D
5. D
6. D
7. A
8. D
9. B
10. A
3. When an entity issued bonds payable with detachable share warrants, how will
share premium be computed if the warrants are exercised by the bondholders?
a. It is the difference between the proceeds received based on the exercised price
4. When an entity issued convertible bonds, how will share premium be computed if
the bonds were converted into ordinary shares?
a. It is the difference between the carrying amount of the bonds and the total par or
stated value of the shares issued.
b. It is the difference between the face value of the bonds and the total par or stated
value of the shares issued.
c. It is the difference between the carrying amount of the bonds plus share premium
from conversion privilege and the total par or stated value of the shares issued.
d. It is the difference between the face value of the bonds plus the share premium
from conversion privilege and the total par or stated value of the shares issued.
5. The proceeds from a bond issued with share warrants shall be accounted for as
a. Entirely bonds payable
b. Entirely shareholders' equity
c. Partly bonds payable and partly unearned revenue
d. Partly bonds payable and partly shareholders' equity
1.
2.
3.
4.
5.
B
C
B
C
D
value of the bonds without the warrants, the excess should be credited to
a. Share premium- ordinary
b. Retained earnings
c. Liability account
d. Share premium- share warrants
2. The proceeds from an issue of bonds with share warrants should not be allocated
between the liability and equity components when
a. The fair value of the warrants is not readily available.
b. The exercise of the warrants within the next reporting period seems remote.
c. The warrants issued are nondetachable
d. The proceeds should be allocated between liability and equity under all of these
circumstances.
3. When bonds are issued with share warrants, a portion of the proceeds should be
allocated to equity when the bonds are issued with
a. Detachable share warrants.
b. Nondetachable share warrants
c. Both detachable and nondetachable share warrants
d. Neither detachable nor nondetachable share warrants.
4. When bonds are issued with share warrants, the equity component is equal to
a. Zero
b. The excess of the proceeds over the face value of the bonds
c. The market value of the share warrants
d. The excess of the proceeds over the fair value of the bonds without the share
warrants
5. 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 they are issued tobthe
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.
ANSWERS:
1. D
2. C
3. C
4. B
5. A
4. 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 their components based on relative fair value
d. All of the choices are correct
5. 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 or carrying amount method is used
which of the following correctly states an effect of the conversion?
a. Shareholders' equity is increased.
b. Share premium is decreased
c. Retained earnings account increased
d. A loss is recognized.
4. Under the fair value option, the entity shall measure the note payable initially at
a. Face amount
b. Fair value plus transaction cost
c. Fair value minus transaction cost
d. Fair value
5. Which of the following statements is incorrect in relation to the fair value option
of measuring note payable?
a. At initial recognition, an entity may irrevocably designate the note payable as
at
fair value through profit or loss.
b. At initial recognition, an entity may revocably designate the note payable as at
fair value through profit or loss.
c. The interest expense on the note payable is recognized using the stated interest
rate.
d. After initial recognition, the note payable is remeasured at fair value at every
year end with changes in fair value recognized partly in other comprehensive
income and partly in profit or loss.
2. If the present value of a note issued in exchange for a property is less than its 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 at a short-term
noninterest 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 transaction 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 prevailing
market rate for similar notes.
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing
market rate for similar notes.
5. The discount resulting from the determination of the present value of a note
payable should be reported in the statement of financial position as
a. Deferred credit separate from the note.
b. Direct deduction from the face amount of the note.
c. Deferred charge separate from the note.
d. Addition to the face amount of the note.
7. A note payable with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place
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 property
becomes
evident.
c. The entity receiving the property should estimate a value for the property.
d. Both entities involved in the transaction should negotiate a value to be assigned
to the property.
8. When a note payable is issued for property, the present value of the note is
measured 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
9. When a note payable is exchanged for property, the stated interest rate is presumed
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.
10. On October 1, 2014, an entity borrowed cash and signed a three-year interest
bearing note in which both the principal and interest are payable on October 1,
2017. On December 31, 2014, accrued interest should
a. Be reported as current liability
b. Be reported as noncurrent liability
c. Be reported as part of the note payable
d. Not be reported
3. In a debt extinguishment in which the debt is continued with modified terms and
the carrying amount of the debt is more than the fair value of the debt
a. A loss should be recognized by the debtor.
b. A new effective interest rate must be computed.
c. A gain should be recognized by the debtor.
d. No interest expense should be recognized in the future.
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 of the fair value of the equity instruments issued, and the fair value of the
financial liability extinguished cannot be measured reliably, the equity instruments
issued shall be measured at
a. Carrying amount of the liability extinguished
b. Par value of equity instruments issued
c. Book value of the equity instruments issued
d. Value assigned by the Board of Directors
4. The difference between the carrying amount of the financial liability extinguished
and the fair value of equity instruments issued or fair value of liability extinguished
in the absence of the fair value of equity instruments issued shall be recognized in
a. Profit or loss
b. Other comprehensive income
c. Retained earnings
d. General reserve
2. Rent received in advance by the lessor for an operating lease should be recognized
as revenue
a. When received
b. At the lease inception
c. At the lease expiration
d. over the lease term
a lessee, twelve months of free rent under a five-year operating lease. The lease was
effective at the beginning of current year and provided for monthly rental payments
to begin at the beginning of next year. Zeta made the first rental payment at the
currents year-end. In the current year income statement, Gray Company should
report rent revenue equal to
a. Zero
b. Cash received during the current year
c. One-fourth of the total cash received
d. One-fifth of the total cash to be received over the lease term
6. The lessor should report the leased asset under an operating lease and income
therefrom as which of the following?
a. The asset should be kept off the statement of financial position and the lease
income should go to reserves.
b. The asset should be kept off the statement of financial position and the lease
income should go to the income statement.
c. The asset should be reported in the statement of financial position according to
its nature and the lease income should go to reserves.
d. The asset should be reported in the statement of financial position according to
its nature and the lease income should go to the income statement.
7. When equipment held under an operating lease is subleased by the original lessee,
the original lessee would account for the sublease as
a. Operating lease
b. Sales-type lease
c. Direct financing lease
d. Finance lease
8. In a lease that is recorded as an operating lease by the lessee, the equal monthly
10. A twenty-year operating lease provides for a 10% increase in annual payments
every five years. In the sixth year compared to the fifth year, what could be the
effect on the entitys expenses?
a. Rent and interest expense will both increase.
b. Interest expense will increase but not rent expense
c. Rent expense will increase but not interest expense
d. No increase in both rent and interest expense
3. It is the date on which the lessee is entitled to exercise the right to use the leased
asset.
a. Inception of the lease
b. Commencement of the lease
c. Date of lease agreement
d. Date of commitment to the provisions of the lease
4. The situations which would normally lead to a lease being classified as a finance
lease include all of the following, except
a. The lease transfers ownership of the lessee by the end of the lease term
b. The lessee has the option to purchase the asset at a price which would be
expected to be sufficiently higher than the fair value at the date the option
becomes exercisable.
c. The lease term is for the major part of the economic life of the asset even if title
is not transferred.
d. The present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset at the inception of the
lease.
the lessee
d. The lessee has the ability to continue the lease for a secondary period at a rent
which is substantially the same as the market rent.
6. At the commencement of the lease term, the lessee shall recognize a finance lease
as asset and liability at an amount equal to the
a. Fair value of the leased asset
b. Present value of the minimum lease payment.
c. Fair value of the asset or present value of the minimum lease payments,
whichever is lower.
d. Fair value of the asset or present value of the minimum lease payments,
whichever is higher.
8. It is that portion of the lease payment that is not fixed in amount but is based on a
factor other than just the passage of time, for example, percentage of sales, amount
of usage, price index and market rate of interest.
a. Variable rent
b. Contingent rent
c. Bargain purchase option
d. Executory cost
a. I only
b. II only
c. Both I and II
d. Neither I nor II
10. If there is reasonable certainty that the lessee will obtain ownership by the end of
the lease term, the depreciation of the leased asset is based on the
a. Useful life of the asset
b. Lease term
c. Useful life of the asset or lease term, whichever is shorter
d. Useful life of the asset or lease term, whichever is longer
2. It is that portion of the residual value of the leased asset, the realization of which by
the lessor is not assured or is guaranteed solely by a party related to the lessor.
a. Residual value
b. Guaranteed residual value
c. Unguaranteed residual value
d. Minimum lease payment
3. It is that part of the residual value that is guaranteed by the lessee or by a party
related to the lessee, the amount of any guarantee being the maximum amount that
could in any event become payable.
a. Bargain purchase option
b. Residual value
c. Guaranteed residual value
d. Unguaranteed residual value
4. Which of the following statements is true regarding land and building lease?
I. A land lease with a lease term of several decades or longer may be classified as
a finance lease even if title will not pass to the lessee at the end of lease term.
II. When a lease includes both land and building, an entity shall determine the
classification of the land lease and building lease based on the classification
criteria taking into account that land normally has an indefinite economic life.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Where there is a lease of land and building and the title to the land is not
transferred,
generally the lease is treated as if
a. The land is a finance lease and the building is a finance lease
b. The land is a finance lease and the building is an operating lease
c. The land is an operating lease and the building is a finance lease
d. The land is an operating lease and the building is an operating lease
3. The lease of a land and building when split cause difficulty in the allocation of the
minimum lease payments. In this case, the minimum lease payments should be split
a. According the relative fair value of two elements
b. By the entity based on the useful life of two elements
c. Using the sum of the digits method
d. According to any fair method devised by the entity
b. Costs for services and taxes to be paid by and reimbursed to the lessor
c. Required payments over the lease term
d Any amounts guaranteed by a party related to the lessee
3. Which one of the following items is not part of the minimum lease payments from
the standpoint of the lessee?
a. The minimum lease payments called for by the lessee
b. Any guarantee the lessee is required to make at the end of the lease term
regarding any deficiency from a specified amount
c. Any estimated residual value at the end of the lease term
d. Any payment the lessee must make at the end of the lease term to purchase the
leased property under a bargain purchase option
4. From the standpoint of the lessee, the minimum lease payments included all of the
following except
a. The guaranteed residual value
b. The lessees obligation to pay executor costs
c. The bargain purchase option
d. Any payment that the lessee must make upon failure to extend or renew the
lease
6. One of the four determinative criteria for a finance lease specifies that the lease
term
be equal or greater than
a. The estimated economic life of the property
b .90 percent of the estimated life of the property
c. 75 percent of the estimated life of the property
d. 50 percent of the estimated life of the property
7. One of the four determinative criteria of a finance lease is that the present value at
the beginning of the lease term of the minimum lease payments equal or exceeds
3. What are the tree types of period costs that a lessee experiences finance lease?
a. Interest expense, amortization expense, executory cost
b. Amortization expense, executory cost, lease expenses
c. Executory cost, interest expense, lease expenses
d. Lease expenses executory cost, initial cost
5. At the inception, the lease term is 50% of the economic life of the leased property
but the lease contains a bargain purchase option. The lessee should record the lease
as
a. Neither the asset nor the liability
8. For a finance lease, the amount recorded initially by the lessee as a liability should
a. Exceed the present value of the minimum lease payments
b. Exceed the total minimum lease payments
c. Not to exceed the fair value of the leased property at the inception of the lease
d. Equal the total of the minimum lease payments
9. For a finance lease, the amount recorded initially by the lessee as a liability should
normally
a. Exceed the minimum lease payments
b. Exceed the present value of the minimum lease payments at the beginning of
the
lease
c. Equal the minimum lease payments
d. Equal the present value of the minimum lease payments at the beginning of the
lease
10. The lessees carrying amount of an asset from the capitalization of a lease would
periodically reduced by
a. Total minimum lease payments
b. Portion of the minimum lease payment allocable to interest
c. Portion of the minimum lease payment allocable to reduction of lease liability
d. Depreciation of asset
3. At the beginning of the current year, an entity made long- term improvements to a
recently leased building. The lease agreement provides for neither a transfer of title
nor a bargain purchase option. The present value of the minimum lease payments
equals 85% of the buildings fair value, and the lease term equals 70% of the
buildings economic life. The lessee should recognize an asset for
a. Building
b. Leasehold improvement
c. Both building and leasehold improvement
5. A six year finance lease entered into on December 31 of the current year specified
equal minimum lease payments due on December 31 of each year. The first
minimum lease payment paid on December 31 of the current year consist which
of the following?
I. Interest expense
II. Lease liability
a. I only
b. II only
c. Both I and II
d. Neither I nor II
6 . A six year finance lease entered into on December 31 of the current year specified
equal minimum lease payments due on December 31 of each year, the first payment
being paid December 31 of the current year. The portion of the third minimum
lease payment applicable to which of the following increased over the
corresponding second minimum lease payments?
I. Interest expense
II. Reduction of lease liability
a. I only
b. II only
c. Both I and II
d. Neither I nor II
7. A lease had a ten year finance lease requiring equal minimum annual payments . the
reduction of the lease liability in year 2 should equal
a. The current liability shown for the lease at the end of year 1
b. The current liability shown for the lease at the end of year 2
c. The reduction of the lease liability in year 1
d. One tenth of the original lease liability
8. A six year finance lease specifies equal minimum annual lease payments. Part of
this
payment represents interest and part represents a reduction in the lease liability. The
portion of the minimum lease liability 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 in the sixth year
d. More than in the sixth year
9. The present value of the minimum lease payments should be used by the lessee in
the
determination of
a. Finance lease liability
b. Operating lease liability
c. Both finance lease liability and operating lease liability
d. Neither finance lease liability nor operating lease liability
10. For which of the following transactions would be use of present value of an
annuity
due concept be appropriate in calculating the present value of cash flows?
a. A finance lease is entered into with the initial payment due in one month
subsequent to the signing of the lease
b. A finance lease is entered into with the initial payment due upon signing of the
lease
c. A ten year 8% bond is issued on January 1 with interest payable semiannually
on
January 1 and July 1 yielding 7%
d. A ten year 8% bond is issued on January 1 with interest payable semiannually
on
January 1 and July 1 yielding 9%
5. What is the interest rate used by a lease to capitalize a finance lease when the
implicit rate cannot be determined?
a. Primary rate
b. Lessors published rate
c. Lessees average borrowing rate
d. Lessees incremental rate
7. In computing depreciation of a leased asset under a finance lease, the lessee should
deduct
a. An guaranteed residual value and depreciate over the lease term
b. An unguaranteed residual value and depreciate over the lease term
c. An guaranteed residual value and depreciate over the life of the asset
d. An unguaranteed residual value and depreciate over the life of the asset
9. A lessee with a finance lease containing bargain purchase option should depreciate
the leased asset over the
a. Useful life of the asset
b. Lease term
c. Useful life of the asset or lease term whichever is shorter
d. Useful life of the asset or lease term whichever is longer
10. Which of the following statement is true about accounting for lease?
a. All leases are treated as finance lease
b. All leases are treated as operating lease
c. When land and building are leased, elements of the lease are considered
separately in accounting for lease
d. Operating leases are never recorded in the statement of financial position
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 recognize all
finance payments in income statement.
b. Treat as a receivable equal to gross amount receivable on lease and recognize
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 statement.
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. Under a direct financing lease, the excess of aggregate rentals over the cost of
leased property shall be recognized as income of the lessor
a. In increasing amounts during the term of the lease
b. In constant amounts during the term of the lease
2. 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.
5. Which of the following statements is correct regarding initial direct costs incurred
by the lessor?
a. In a direct financing lease, initial direct costs are added to the net investment 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 are deferred and allocated over the
lease erm.
d. All of these statement are correct.
3. These are incremental costs that are directly attributable to negotiating and
arranging a lease
a. Initial direct costs
b. Transaction costs
c. Costs of services
d. Executory costs
4. Initial direct cost incurred by the lessor under a sales type lease should be
a. Deferred and allocated over the economic life of the leased property.
b. Expensed in the period incurred
c. Deferred and allocated over the term of the lease in proportion to the
recognition of rental income.
d. Added to the gross investment in the lease and amortized over the term of the
lease as a yield adjustment.
a. The lessor recognizes only interest revenue over the life of the asset.
b. The lessor recognizes only interest revenue over the lease term.
c. The lessor recognizes a dealers profit at lease inception and interest revenue
over the lease term.
d. The lessor recognizes a dealers profit at lease inception and interest revenue
over the life of the asset.
6. 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 life of the lease
9. The excess of the fair value of leased property at the inception of the lease over the
carrying amount shall be recognized by the dealer lessor as
a. Unearned income from a sales type lease
10. In a lease that is recorded as a sales type lease by the lessor, interest revenue
a. Does not arise
b. Shall be recognized over the period of the lease using the interest method
c. Shall be recognized over the period of the lease using the straight line method
d. Shall be recognized in full as revenue at the inception of the lease
2. If the sale and leaseback transaction results in an operating lease and the sale price
is above fair value, the excess of the sale price over fair value is
a. Deferred and amortized over the period for which the asset is expected to used.
b. Recognized immediately in profit or loss.
c. Recognized in other comprehensive income.
d. Not recognized.
3. For sale and leaseback transaction resulting in an operating lease if the fair value of
the asset at the time of sale and leaseback is below the carrying amount of the
asset, the differences is recognized
a. As loss immediately
b. As gain immediately
4. If the sale and leaseback transactions results in a finance lease, any excess of sale
proceeds over the carrying amount of the asset is
a. Deferred and amortized as income over the lease term.
b. Deferred and amortized as income over the life of the asset.
c. Recognized in profit or loss immediately.
d. Recognized in other comprehensive income.
5. Which of the following statements is true regarding sale and leaseback transaction?
a. Both profit and loss on sale followed by an operating lease are recognized
immediately if the transaction is established at fair value.
b. Profit from the sale should be amortized in proportion to the rental payments if
an operating lease results from the sale and leaseback transaction.
2. These are differences that will result in future taxable amount in determining
taxable
profit of future periods when carrying amount of the asset or liability is recovered or
settled.
a. Temporary Difference
b. Taxable Temporary Difference
c. Deductible Temporary Difference
d. Permanent Temporary Difference
3. These are differences that result in future deductible amount in determining taxable
profit in future periods when the carrying amount of the asset or liability recovered
or settled.
a. Taxable Temporary Differences
b. Deductible Temporary Differences
c. Taxable Temporary and Permanent Differences
d. Deductible Temporary and Permanent Differences
7. It is the aggregate amount included in the determination of net profit for the period
in
respect of current tax and deferred tax.
a. Tax Expense
b. Current Tax Expense
c. Deferred Tax Expense
d. Deferred Tax Benefit
8. It is the profit for a period determined in accordance with the rules established by
taxation authorities upon which income taxes are payable.
a. Accounting Profit
b. Taxable Profit
c. Net Profit
d. Accounting profit subject to tax
3. A deferred tax asset shall be recognized for all deductible temporary differences
and
operating loss carry forward.
a. It is probable that taxable income will be available against within the deferred tax
asset can be used.
b. It is probable that accounting income will be available against which the deferred
tax asset can be used.
c. It is possible that taxable income will be available against which the deferred tax
asset can be used.
d. It is possible that accounting income will be available against which the deferred
tax asset can be used.
4. An entity shall offset a deferred tax asset and deferred tax liability when
I. The deferred tax asset and deferred tax liability relate to income taxes levied by
the same taxing authority.
II. The entity has a legal enforceable right to offset a current tax asset against a
current tax liability.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Deferred tax assets are the amount of income taxes in future periods in respect of
a. Carry forward of unused tax losses only
b. Taxable temporary differences and carry forward of unused tax losses
c. Deductible temporary diffences and carry forward of unused tax losses
d. Permanent differences
II. The tax base for a machine for tax purposes is greater than the carrying amount
in the financial statements up to the end of reporting period. This will give rise
to
a deferred tax asset.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
Answers Problem 15-3 Multiple choice
1. A
2. C
3. A
4. C
5. B
5. An entity, cash basis taxpayer, prepares accrual basis financial statements. In its
year-end statement of financial position, the entitys deferred tax liabilities
increased compared to the prior year. Which of the following changes would cause
this increase in deferred tax liabilities?
I. An increase in prepaid insurance
II. An increase in rent receivable
III. An increase in warranty obligation
a. I only
b. II only
c. II and III only
d. III only
6. An entity reported deferred tax assets and deferred tax liabilities 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 changes in deferred tax assets
and deferred tax liabilities
d. Sum of the net changes in deferred tax assets and deferred tax liabilities
8. At the current year-end, an entity had a deferred tax liability arising from
accelerated depreciation that exceeded a deferred asset relating to rent received in
advance which is expected to reverse in the next year. Which of the following shall
be reported in the entitys current year-end statement of financial 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. The financial reporting basis of a plant asset exceeded the tax basis because a
different method of reporting depreciation is used for financial accounting purpose
and tax purposes. What is reported if there are no other temporary differences?
a. Current tax asset
b. Deferred tax asset
c. Deferred tax liability
d. Current tax payable
10. A deferred tax liability is computed using
a. Current tax law regardless of expected or enacted future 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 expected
future tax law is enacted or not.
1. C
2. C
3. C
4. D
5. B
6. D
7. D
8. C
9. C
10. C
c. Use of a shorter depreciation period for accounting purposes than is used for
income tax purposes.
d. Investment losses recognized earlier for accounting purposes than for tax
purposes.
4. Which of the following is the most likely item to result in a deferred tax asset?
a. Using accelerated depreciation for tax purposes but straight line depreciation
for
accounting purposes.
b. Using the cost recovery method of recognizing construction revenue for tax
purposes but using percentage of completion method for financial reporting
purposes.
c. Prepaid expense
d. Unearned revenue
a. A current liability.
b. A noncurrent liability.
c. A noncurrent liability for the portion of the temporary difference reversing
within a year and a noncurrent liability for the remainder.
d. An offset to the accumulated depreciation.
7. An item that would create a permanent difference in pretax financial and taxable
income would be
a. Using accelerated depreciation for tax purposes and straight line depreciation
for
book purposes.
b. Purchasing equipment previously leased with an operating lease in prior years.
c. Using the percentage of completion method on long-term construction
contracts.
d. Paying fines for violation of laws.
8. Recognizing tax benefits in a loss year due to a loss carry forward requires
a. Only a footnote disclosure.
b. Creating a new carry forward for the next year.
c. Creating a deferred tax asset.
d. Creating a deferred tax liability.
9. Intraperiodtax allocation
a. Involves the allocation of income taxes between current and future periods.
b. Associates tax effect with different items in the income statement.
c. Arises because certain revenue and expenses appear in the financial statements
either before or after they are included in the income tax return.
d.Arises because different income statement items are taxed at different rates.
10. In computing the change in deferred tax asset or liability, which of the following
tax rate is used?
a. Current tax rate
b. Estimated future tax rate
c. Enacted future tax rate
d. Past years tax rate
Answers 15-5
1. C
2. D
3. D
4. B
5. C
6. C
7. D
8. C
9. B
10. C
3. Taxable income
a. Differs from accounting income due to differences in interperiodtax allocation
b. Differs from accounting income due to differences in interperiodtax allocation
and permanent differences.
c. Is based on international financial reporting standards.
d. Is reported in income statement.
2. These are employee benefits which are payable after completion of employment
a. Short-term employee benefits
b. Postemployment employee benefits
c. Other long-term employee benefits
d. Termination benefits
7. What is the mandated method of determining the present value of the defined
benefit
obligation?
a. Projected unit credit method
b. Entry age normal method
c. Individual level premium method
d. Aggregate method
10. When an entity pays insurance premiums to fund a postemployment benefit plan
and the entity has no legal or constructive obligation on the policy, the
postemployment benefit plan shall be treated as
a. Defined contribution plan
b. Defined benefit plan
c. Either defined contribution plan or defined benefit plan
d. Multiemployer plan
6. C
7. A
8. D
9. C
10. A
2. The service cost of a defined benefit plan comprises all of the following, except
a. Current service cost
b. Past service cost
c. Gain or loss on settlement
d. Net interest
4. It is the increase in the present value of the defined benefit obligation resulting
from
employee service in the current period
a. Current service cost
b. Interest expense
c. Past service cost
d. Remeasurements
5. It is the increase in the present value of the defined benefit obligation of employee
service in prior periods, resulting from a plan amendment or curtailment
a. Current service cost
b. Net interest
9. Plan assets are held by a long-term benefit fund and must satisfy the following
conditions, except
a. The assets are held by an entity, the fund itself that is legally separate from the
reporting entity.
b. The assets in the fund are available to pay only employee benefits
c. The assets in the fund are not available to the reporting entitys own creditors.
d. The assets in the fund can be returned to the entity even if the remaining assets
are insufficient to meet all employee benefit obligation.
10. It is an insurance policy issued by an insurer that is not a related party of the
reporting entity and the proceeds of the policy can be used only to pay or fund
employee benefits under a defined benefit plan
a. Qualifying insurance policy
b. Aggregate policy
c. Annuity
d. Unconditional insurance policy
Answers 16-2
1. D
6. D
2. D
7. C
3. D
8. C
4. A
9. D
5. C
10. A
4. These are the changes in the present value of the defined benefit obligation
resulting from experience adjustments and the effects of changes in actuarial
assumptions
a.
b.
c.
d.
Future salary
Future medical salary
Tax payable by the plan
Claim rate under medical plan
7. Actuarial gains and losses may arises from all of the following, except
a.
b.
c.
d.
10. What is the transitional effect of the application of PAS 19R on unamortized past
service cost and unrecognized actuarial gain or loss?
a. Unamortized past service cost and actuarial gain and loss are recognized
currently in profit or loss.
b. Unamortized past service cost and actuarial gain or loss are recognized
currently in other comprehensive income
c. Unamortized past service cost is recognized retrospectively in retained
earnings and actuarial gain and loss are recognized currently in profit or loss.
d. Unamortized past service cost and actuarial gain or loss are recognized
retrospectively in retained earnings.
2. An entity has decided to improve its defined benefit pension scheme. The benefit
payable will be determined by reference to 60 years of service rather than 65 years
of service. As a result, the defined benefit pension liability will increase. The
average remaining service lives of the employees is 10 years. How should the
increase in the pension liability 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
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
4. Which of these events will not cause a change in a defined benefit obligation
5. Under which category should lump sum benefit and actuarial gains be accounted
for?
a. Lump sum benefit and actuarial gains should be accounted for under defined
benefit plans
b. Lump sum benefit should be accounted for under short term employee
benefits. Actuarial gains should be accounted for under defined benefit plans
c. Lump sum benefit should be accounted for under defined benefit plans.
Actuarial gains should be accounted for under defined contribution plans
d. Lump sum benefit should be accounted for under short term employee
benefits. Actuarial gains should be accounted for under defined contribution
plans
a. Define benefit plans are comparatively simple in construction and raise few
accounting issues for employers
b. Retirement benefits are based on the plans benefit formula
c. Retirement benefits depend on how well pension fund asstes have been
managed
d. The investment risk is borne by the employee
3. Which of the following components should not be included in the calculation of net
pension cost recognized for a period by an employer sponsoring a defined benefit
plan?
a.
b.
c.
d.
8. Vested benefits
a.
b.
c.
d.
Problem 16-5
1. B
6. C
2. B
7. D
3. D
8. D
4. C
9. A
5. A
10. D
5. Which measure requires the use of future salaries in the computation of benefit
obligation?
a.
b.
c.
d.
6. In determining the present value of the projected benefit obligation, all of the
following should be considered, except
a.
b.
c.
d.
10. What is the relationship of the amount funded and the amount reported for the
defined benefit cost?
a.
b.
c.
d.
I only
II only
Both I and II
Either I and II
I only
II only
Both I and II
Either I and II
3. Which of the following may be disclosed in the financial report of a defined benefit
plan but would not be shown in the financial report of a defined contribution plan?
a. Government bonds held
b. Actuarial present value of promised retirements benefits
c. Employee contributions
d. Employer contributions
4. Which of the following criteria is not required for the recognition of a liability for
compensated absences?
a.
b.
c.
d.
6. An entity shall recognized the expected cost of profit sharing and bonus plans when
I. The entity has a present legal or constructive obligation to make such payment
as
a result of past event.
II. A realiable estimate of the obligation can be made.
a.
b.
c.
d.
I only
II only
Both I and II
Either I and II
8. Which of the following is true in relation to the recognition of defined benefit cost
for other long-term employee benefits?
I. Current service cost, past service cost and any gain or loss on settlement are
fully recognized through profit or loss.
II. Remeasurements are fully recognized through profit or loss.
a.
b.
c.
d.
I only
II only
Both I and II
Either I and II
9. These are employee benefits that are payable as a result of an entitys decision to
terminate employees employment before the normal retirement date, or an
employees decision to accept an offer of benefits in exchange for termination of
employment.
a.
b.
c.
d.
Termination benefits
Short-term employee benefits
Other long-term employee benefits
Postemployment employee benefits
2. The employees are each entitled to 10 days of paid holiday leave per calendar year.
Unused holiday leave may be carried forward until the employee leave the
employment of the entity, at which time the entity will pay the employee for all
unused holiday leave. The holiday leave is
a.
b.
c.
d.
plan. The entity has an obligation to pay employees that choose voluntary
redundancy a lump sum equal to twice their gross annual salary. The obligation to
pay employees that choose voluntary redundancy is
a.
b.
c.
d.
4. A profit sharing plan requires entity to pay a specified proportion of the cumulative
profit for a five period to employees who serve throughout the five period. The
profit sharing plan
a.
b.
c.
d.
5. A profit sharing plan requires entity to pay a specified proportion of the cumulative
profit for the year to employees who serve throughout the year. The profit sharing
plan
a.
b.
c.
d.
3. The amount of the liability for the paid absences should be based on
a. The current rate of pay in effect when employees earn the right to paid
absences.
b. The expected rate to pay expected to be paid when employees use paid time.
c. The present value of the amount expected to be paid in future periods.
d. Either the current pay in effect when employees earn the right to paid
absences or the expected rate to pay to be paid when employees use paid time.
5. What is the requirement for the accrual of a liability for sick pay?
a. Sick pay benefits can be reliably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits do not vest.
d. Sick pay benefits accumulate.