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REVIEW OF FINANCIAL ACCOUNTING THEORY AND PRACTICE

LIABILITIES – THEORY
Related standards: PAS 1, 12, 17, 19 & 37
1. Which is not an essential characteristic of an accounting liability?
a. The liability is the present obligation of a particular entity.
b. The payee to whom the obligation is owed must be identified.
c. The liability arises from past event or transaction.
d. The settlement of the liability requires an outflow of resources embodying economic
benefits.
2. It is an existing liability of uncertain amount or uncertain timing.
a. Contingent liability c. Discount on note payable
b. Unearned income d. Provision
3. A provision is recognized in the balance sheet when and only when
I. An enterprise has a present obligation, legal or constructive, as a result of a past
event.
II. It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
III. A reliable estimate can be made of the amount of the obligation.
a. I, II and III b. I only c. II and III d. II only
4. A constructive obligation is an obligation
I. Arising from contract, legislation or operation of law.
II. That is derived from an enterprise’s action that the enterprise will accept certain
responsibilities because of past practice, published policy or current statement
and as a result, the enterprise has created a valid expectation in other parties
that it will discharge those responsibilities.
a. Both I and II b. Neither I nor II c. I only d. II only
5. It is an event that creates a legal or constructive obligation because the enterprise has
no other realistic alternative but to settle the obligation.
a. Event after balance sheet date c. Nonadjusting event
b. Adjusting event d. Obligating event

6. What amount is accrued as a provision?

a. Minimum c. Median
b. Maximum d. Best estimate
7. Where there is a continuous range of possible outcomes, and each point in that range
is as likely as any other, the range to be used is the
a. Minimum c. Midpoint
b. Maximum d. Summation of the minimum and maximum

8. At issuance date, the present value of a promissory note will be equal to its face
amount if the note
a. Bears a stated rate of interest which is realistic.
b. Bears a stated rate 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.
9. Which of the following statements concerning discount on note payable is false?
a. Discount on note payable may be debited when a company discounts its own note
with the bank.
b. The discount on note payable is a contra liability account which is shown as a
deduction from note payable.
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c. The discount on note payable represents interest charges applicable to future

periods.
d. Amortizing the discount causes the carrying value of the liability to gradually
decrease over the life of the note.
10. The proceeds from a bond issued with detachable stock purchase warrants should be
accounted for
a. Entirely as bonds payable
b. Entirely as stockholders’ equity
c. Partially as unearned revenue and partially as bonds payable
d. Partially as stockholders’ equity and partially as bonds payable
11. The proceeds from the issuance of convertible bonds payable shall initially be
accounted for as
a. Equity for the entire proceeds
b. Liability for the entire proceeds
c. Liability for the face amount of the bonds and equity for the excess proceeds.
d. Partly liability and partly equity
12. After initial recognition, an entity shall measure a bond liability at amortized cost using
the
a. Effective interest method c. Straight line method
b. Bond outstanding method d. Either effective interest or straight line method
13. Use of the effective interest method in amortizing a discount on bonds payable would
result in
a. A decreasing amount of discount amortization each period over the life of the bonds
b. A constant amount of discount amortization each period over the life of the bonds
c. An increasing amount of discount amortization each period over the life of the
bonds
d. Cannot be determined from the information given

14. In theory, the proceeds from the sale of a bond will be equal to the
a. Face value of the bond.
b. Present value of the principal amount due at the end of the life of the bond plus the
present value of the interest payments made during the life of the bond.
c. Face value of the bond plus the present value of the interest payments made during
the life of the bond.
d. Face value of the bond plus the interest payments made during the life of the bond.
15. What is the market rate of interest for a bond issue which sells for more than its face
value?
a. Less than rate stated on the bond c. Equal to rate stated on the bond
b. Higher than rate stated on the bond d. Independent of rate stated on the bond

16. The appropriate valuation of an operating lease is

a. Zero
b. The absolute sum of the lease payments
c. The present value of minimum lease payments discounted at an appropriate rate
d. The market value of the asset at the date of the inception of the lease
17. Lease payments under an operating lease should be recognized as expense using the
a. Cash method
b. Sum of years’ digits method
c. Declining balance method
d. Straight line method, unless another systematic basis is representative of the time
pattern of the user’s benefit.

18. What is the cost basis of an asset acquired under a finance lease?
a. The sum of the minimum lease payments?
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b. The present value of the minimum lease payments discounted at an appropriate

rate
c. The net realizable value of the asset at the inception of the lease
d. The present value of the market price of the asset discounted at an appropriate rate
19. The minimum lease payments under a finance lease include all of the following, except
a. Contingent rent and executory costs
b. Periodic rentals over the lease term
c. Any amount guaranteed by the lessee or by a party related to the lessee.
d. Payment required to exercise an option on the part of the lessee to purchase the
asset at a price which is expected to be sufficiently lower than its fair value at the
option exercise date.
20. A lease contains a bargain purchase option. In determining the capitalized cost at the
beginning of the lease term, the payment called for by the bargain option would
a. Not be capitalized c. Be subtracted at its present value
b. Be added at its exercise value d. Be added at its present value
21. At the inception of a capital lease, the guaranteed residual value should be
a. Included as part of minimum lease payments at present value
b. Included as part of minimum lease payments at future value
c. Excluded from minimum lease payments
d. Included as part of minimum lease payments to the extent that the guaranteed
residual value is expected to exceed estimated residual value

22. The lessee’s balance sheet liability for a capital lease would be periodically reduced by
the
a. Minimum lease payment plus the amortization of the related asset
b. Minimum lease payment less the amortization of the related asset
c. Minimum lease payment
d. Minimum lease payment less the portion allocable to interest
23. The depreciable asset recognized by the lessee under a finance lease should be
depreciated over the
a. Useful life of the asset
b. Lease term
c. Useful life of the asset if there is reasonable certainty that the lessee will obtain
ownership by the end of the lease term.
d. Lease term or useful life of the asset, whichever is shorter
24. Under a sales type lease, what is the meaning of “gross investment in the lease” on the
part of the lessor?
a. Present value of minimum lease payments
b. Present value of minimum lease payments and present value of unguaranteed
residual value.
c. Absolute amount of the minimum lease payments
d. Aggregate of minimum lease payments and unguaranteed residual value
25. Net investment in the lease is equal to the
a. Gross investment in the lease less unearned finance income
b. Gross investment in the lease less dealer’s profit
c. Minimum lease payments
d. Minimum lease payments less unguaranteed residual value.
26. What is the treatment of unguaranteed residual value in determining the cost of sales
under a sales type lease?
a. Ignored
b. Added to the cost of the leased asset
c. Deducted from the cost of the leased asset at absolute amount
d. Deducted from the cost of the leased asset at present value
27. Initial direct costs incurred by the lessee in connection with a finance lease are
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a. Included as part of the amount recognized as an asset under the lease

b. Expensed immediately
c. Deferred and amortized over the lease term on a straight line basis.
d. Included in the minimum lease payments at present value.
28. Which statement is correct concerning a finance lease on the part of the lessor?
I. Initial direct costs should be recognized as expense in the income statement at
the inception of a sales type lease.
II. Initial direct costs incurred by the lessor in a direct financing lease are included
in the net investment in the lease and will have the effect of reducing the interest
income from the finance lease.
a. I only b. II only c. Both I and II d. Neither I nor II
29. If the sale and leaseback transaction results in a finance lease, any gain from the sale
and leaseback should
a. Not be recognized
b. Be recognized as income immediately.
c. Be deferred and amortized over the lease term.
d. Be deferred and amortized over the useful life of the asset.

30. ABC Company sold its headquarters building at a gain and simultaneously leased back
the building. The lease was reported as a finance lease. At the time of sale, the gain
should be reported as
a. Operating income
b. An extraordinary item
c. A separate component of stockholders’ equity
d. As asset valuation allowance
31. Under PAS 12, which enterprises are required to report deferred tax asset or liability?
I. Public enterprises II. Nonpublic enterprises
a. I only b. II only c. Both I and II d. Neither I nor II
32. Temporary difference is the
I. Difference between the tax basis of an asset or liability and its reported amount
that will result in taxable or deductible amounts in future years when the reported
amount of the asset or liability is recovered or settled respectively.
II. Item of income or expense which is included in either financial income or taxable
income but will never be included in the other.
a. I only b. II only c. Both I and II d. Neither I nor II
33. Taxable temporary difference is the
I. Temporary difference that will result in taxable amount in determining taxable
income of future periods when the carrying amount of the asset or liability is
recovered or settled.
II. Temporary difference that will result in deductible amount in determining taxable
income of future periods when the carrying amount of the asset or liability is
recovered or settled.
a. I only b. II only c. Both I and II d. Neither I nor II
34. A deferred tax liability is computed using
a. The current tax law, regardless of the enacted future tax law
b. Expected future tax law, regardless of whether this expected law has been enacted
c. Current tax law, unless enacted future tax law is different
d. Either current or expected future law, regardless of whether the expected law has
been enacted
35. It is deferred tax consequence attributable to a taxable temporary difference.
a. Deferred tax liability c. Deferred tax asset
b. Current liability d. Noncurrent deferred tax liability
36. It is deferred tax consequence attributable to a deductible temporary difference and
operating loss carry forward.
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a. Deferred tax asset c. Deferred tax liability

b. Current tax asset d. Current tax liability

37. It is the amount of income tax paid or payable for the year as determined in applying
the provisions of the enacted tax law to the taxable income.
a. Current tax expense c. Deferred tax expense
b. Deferred tax benefit d. Income tax expense

38. It is excess of taxable revenues over tax deductible expenses and exemptions for the
year as defined by the BIR.
a. Pretax financial income c. Financial income subject to tax
b. Gross income d. Taxable income

39. An entity shall offset 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 set off 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

40. Postemployment employee benefits include

a. Termination benefits
b. Short-term employee benefits
c. Equity compensation benefits
d. Retirement benefits, such as pensions

41. It is the increase in the present value of the defined benefit obligation resulting from
employee service in the current period.
a. Past service cost c. Current service cost
b. Interest cost d. Current service and interest cost

42. Which statement is correct concerning past service cost ?

a. The past service cost should be expensed immediately when additional benefits
vest immediately.
b. If the additional benefits are not vested, the past service cost is amortized on a
straight line basis over the period until the benefits vested.
a. Both I and II b. Neither I nor II c. I only d. II only

43. The vested benefits are employee

a. Benefits accumulated in the hands of a trustee.
b. Benefits that are contingent upon future employment.
c. Benefits that are not contingent upon future employment.
d. Benefits that are to be paid to retired employees in the current period.

44. The “corridor” in the recognition of actuarial gain or loss is equal to

a. 10% of the present value of the defined benefit obligation at the beginning of the
year.
b. 10% of the fair value of the plan assets at the beginning of the year.
c. 10% of the lower between the present value of the defined benefit obligation and
the fair value of the plan assets at the beginning of the year.
d. 10% of the higher between the present value of the defined benefit obligation and
the fair value of the plan assets at the beginning of the year.

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