Problem 1-1 Multiple Choice (PFRS 9)
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
3. The fair value of a liability is defined as
a. The appraised value of the liability
b. The price that would be received to assume the liability in an orderly transaction
between market participants
c. The amount that would be paid when transferring a liability in an orderly
transaction between market participants
d. The carrying amount of the liability on the date of transaction
4. After initial recognition, an entity shall measure a financial liability at
I. Amortized cost using the effective interest method.
II. Fair value through profit or loss
a. I only
b. II only
c. Either I or II
d. Neither I or II
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
Problem 1-2 Multiple Choice (PAS 1)
1. Some liabilities, such as trade payables, accruals for employee and other operating
costs, are expected to be settled in more than twelve months after the reporting
period. How will an entity classify these items in the statements of financial
positions?
a. Current
b. Noncurrent
c. First classify as noncurrent since the term is more than twelve months, then
classify to current if the term is less than twelve months.
d. It will depend on the entity’s policy
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.
4. Which of the following should be classified as noncurrent liability?
a. Long-term loan arrangement wherein an entity breaches a provision such that the
loan becomes payable on demand. After the reporting period and before
authorization of the financial statements for issue, the lender has agreed not to
demand payment.
b. Bond payable issued with the intention to repurchase in the near term
c. Dividend payable due in two years after the reporting period
d. Trade note payable
5. Which of the following should be classified as noncurrent liability?
a. Trade and other payable
b. Provision
c. Financial liability held for trading
d. Deferred tax liability
Problem 1-3 Multiple choice (PAS 1)
1. The principal classifications of liabilities are
a. Current liabilities and noncurrent liabilities
b. Current liabilities, noncurrent liabilities and deferred revenue
c. Current liabilities and deferred revenue
d. Noncurrent liabilities and deferred revenue
2. All of the following condition would require the classification of a liability as
current, except
a. The entity expects to settle the liability within the entity’s operating cycle
b. The entity holds the liability for the purpose of trading
c. The liability is due to be settled within twelve months after the reporting period
d. The entity has an unconditional right to defer settlement of the liability for 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
Problem 1-4 Multiple choice (IAA)
1. For a liability to exist
a. A past transaction or event must have occurred
b. The exact amount must be known
c. The identity of the party owed must be known
d. An obligation to pay cash in the future must exists
2. The conceptually appropriate method of measuring a liability is
a. Discount the amount of expected cash outflows that are necessary to liquidate the
liability using the market rate of interest at the date the liability was initially
incurred.
b. Discount the amount of expected cash outflows that are necessary to liquidate the
liability using the market rate of interest at the date financial statements are
prepared.
c. Record as a liability the amount of cash that the entity would be required to pay
to eliminate the liability in the ordinary course of business on the date of the
financial statements.
d. Record as a liability the amount of cash actually received when a liability was
incurred.
3. Which of the following represents a liability?
a. The obligation to pay for goods that an entity expects to order from suppliers
next year.
b. The obligation to provide goods that customers have ordered and paid for during
the current year.
c. The obligation to pay interest on a five-year note payable that was issued the last
day of the current year.
d. The obligation to distribute an entity's own shares next year as a result of a stock
dividend declared near the end of the current year.
4. Which of the following does not meet the definition of a liability?
a. The signing of a three-year employment contract at a fixed annual salary.
b. An obligation to provide goods or services in the future.
c. A note payable with no specified maturity date.
d. An obligation that is estimated in amount.
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
Problem 1-5 Multiple choice (IAA)
1. Among the short-term obligations as of the year-end are notes payable with a
certain bank. These are 90-day notes, renewable for another 90-day period. These
notes should be classified
a. Current liabilities
b. Deferred credits
c. Noncurrent liabilities
d. Intermediate debt
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?
a. Current liability with separate disclosure at the note refinancing.
b. Current liability with no disclosure required.
c. Noncurrent liability with separate disclosure of the note refinancing
d. Noncurrent liability with no separate disclosure required
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
5. Which of the following circumstances may result in the classification of a liability
as current?
a. Short-term obligations refinanced with long-term debt at the end of reporting
period
b. Debts to be liquidated from funds that have been accumulated and are reported
as noncurrent assets
c. Violation of provisions of a debt agreement
d. Obligations for advance collections that involve long term deferment of the
delivery of goods or services
Problem 1-6 Multiple choice (IAA)
1. Which of the following is a characteristics of a current liability but not a current
liability ?
a. Unavoidable obligation
b. Present obligation requires settlement by probable future transfer or use of cash,
goods or services.
c. Settlement is expected wothin the normal operating cycle or within 12 months,
whichever is longer.
d. The obligating event creating the liability has already occurred.
2. Which of the following is not considered a characteristics of liability ?
a. Present obligation
b. Arises from past event
c. Results in an outflow of resources
d. Liquidation is reasonably expected to require use of current 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.
5. Which of the following is NOT an acceptable presentation of current liabilities?
a. Listing current liabilities in the order of maturity.
b. Listing current liabilities according to amount.
c. Offsetting current liabilities against assets that are to be applied to their
liquidation.
d. Showing current liabilities in the order of liquidation preference.
Problem 1-7 Multiple choice (IFRS)
1. Which of the following statements best describes the term "liability" ?
a. An excess of equity over current assets
b. Resources to meet financial commitments as they fall due
c. The residual interest in the assets of the entity after deducting all of the liabilities
d. A present obligation of the entity arising from past events
2. Conceptually, a short-term note payable with no stated rate of interest should be
a. Recorded at maturity value.
b. Recorded at the face amount.
c. Discounted to its present value.
d. Reported separately from other short-term notes payable.
3. In which section of the statement of financial position should employment taxes
that are due for settlement in 15 months' ime be presented?
a. Current liabilities
b. Current assets
c. Noncurrent liabilities
d. Noncurrent assets
4. Which of the following should be classified as noncurrent liability?
a. Unearned revenue
b. Mandatory redeemable preference share
c. The currently maturing portion of long-term debt
d. Accrued salaries payable to management
5. Which of the following is a noncurrent liability?
a. Income tax payable
b. One-year magazine subscription received in advance
c. Unearned interest income related to noninterest-bearing long-term note
receivable
d. Estimated warranty liability
Problem 1-8 Multiple choice (IAA)
1. Liabilities are
a. Any accounts with credit balances
b. Deferred credits
c. Obligations to transfer ownership shares
d. Present obligations arising from past events and result in an outflow of resources
2. Which of the following is not a liability?
a. Deposit received from customer
b. Unearned revenue
c. Zero interest-bearing note payable
d. Stock dividend payable
3. All of the following are classified as current liabilities, except
a. Long-term debt maturing currently refinanced on a long-term basis at the end of
reporting period
b. Long-term debt maturing currently to be paid with cash in a sinking fund.
c. Long-term debt maturing currently refinanced on a long-term basis after the end
of reporting period
d. Long-term debt maturing currently with no option for refinancing.
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.
5. What is the classification of debt callable by the creditor?
a. Noncurrent liability
b. Current liability
c. Current liability if the creditor intends to call the debt within one year.
d. Current liability if it is probable that the creditor will call the debt within one
year.
Problem 2-1 Multiple choice (IFRIC 13)
1. It is a marketing scheme whereby an entry grants award credits to customers and
the
entity can redeem the award credits in exchange for free or discounted goods or
services.
a. Customer loyalty program
b. Premium plan
c. Marketing program
d. Loyalty award
2. The award credits granted to customers under a customer loyalty program is often
described as
a. Points
b. Awards
c. Credits
d. Royalty
3. The consideration allocated to the award credits is measured at
a. Fair value of the award credits
b. Carrying amount of goods to be received in exchange
c. Fair value of goods to be received in exchange
d. The proportion f the fair value of the award credits relative to the total
consideration received from the initial sale of goods
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
Problem 2-2 Multiple choice (IAA)
1. The accrual approach in accounting for products warrant cost
a. Is required for income tax purposes
b. Is frequently justified on the basis of expediency when warranty cost is
immaterial
c. Finds the expense account being charged when the seller performs in compliance
with the warranty
d. Represents accepted practice and should be used whenever the warranty is an
integral and inseparable part of the sale.
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
3. Which of the following best describes the expense as incurred approach of
accounting for warranty cost?
a. Expensed based on estimate in year or sale
b. Expensed when liability is accrued
c. Expensed when warranty claims are certain
d. Expensed when incurred
4. An entity has a continuing policy of guaranteeing now products against defects for
three years. What is the classification of the estimated warranty liability?
a. Noncurrrent
b. Current
c. Partly current and partly noncurrent
d. No need for disclosure
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
Problem 3-1 Multiple choice (AICPA Adopted)
1. An entity sells appliances that include a two-year warranty. Service calls under the
warranty are performed by an independent mechanic under contract with the entity.
Based on experience, warranty costs are estimated at a certain amount for each
appliance sold. When should the entity recognize these warranty costs?
a. Evenly over the life of the warranty
b.When the service calls are performed
c. When payments are made to the mechanic
d. When the appliances are sold
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
b. Contra asset account
c. Current liability
d. Noncurrent liability
4. An entity is a retailer of home appliances and offers a service contract on each
appliance sold. The entity sells appliances on installment contracts but all service
contracts must be paid in full at the time of sale. Collections received for service
contracts should be recorded as an increase in
a. Deferred revenue account
b. Sales contracts receivable valuation account
c. Shareholders’ equity valuation account
d. Service revenue account
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 merchandise’s retail price
b. Unearned revenue at the cash received
c. Revenue at the merchandise’s price
d. Revenue at the cash received.
7. How would the proceeds received from the advance sale of nonrefundable tickets
for
a theatrical performance be reported in the statement of financial position before the
performance?
a. Revenue for the entire proceeds
b. Revenue to the extent of related costs expanded
c. Unearned revenue to the extent of related costs expended
d. Unearned revenue for the entire proceeds
8. Magazine subscriptions collected in advance should be treated as
a. A contra account to magazine subscriptions receivable
b. Deferred revenue in the liability section
c. Deferred revenue in the shareholders’ equity section.
d. Magazine subscription refund in the income statement in the period collected.
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
Problem 4-1 Multiple Choice (PAS 37)
1. Which is the correct definition of provision?
a. A possible obligation arising from past events.
b. A liability of uncertain timing or amount
c. A liability which cannot be easily measured
d. An obligation to transfer funds to an entity.
2. A provision shall be recognized when:
I. An entity has a present obligation as a result of past event.
II. It is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation.
a. I and II only.
b. I and III only
c. II and III only
d. I, II and III
3. A constructive obligation is an obligation.
I. That is derived from an entity’s action that the entity will accept certain
responsibilities because of past practice, published policy or current
statement.
II. The entity has created a valid expectation in other parties that it will
discharge those responsibilities.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
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.
6. What amount is recognized as provision?
a. Best estimate of the expenditure
b. Minimum of the range
c. Maximum of the range
d. Midpoint of the range
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
Problem 4-2 Multiple Choice (PAS 37)
1. Which of the following statements is true regarding recognition of a provision?
I. No provision is recognized for cost that need to be incurred to operate in the
future.
II. A provision for the decommissioning of an oil installation or a nuclear plant
station shall be recognized to the extent that an entity is obliged to rectify
damaged already caused.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Provisions shall be discounted if the effect is material. Which of the following is
incorrect regarding the discount rate?
a. Reflects current market rate assessment of the time value of money.
b. Reflects risk specific to the liability.
c. Does not reflect risk for which future cash flow estimates have already been
adjusted.
d. Is a post-tax discount rate.
3. For an event to be an obligating event, it is necessary that the entity has no
realistic alternative but to settle the obligation created by the event and this is the
case only:
I. Where the settlement of the obligation can be enforced by law.
II. Where the event creates valid expectation in other parties that the entity will
discharge the obligation as in the case of constructive obligation.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
4. Which of the following statements is true concerning the measurement of a
provision?
I. The amount recognized as a provision should be the best estimate of the
expenditure required to settle the present obligation at the end of reporting
period.
II. The best estimate of the expenditure required to settle the present obligation is
the amount that an entity would rationally pay to settle the obligation at the
end of reporting period or to transfer it to a third party at the same time.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
5. Which of the following terms is associated with recognizing provision?
a. Possible
b. Likely
c. Remote
d. Probable
ANSWERS:
1. C
2. D
3. C
4. C
5. D
Problem 4-3 Multiple Choice (PAS 37)
1. Which of the following statements is true in relation to the measurement of a
provision?
I. The risk and uncertainties that inevitably surround many events and
circumstances shall be taken into account in reaching the best estimate of a
provision.
II. Where the effect of the time value of money is material, the amount of a
provision shall be the present value of the expenditure expected to settle the
obligation.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
2. Which of the following statements is true in relation to measurement of a
provision?
I. Future events that may affect the amount required to settle the obligation shall
be reflected in the amount of the provision where there is sufficient objective
evidence that the future events will occur.
II. Gains from expected disposal of assets shall be taken into account in
measuring a provision.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
3. Which of the following statements is incorrect concerning recognition of a
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
Problem 4-4 Multiple choice (PAS 37)
1. This is defined as “a structured program that is planned and controlled by the
management that materially changes either the scope of a business of an entity or
the manner in which that business is conducted”.
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
3. Which is a cost of restructuring?
a. Cost of retraining or relocating continuing staff
b. Marketing or advertising cost
c. Investment in new system and distribution network
d. Cost of relocating business activities from one location to another
4. It is the abusive practice of manipulation and creative accounting by dumping all
kinds of provisions under the banner of provision for restructuring.
a. Big bath provision
b. Creative accounting
c. Cookie jar
d. General reserve
5. A provision for restructuring is required when
I. The entity has a detailed plan for the restructuring.
II. The entity has raised valid expectation in the minds of those affected that the
entity will carry out the restructuring by announcing its main features to those
affected by it
a. I only
b. II only
c. Both I and II
d. Neither I nor II
ANSWERS:
1. A
2. D
3. D
4. A
5. C
Problem 4-5 Multiple choice (IFRS)
1. A legal obligation is an obligation that is derived from all of the following except
a. Legislation
b. A contract
c. Other operation of law
d. An established pattern of past practice
2. A provision should be recognized for which of the following?
a. Future operating losses
b. Obligations under insurance contracts
c. Reductions in fair value of financial instruments
d. Obligations for plant decommissioning costs
3. Provisions shall be recognized for all of the following except
a. Cleaning-up costs of contaminated land when an oil entity has a published
policy that it will undertake to clean up all contamination that it causes.
b. Restructuring costs after a binding sale agreement has been signed
c. Rectification costs relating to defective products already sold
d. Future refurbishment costs due to introduction of a new computer system
4. An entity is closing one of its operating divisions and the conditions for making
restructuring provision have been met. The closure will happen in the first quarter
of the next financial year. At the current year-end, the entity has announced the
formal plan publicly and is calculating the restructuring provision. Which of the
following costs should be included in the restructuring provision?
a. Retraining staff continuing to be employed
b. Relocation costs relating to staff moving to other divisions
c. Contractually required costs of retraining staff being made redundant from the
division being closed
d. Future operating losses of the division being closed up to the date of closure.
5. An entity operates chemical plants. Its published policies include a commitment to
making good any damaged caused to the environment by its operations. It has
always honored this commitment. Which of the following scenarios relating to the
entity would give rise to an environmental provision?
a. On the past experience it is likely that a chemical spill which would result in
having to pay fines and penalties will occur in the next year.
b. Recent research suggests there is a possibility that the entity’s actions may
damage surrounding wildlife
c. The government has outlined plans for a new law requiring all environmental
damage to be rectified
d. A chemical spill from one of the entity’s plants has caused harm to the
surrounding area and wildlife
ANSWERS:
1. D
2. D
3. D
4. C
5. D
Problem 4-6 Multiple choice (IFRS)
1. A provision shall be recognized when
a. There is a legal obligation arising from a past obligating event, the probability of
the outflow of resources is more than remote but less than probable, and a
reliable estimate can be made of the amount of the obligation.
b. There is a constructive obligation as a result of a past obligating event, the
outflow of resources is probable, and a reliable estimate can be made of the
amount of the obligation
c. There is a possible obligation arising from a past event, the outflow of resources
is probable, and an approximate amount can be set aside toward the obligation
d. Management decides that it is essential that a provision be made for unforeseen
circumstances and keeping in mind this year the profits were enough but next
year there may be losses
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
year’s 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
the settlement check is actually received
4. An entity has been served a legal notice at year-end by the Department of
Environment and Natural Resources to fit smoke detectors in its factory on or
before middle of the next year. The cost of fitting smoke detector can be
measured reliably. How should the entity treat this in its financial statements at
year-end?
a. Recognize a provision for the current year equal to the estimated amount
b. Recognize a provision for the current year equal to one-half only of the
estimated amount
c. No provision is recognized at year-end because there is no present obligation
for the future expenditure since the entity can avoid the future expenditure by
changing the method of operations, but disclosure is required
d. Ignore the event
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 chirma’s
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 year’s financial statements
ANSWERS:
1. B
2. B
3. C
4. C
5. A
Problem 4-7 Multiple choice (PAS 37)
1. Which of the following statements is incorrect concerning a contingent liability?
a. A contingent liability is both probable and measurable
b. An entity shall not recognize a contingent liability in the financial statements
c. A contingent liability is disclosed only
d. If a contingent liability is remote, no disclosure is required
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
3. Which of the following statements in relation to a contingent liability is true?
I. An obligation as a result of the entity creating a valid expectation that it will
discharge its responsibilities is a contingent liability
II. A present obligation that arises from past event but cannot be reliably
measured is a contingent liability
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
wholly within the control of the entity
a. Contingent asset
b. Contingent gain
c. Possible asset
d. Asset in suspense
5. Which of the following statement is incorrect concerning a contingent asset?
a. A contingent asset is recognized because this may result to recognition of
income that may never be realized.
b. When the realization of income is virtually certain, the related asset is no longer
a contingent asset and its recognition is appropriate.
c. A contingent asset is disclosed where an inflow of economic benefit is probable.
d. A contingent asset is disclosed where an inflow of economic benefit is possible
or remote
ANSWERS:
1. A
2. A
3. B
4. A
5. D
Problem 4-8 Multiple Choice (AICPA Adapted)
1. The likelihood that the future event will or will not occur can be expressed by a
range of outcome. Which range means that the future event occurring is very
slight?
a. Probable
b. Reasonably certain
c. Certain
d. Remote
2. An entity did not record an accrual for a present obligation but disclose the nature
of the obligation and range of the loss. How likely is the loss?
a. Remote
b. Reasonably possible
c. Probable
d. Certain
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 lawsuit’s probable
outcome on the entity’s 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
5. Contingent assets are usually recognized when
a. Realized
b. Occurrence is reasonable and the amount can be reasonably estimated
c. The amount can be reasonably estimated
d. The amount can be reasonably estimated
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
7. Which of the following is the proper accounting treatment of a probable contingent
asset?
a. An accrued account
b. Deferred earnings
c. An account receivable with an additional disclosure explaining the nature of
transaction
d. A disclosure only
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 entity’s
financial statements should report the expected award as
a. Receivable and revenue
b. Receivable and reduction of patent
c. Receivable and deferred revenue
d. Disclosure only
ANSWERS:
1. D
6. C
2. B
3. D
4. B
5. A
7. D
8. C
9. C
10. D
Problem 4-9 Multiple choice (IAA)
1. Contingent liabilities will or will not become actual liabilities depending on
a. Whether they are probable and estimable.
b. The degree of uncertainty.
c. The present condition suggesting a liability.
d. The outcome of a future event.
2. A contingent liability shall be recognized when
a. Any lawsuit is actually filed against an entity.
b. It is certain that funds are available to pay the amount of the claim.
c. It is probable that a liability has been incurred even though the amount of the
loss cannot be reasonably estimated.
d. The amount of the loss can be reasonably estimated and it is probable prior to
issuance of financial statements that a liability has been incurred.
3. How should a contingent liability be reported in the financial statements when it is
reasonably possible that the entity will have to pay the liability at a future date?
a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable with an additional disclosure explaining the nature of
the transaction
4. Disclosure usually is not required for
a. Contingent gains that are probable and can be reasonably estimated.
b. Contingent losses that are reasonably possible and cannot be reasonably
estimated.
c. Contingent losses that are probable and cannot be reasonably estimated.
d. Contingent losses that are remote and can be reasonably estimated.
5. Provisions are accrued because the likelihood of an unfavorable outcome is
a. Virtually certain
b. Greater than 50%
c. At least 75%
d. Possible
6. Reporting is required for
a. Loss contingencies that are probable and can be reliably measured.
b. Gain contingencies that are probable and can be reliably measured.
c. Loss contingencies that are possible and can be reliably measured.
d. All loss contingencies.
7. Pending litigation would generally be considered
a. Nonmonetary liability
b. Contingent liability
c. Estimated liability
d. Current liability
8. Gain contingencies that are remote and can be reliably measured
a. Must be disclosed.
b. May be disclosed.
c. Must be reported.
d. Should not be reported or disclosed.
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.
10. Which of the following should be disclosed in the financial statements as a
contingent liability?
a. The entity has accepted liability prior to the year-end for unfair dismissal of an
employee and is to pay damages.
b. The entity has received a letter from a supplier complaining about an old unpaid
invoice.
c. The entity is involved in a legal case which it may possibly lose, although this is
not probable.
d. The entity has not yet paid certain claims under sales warranties.
ANSWERS:
1. D
6. A
2. D
7. B
3. C
8. D
4. D
9. D
5. B
10. C
Problem 4-10 Multiple choice (IAA)
1. What condition is necessary to recognize an environmental liability?
a. The entity has an existing legal obligation and the amount of the liability can be
reliably estimated.
b. The entity can reliably estimate the amount of the liability.
c. The entity has a existing legal obligation.
d. Obligating event has occurred.
2. Which of the following is not considered when evaluating whether or not to
received a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reliable estimate of the amount of the loss.
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.
d. A description of operations both within and outside of the home country.
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.
5. How should incurred cost associated with relocating employees in a restructuring
be accounted for?
a. Measured at fair value and recognized over two years.
b. Measured at fair value and recognized when the liability is incurred.
c. Recognized when cost are paid.
d. Measured at fair value and treated as prior period error.
ANSWERS:
1. A
2. A
3. B
4. B
5. B
Problems 5-1 Multiple Choice (PFRS 9)
1. Bonds Payable not designated at fair value through profit loss 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
2. After initial recognition, bonds payable shall be measured at
I. Amortized cost using the effective interest method.
II. Fair value through profit or loss.
a. I only
b. II only
c. Either I or II
d. Neither I nor II
3. The “amortized cost” of bonds payable means
a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable, minus discount on bonds payable
and minus bond issue cost
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
Problem 5-2 Multiple choice (AICPA Adapted)
1. Bonds that mature on a single date are called
a. Term bonds
b. Serial Bonds
c. Callable Bonds
d. Convertible bonds
2. Bond issued with scheduled maturities at various dates are called
a. Convertible bonds
b. Term bonds
c. Serial bonds
d. Callable bonds
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
b. Decreased by accrued interest from May 1 to June 1
c. Increased by accrued interest from May 1 to June 1
d. Increased by accrued interest from May 1 to June 1
5. The issuer of a 10-year bond sold at par three years ago with interest payable
February 1 and August 1 should report in the year-end statement financial position
a. Liability for accrued interest
b. An addition to bonds payable
c. Increase in deferred charge
d. Contingent Liability
6. A bond issued on June 1 of the current year has interest payment dates of April 1
and
October 1.Bond interest expense for the current year ended December 31 is for a
period of
a. Three months
b. Four months
c. Six months
d. Seven months
7. A ten year term bond was issued at a discount with a call provision to retire the
bond.
When the bond issuer exercised the call provision on an interest date, the carrying
amount of the bond was less than the call price. The amount of bond liability
derecognized should have equaled the
a. Call price
b. Call price less unamortized discount
c. Face amount less unamortized discount
d. Face amount plus unamortized discount
8. How would the amortization of premium on bonds payable affect the carrying
amount of bonds and net income, respectively?
a. Increase and Decrease
b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase
9. How would the amortization of discount on bonds payable affect the carrying
amount of bond and net income, respectively?
a. Increase and Decrease
b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase
10. Unamortized debt discount should be reported as
a. Direct deduction from the face value of the debt
b. Direct deduction from the present value of the debt
c. Deferred charge
d. Part of the bond issue cost
ANSWERS:
1. A
2. C
3. D
4. D
5. A
6. D
7. C
8. D
9. A
10. A
Problem 5-3 Multiple Choice (IAA)
1. Debentures are
a. Unsecured bonds
b. Secured bonds
c. Ordinary bonds
d. Serial bonds
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
4. Which of the following statements is true regarding premium on bonds payable?
a. The premium on bonds payable is a contra shareholders’ equity account
b. The premium on bonds payable appears on the books of the investors
c. The premium on bonds payable increases when amortization entries are made
until maturity date
d. The premium on bonds payable decreases when amortization entries are made
until the balance reaches zero at the maturity date
5. The carrying amount of a bond liability is the
a. Call price of the bond plus bond discount or minus bond premium
b. Face amount of the bond plus related premium or minus related discount
c. Face amount of the bond plus related discount or minus related premium
d. Maturity value of the bond plus related discount or minus related premium
6. The proceeds from the sale of bonds
a. Will always be equal to the face amount
b. Will always be less than the face amount
c. Will always be more than the face amount
d. May be equal to or more or less than the face amount depending on market
interest
rate
7. An extinguishment of bonds payable originally issued at a premium is made by
purchase of the bonds between interest dates. Which of the following statements is
true at the time of extinguishment?
a. Any costs of issuing the bonds must be amortized up to the purchase date
b. The premium must be amortized up to the purchase date
c. Interest must be accrued from the last interest date to the purchase date
d. All of these statements are 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
9. An entity neglected to amortize to discount on outstanding bonds payable. What is
the effect of the failure to record discount 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
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
Problem 5-4 Multiple Choice (IAA)
1. What is the contract between the issuer of bonds and the bondholders?
a. Bond indenture
b. Bond debenture
c. Register bond
d. Bond coupon
2. Bonds for which the bondholder’s 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
4. Bond issue costs should be
a. Expensed in the period when incurred.
b. Recorded as a reduction in the carrying amount of bonds payable.
c. Deferred and amortized over the life of the bonds
d. Expensed in the period when the bonds are retired
5. The amortization of discount on bonds payable
a. Decreases the face amount of bonds payable
b. Decreases the amount of interest expense
c. Decreases the carrying amount of bonds payable
d. Increases the carrying amount of bonds payable
ANSWERS:
1. B
2. C
3. B
4. B
5. A
Problem 6-1 Multiple choice (IAA)
1. Under the effective interest method of amortization, the interest expense is equal to
a. The stated rate of interest multiplied by the face amount of the bonds.
b. The market rate of interest multiplied by the face amount of the bonds.
c. The stated rate of interest multiplied by the beginning carrying amount of the
bonds.
d. The market rate of interest multiplied by the beginning carrying amount of the
bonds.
2. 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
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
4. When an entity failed to recognized amortization of discount on bond payable for
the current year, what is the effect of the error on liabilities and equity,
respectively?
a. Overstated and overstated
b. Understated and understated
c. Overstated and understated
d. Understated and overstated
5. Cost of issuing bonds payable
I. Is included in the measurement of the bonds payable measured at amortized cost
II. Is amortized using the “interest” method over the life of the bonds.
III. Will effectively increase the market rate of interest
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
Problem 6-2 Multiple choice
1. What is the effective interest rate of a bond measured at amortized cost?
a. The stated rate of the bond.
b. The interest rate currently charged by the entity or by others for similar bond.
c. The interest rate that exactly discounts estimated future cash payments through
the expected life of the bond or when appropriate, a shorter period to the net
carrying amount of the bond.
d. The basic risk-free interest rate that is derived from observable government
bond prices.
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
b. Equal to rate stated on the bond
c. Higher than rate stated on the bond
d. Independent of rate stated on the bond
4. If bond are issued at a premium, this indicate that
a. The yield rate exceeds the nominal rate
b. The nominal rate exceeds the yield rate
c. The yield and nominal rates coincide
d. No necessary relationship exists between the two rates
5. Which of the following is true for a bond maturing on a single date when the
effective interest method of amortizing bond discount is used?
a. Interest expense as a percentage of the carrying amount varies from period to
period
b. Interest expense increases each six-month period
c. Interest expense remains constant each six-month period
d. Nominal interest rate exceeds effective interest rate
6. In theory, the proceeds from the sale of a bond will be equal to
a. The face amount of the bond
b. The present value of the principal due at the end of the life of the bond plus the
interest payments made during the life of the bond
c. The face amount of the bond plus the present value of the interest payments
during the life of the bond
d. The sum of the face amount of the bond and the periodic interest payments
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
8. A five-year term bond was issued by an entity on January 1, 2014 at a premium.
The carrying amount of the bond on December 31, 2015 would be
a. The same as the carrying amount on January 1, 2014
b. Higher than the carrying amount on January 1, 2014
c. Higher than the carrying amount on December 31, 2016
d. Lower than the carrying amount on December 31, 2016
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
Problem 6-3 Multiple choice (IAA)
1. What is the interest rate written on the face of the bond?
a. Coupon rate
b. Nominal rate
c. Stated rate
d. Coupon rate, nominal rate or stated rate
2. What is the rate of interest actually incurred?
a. Market rate
b. Yield rate
c. Effective rate
d. Market, yield or effective rate
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.
4. A discount on bond payable is charged to interest expense
a. Equally over the life of the bond
b. Only in the year the bond is issued
c. Using the effective interest method
d. Only in the year the bond matures
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
Problem 7-1 Multiple Choice (PAS 32)
1. It is any contract that gives rise to both a financial asset of one entity and a
financial liability or equity instrument of another entity.
a. Financial instrument
b. Equity instrument
c. Debt instrument
d. Derivative instrument
2. A financial liability is a contractual obligation
I. To deliver cash or other financial asset to another entity
II. To exchange financial instruments with another entity under conditions that are
potentially unfavorable.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
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.
4. Financial liabilities include all of the following, except
a. Trade accounts payable
b. Notes payable
c. Bonds payable
d. Income taxes payable
5. Equity instruments include all of the following, except
a. Ordinary shares
b. Preference shares
c. Warrants or options that allow the holder to purchase a fixed number of
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.
6. Which of the following is not classified as a financial instrument?
a. Convertible bond
b. Foreign currency contract
c. Warranty provision
d. Loan receivable
7. A bond or similar instrument convertible by the holder into a fixed number of
ordinary shares of the entity is
a. A compound financial instrument
b. A primary financial instrument
c. A derivative financial instrument
d. An equity instrument
8. Which of the following should be considered a financial liability?
a. Deferred revenue
b. A warranty obligation
c. A constructive obligation
d. Redeemable preference share
9. What is the principal accounting for a compound financial instrument?
a. The issuer shall classify a compound instrument as either liability or equity
based on evaluation of the predominant characteristics of the contractual
arrangement.
b. The issuer shall classify the liability and equity components of a compound
instrument separately as financial liability or equity instrument
c. The issuer shall classify a compound instrument as a liability in its entirety,
until converted into equity, unless the equity component is detachable and
separately transferable, in which case the liability and equity components shall
be presented separately.
d. The issuer shall classify a compound instrument as a liability in its entirety,
until converted into equity.
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
Problem 7-2 Multiple Choice (ACP)
1. When an entity issued bonds payable that can be converted into ordinary shares,
what will be the effect on liabilities and equity, respectively?
a. Increase and No effect
b. Increase and Increase
c. No effect and Increase
d. Decrease and Increase
2. An entity issued bonds payable with nondetachable share warrants. In computing
interest expense for the first year, the effective interest rate is multiplied by the
a. Proceeds received from sale of the bonds
b. Face value of the bonds
c. Fair value of the bonds only
d. Share warrants outstanding
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
and the total par or stated value of the shares issued.
b. It is the difference between the proceeds received based on the exercised price
plus the share warrants outstanding and the total par or stated value of the share
issued.
c. It is the sum of the share warrants outstanding and total par or stated value of
the shares issued.
d. It is the balance of the share warrants outstanding.
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
Problem 7-3 Multiple Choice (IAA)
1. When the cash proceeds from bonds issued with share warrants exceed the fair
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
Problem 7-4 Multiple Choice (IAA)
1. Convertible bonds
a. Have priority over other indebtedness
b. Are usually secured by the mortgage
c. Pay interest only in the event earnings are sufficient
d. May be exchanged for equity shares
2. The conversion of bonds is usually recorded by
a. Incremental method
b. Proportional method
c. Fair value method
d. Carrying amount method
3. When convertible bond is not converted but paid at maturity
a. A gain or loss is recorded for the difference between the carrying amount of the
bond and the present value of the cash flows.
b. The amount allocated to equity is recorded as a gain
c. The amount allocated to equity is recorded as a loss.
d. The carrying amount of the bond equal to face value is derecognized
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.
CHAPTER 8: NOTE PAYABLE
Problem 8 – 1 Multiple Choice (PFRS 9)
1. An entity shall measure initially a note payable not designated at fair value
through profit or loss at
a. Face amount
b. Fair value
c. Fair value plus transaction cost
d. Fair value minus transaction cost
2. After initial recognition, an entity shall measure a note payable at
a. Amortized cost
b. Fair value through profit or loss
c. Either amortized cost or fair value through profit or loss
d. Either amortized cost or fair value through other comprehensive income
3. What is the amortized cost of note payable?
a. The amount at which the note payable is initially recognized.
b. The amount at which the note payable is initially recognized minus principal
repayment.
c. The amount at which the note payable is initially recognized plus or minus the
cumulative effective interest amortization of the difference between the initial
carrying amount and maturity amount.
d. The amount at which the note payable is initially recognized minus principal
repayment, plus or minus the cumulative effective interest amortization of the
difference between the initial carrying amount and maturity amount.
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.
Problem 8 – 2 Multiple Choice (AICPA Adapted)
1. An entity issued a note solely in exchange for cash. Assuming that the items listed
below differ in amount the present value of the note at issuance is equal to
a. Face amount
b. Face amount discounted at the prevailing interest rate
c. Proceeds received
d. Proceeds received discounted at the prevailing interest rate
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.
6. Which of the following statements concerning discount on note payable is
incorrect?
a. Discount on note payable may be debited when entity 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.
c. The discount on note payable represents interest charges applicable to future
periods.
d. Amortizing the discount on note payable causes the carrying amount of the
liability to gradually decrease over the life 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
CHAPTER 9 – DEBT RESTRUCTURE
Problem 9 – 1 Multiple Choice (PFRS 9)
1. In a debt restructure that is considered an asset swap, the gain on extinguishment is
equal to the
a. Excess of the fair value of the asset over its carrying amount
b. Excess of the carrying amount of the debt over the fair value of the asset
c. Excess of the fair value of the asset over the carrying amount of the debt
d. Excess of the carrying amount of the debt over the carrying amount of the asset
2. For a debt restructuring involving substantial modification of terms, it is
appropriate for a debtor to recognize a gain when the carrying amount of the debt
a. Exceeds the total future cash payments specified by the new terms.
b. Is less than the total future cash payments specified by the new terms.
c. Exceeds the present value of the future cash payments specified by the new
terms.
d. Is less than the present value of the future cash payments specified by the new
terms.
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.
4. Under a debt restructuring involving substantial modification of terms, the future
cash flows under the new terms should be discounted using
a. Original effective interest rate
b. Interest rate under the new terms
c. Market rate of interest
d. Prime interest rate
5. There is substantial modification of terms of an old financial liability if the gain or
loss on extinguishment is
a. At least 10% of the carrying amount of the old liability
b. Less than 10% of the carrying amount of the old liability
c. At least 10 % of the new liability
d. Less than 10% of the new liability
Problem 9 – 2 Multiple Choice (IFRIC 19)
1. An entity shall initially measure equity instruments issued to extinguish all or part
of a financial liability at
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished
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
5. The gain or loss from extinguishment of a financial liability by issuing equity
instruments shall be presented in the statement of comprehensive income as
a. Other income or other expenses
b. Separate line item in profit or loss
c. Component of other comprehensive income
d. Component of finance cost
CHAPTER 10 – OPERATING LEASE
Problem 10 – 1 Multiple Choice
1. The appropriate valuation of an operating lease in the statement of financial
position of the lessee is
a. Zero
b. The absolute sum of the lease payments
c. The present value of the sum of the lease payments discounted at an
appropriate rate
d. The market value of the asset at the inception of the lease
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
3. When should a lessor recognize in income a non-refundable lease bonus paid by a
lessee on signing an operating lease?
a. When received
b. At the inception of the lease
c. At the lease expiration
d. Over the lease term
4. As an inducement to enter a lease, Gray Company, a lessor, granted Zeta Company,
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
5. Lease payments under an operating lease shall be recognized as an expense in the
income statement on
a. Straight line basis over the lease term unless another systematic basis is
representative of the times pattern
b. Diminishing balance basis
c. Sum of units basis
d. Cash basis
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
rental payments should be
a. Allocated between a reduction in the liability for leased asset and depreciation
expense
b. Allocated between a reduction in the liability for leased asset and interest
expense
c. Recorded as a reduction in the liability for leased asset
d. Recorded as a rental expense
9. Which statement characterizes an operating lease?
a. The lessee records depreciation and interest.
b. The lessee records the lease obligation related to the lease asset.
c. The lessor transfers title of the leased property to the lessee for the duration of
the lease term.
d. The lessor records depreciation and lease revenue
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 entity’s 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
CHAPTER 11 – FINANCE LEASE – LESSEE
Problem 11 – 1 Multiple Choice (PAS 17)
1. It is a contract that transfers substantially all the risks and rewards incidental to
ownership of an asset, although title may or may not eventually be transferred.
a. Lease
b. Finance lease
c. Operating lease
d. Lease purchase
2. The inception of the lease is the
a. Date of the lease agreement.
b. Date of commitment by the parties to the principal provisions of the lease
c. Earlier of the date of the lease agreement or date of commitment by the parties
to the principal provisions of the lease
d. Later of the date of the lease agreement or date of commitment by the parties to
the principal provisions of the lease
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.
5. Situations which individually or in combination could also lead to a lease being
classified as finance lease include all of the following, except
a. The leased asset is of a specialized nature such as that only the lessee can use it
without major modification.
b. If the lessee cancels the lease, the lessor’s losses associated with the
cancelation are borne by the lessee.
c. Gains or losses from the fluctuation in the fair value of the residual accrue to
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.
7. The minimum lease payments include all the following, except
a. Rental payments over the lease term
b. Any amount guaranteed by the lessee or by a party related to the lessee
c. Payment required to exercise an option on the part of the lessee to purchase the
asset at a price expected to be sufficiently lower than its fair value at the
option exercise date.
d. Contingent rent
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
9. Which of the following statements in relation to a finance lease is true?
I. Any initial direct costs incurred by a lessee are added to the amount of the
liability recognized in the statement of financial position.
II. Any initial direct costs incurred by a lessee are added to the amount of the
asset recognized in the statement of financial position.
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
Problem 11 – 2 Multiple Choice (PAS 17)
1. The interest rate implicit in the lease is the discount rate that causes the aggregate
of the present value of the minimum lease payments and the unguaranteed residual
value to be equal to the
a. Fair value of the leased asset.
b. Fair value of the leased asset and initial direct cost of the lessor.
c. Fair value of the leased asset and initial direct cost of the lessee.
d. Gross investment in the lease.
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
5. A cancellable lease is deemed noncancelable under all of the following conditions,
except
a. The lease can be cancelled only upon the occurrence of a remote contingency
b. The lease can be cancelled without the permission of the lessor.
c. The lessee, upon cancelation, enters into a new lease for the same or an
equivalent asset with the same lessor.
d. The lease can be cancelled only upon the payment of a penalty of such
magnitude that the lessee shall be discouraged from cancelling the lease.
Problem 11 – 3 Multiple Choice (IFRS)
1. The classification of a lease normally carried out
a. At the end of the lease term
b. After a “cooling off” period of one year
c. At the inception of the lease
d. When the entity deems it to be necessary
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
4. The classification of the lease as either operating of finance lease is based on
a. The length of the lease
b. The transfer of the risk and rewards of ownership
c. The minimum lease payments being at least 50% of fair value
d. The economic life of the asset
5. All of the following would prima facie lead to a lease being classified as finance
lease, except
a. Transfer of ownership of the lease at the end of the lease term
b. Option to purchase at a value below fair value of the asset
c. The lease term is for a major part of the asset’s life.
d. The present value of minimum lease payments is 50% of the fair value of the
asset
Problem 11 – 4 Multiple Choice (IAA)
1 The accounting concept that is principally used to classify lease into operating and
finance is
a. Substance over form
b. Prudence
c. Neutrality
d. Completeness
2. Which o the following is not included in the definition of minimum lease
payments?
a. Any payment is required by a bargain purchase option that is reasonably certain
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 lessee’s 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
5. Which of the following would be considered an executor costs?
a. Minimum lease payment
b. Interest expense incurred
c. Bargain purchase option
d. Maintenance costs
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
a. The property’s fair market value
b. 90 percent of the property’s fair market value
c. 75 percent of the property’s fair market value
d. 50 percent of the property’s fair market value
8. An entity leased a machine having an expected useful life of 12 years. The
noncancealable lease term is 10 years, and the entity may exercise bargain
purchase option at the end of the noncancealable lease term. The machine should be
capitalized by the entity depreciated value
a. 9 years
b.12years
c. 10 years
d. 10 or 12 years at the entity option
9.If the residual value of a leased asset is greater than theamount guaranteed by the
lessee
a. The lessor pays the lessee for the difference
b. The lessee recognizes a gain at the end of the lease term
c. The lessee has no obligation related to the residual value
d. The lessee pays the lessor for the difference
10. Which of the following statements concerning guaranteed residual value is
appropriate for the lessee?
a. The asset and related liability should increased by the absolute amount of the
residual value
b. The asset and related liability should decreased by the absolute amount of the
residual value
c. The asset and related liability should decreased by the present value of the
residual value
d. The asset and related liability should increased by the present value of the
residual value
Problem 11 – 5 Multiple Choice (AICPA Adapted)
1. Generally accepted accounting principles require that certain lease agreement
should
be accounted for as purchase. The theoretical basis for this treatment is that a lease
of this type
a. Effectively conveys all the benefits and incident to ownership of property
b. Is an example of form over substance
c. Provides the use of the lease asset to the lease for a limited period of time
d. Must be recorded in accordance with the concept of cause and effect
2. A lease contains a bargain purchase option. In determining the lessee’s capitalizable
cost at the beginning of the lease term, the payment called for by the bargain
purchase
option would be
a. Subtracted at its present value
b. Added its exercise value
c. Added its present value
d. Subtracted its exercise price
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
4. Which of the following statements is true regarding the lease term?
a. The lease term doesn’t include all periods covered by the bargain renewal
option
b. The lease term includes all periods for which failure to renew imposes a
penalty
sufficiently high that the lessee probably will renew
c. The lease term may extend beyond the date bargain purchase option becomes
exercisable
d. The lease term does not include all periods representing renewals or extension
of
the lease at the lessor’s option
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
b. Asset but not liability
c. Asset and liability
d. Expense
6. What is the cost basis of an asset acquired in a finance lease?
a. The absolute sum of the minimum leased payments over the lease term
b. The present value of the minimum leased payments under the lease including
executory costs discounted at an appropriate rate
c. The present value of the minimum leased payments under the lease exclusive
of executory costs discounted at an appropriate rate
d. The present value of the market value of the asset discounted at an appropriate
rate as an amount to be received at the end of the lease
7. At the inception of the lease , te guaranteed residual value should be
a. Included as part of the lease payments at present value
b. Included as part of the lease payments at future valuec.
c. Included as part of the lease payments only to the extent guaranteed residual
value is expected to exceed estimated residual value
d. Excluded from the minimum lease payments
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 lessee’s 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
Problem 11 – 6 Multiple Choice (AICPA Adapted)
1. At the beginning of the current year, a lessee signs a 7 year lease for equipment
having a 10 year economic life. The present value of the minimum lease payments
equaled 80% of the equipment fair value. The lease agreement provides for neither a
transfer of title to the lessee nor a bargain purchase option. In the current year’s
income statement, the lessee shall report
a. Rent expense equal to the lease payment in the current year
b. Rent expense equal to the lease payment in the current year less interest
c. Lease amortization equal to one tenth of the equipment’s fair value
d. Lease amortization equal to one tenth of 80% o the equipment’s fair value
2. An entity leased a tractor and a truck. The tractor lease does not include a bargain
purchase option but the lease term is equal 90% of the tractor’s economic life. The
truck lease does not transfer ownership of the truck to the entity by the end of the
lease term but the lease term is equal to 75% of the truck’s economic life. How shoul
the entity classify this leases?
a. Both lease should be classified as finance lease
b. An operating lease for a tractor lease and as a finance lease for the truck lease
c. Both the tractor and the truck leases should be classified as operating lease
d. The tractor lease should be classified as finance lease and the truck lease as
operating lease
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 building’s fair value, and the lease term equals 70% of the
building’s economic life. The lessee should recognize an asset for
a. Building
b. Leasehold improvement
c. Both building and leasehold improvement
d. Neither building and leasehold improvement
4. The lessee’s lease liability for a finance lease would be periodically reduced by
a. Minimum lease payment plus depreciation of the related asset
b. Minimum lease payment less depreciation of the related asset
c. Minimum lease payment less the portion allocable to interest
d. Minimum lease payment
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%
Problem 11 – 7 Multiple Choice (IAA)
1. Which of the following statements is correct regarding the lease capitalization
criteria?
a. The lease transfers ownership of the asset to the lessor
b. The lease contains purchase option
c. The lease term is equal to 75% of the economic life of the leased asset
d. The minimum lease payments are at least 90% of the fair value of the leased
asset
2. Which of the following conditions would require lease capitalization?
a. The lease does not transfer title of the leased asset to the lessee
b. There is no bargain purchase option
c. The present value of minimum lease payments is significantly more than the
fair
value of the leased asset
d. The leased term is significantly below the useful life of the leased asset
3. Which of the following best describes current practice in accounting lease?
a. Leases are not capitalized
b. Leases similar to installment purchases are capitalized
c. All long term leases are capitalized
d. All lease are capitalized
4. An entity signed a lease to rent equipment for ten years. At the end of the lease
term,
the entity may purchase the equipment for a nominal amount, the equipment is
estimated to have a useful life of 12 years. How should the entity classify the lease?
a. Operating lease
b. Capital lease
c. Finance lease
d. Sales type lease
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. Lessor’s published rate
c. Lessee’s average borrowing rate
d. Lessee’s incremental rate
6. Executor costs includes all of the following, except
a. Maintenance
b. Property taxes
c. Insurance
d. Bargain purchase option
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
8. The lease liability should be classified as
a. All current
b. All noncurrent
c. Partly current and partly noncurrent
d. Deferred credit
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
Problems 12-1 Multiple Choice
1. Gross investment in the lease is the
a. Aggregate of the minimum lease payments under a finance lease of the lessor
and any unguaranteed residual value accruing to the lessor.
b. The minimum lease payments under a finance lease of the lessor.
c. Present value of minimum lease payments under a finance lease of the lessor
and any unguaranteed residual value.
d. Present value of minimum lease payments under a finance lease of the lessor.
2. Net investment in a direct financing lease is equal to
a. Cost of the asset
b. Cost of the asset plus initial direct cost paid by the lessor
c. Cost of the asset minus guaranteed residual value
d. Cost of the asset plus unguaranteed residual value
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
c. In decreasing amount during the term of the lease
d. After the cost of leased property has been fully recognized through rentals
Problems 12-2 Multiple Choice
1. The lease receivable in a direct financing lease is equal to
a. The cost of the leased asset on the part of lessor.
b. The difference between the gross rentals and the fair value of the leased asset.
c. The present value of minimum lease payments.
d. The cost of the asset less any accumulated depreciation.
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.
3. All of the following would be included in the lease receivable, except
a. Guaranteed residual value
b. Unguaranteed residual value
c. A bargain purchase option
d. All would be included
4. In a direct financing lease, unearned interest income
a. Should be amortized over the lease term using the interest method.
b. Should be amortized over the lease term using the straight line method.
c. Does not arise.
d. Should be recognized at the lease expiration.
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.
Problems 13-1 Multiple Choice
1. Under a sales type lease, what is the meaning of gross investment in the lease?
a. Present value of minimum lease payments
b. Absolute amount of minimum lease payments
c. Present value of minimum lease payments plus present value of unguaranteed
residual value
d. Aggregate of minimum lease payments and unguaranteed residual value
2. Net investment in a sales type lease is equal to
a. Gross investment in the lease less unearned finance income
b. Cost of the leased asset
c. The minimum lease payments
d. The minimum lease payments less unguaranteed residual value
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.
5. Which of the following statements characterizes a sales type lease?
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 dealer’s profit at lease inception and interest revenue
over the lease term.
d. The lessor recognizes a dealer’s 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
7. The sales revenue recognized at the commencement of the lease by a manufacturer
or dealer is the
a. Fair value of the asset
b. Present value of minimum lease payments
c. Fair value of the asset or present value of the minimum lease payments,
whichever is lower.
d. Fair value if the asset or present value of the minimum lease payments,
whichever is higher.
8. What is the treatment of an unguaranteed residual value in determining the cost of
sales under a sales type lease?
a. The unguaranteed residual value is ignored.
b. The unguaranteed residual value is added to the cost of the leased asset.
c. The unguaranteed residual value is deducted from the cost of the leased asset at
absolute amount.
d. The unguaranteed residual value is deducted from the cost of the leased asset at
present value.
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
b. Unearned income from a direct financing lease
c. Manufacturer’s profit from a sales type lease
d. Manufacturer’s profit from a direct financing 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
Problems 14-1 Multiple Choice
1. If the sale and leaseback transaction results in an operating lease and the sale price
is below fair value that is compensated by future rental at below market value, any
indicated loss on sale is
a. Recognized immediately in profit or loss.
b. Recognized in other comprehensive income.
c. Deferred and amortized in proportion to the lease payments over the period for
which the asset is expected to be used.
d. Not recognized.
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
c. As deferred loss to be amortized over the lease term
d. As deferred gain to be amortized over the lease term
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.
c. Any profit on sale and leaseback transaction resulting in an operating lease is
deferred and any loss is recognized immediately.
d. Profit from the sale should be deferred and amortized in proportion to the
amortization of the leased asset if the sale and leaseback transaction results in a
finance lease.
Problem 15-1 Multiple choice
1. Which entities are required to apply deferred tax accounting?
I. Public entities
II. Nonpublic entities
a. I only
b. II only
c. Both I and II
d. Neither I nor II
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
4. It is the deferred tax consequence attributable to a taxable temporary difference.
a. Deferred Tax Liability
b. Deferred Tax Asset
c. Current Tax Liability
d. Current Tax Asset
5. It is the deferred tax consequence attributable to a deductible temporary difference
and operating loss carry forward.
a. Deferred Tax Liability
b. Deferred Tax Liability
c. Current Tax Liability
d. Current Tax Asset
6. It is the profit for a period before deducting tax expense.
a. Accounting Profit
b. Taxable Profit
c. Gross Profit
d. Net Profit
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
9. It is the amount of income tax payable in respect of taxable profit.
a. Current Tax Expense
b. Total income tax expense
c. Deferred Tax Expense
d. Deferred Tax Benefit
10. The deferred tax expense is equal to
a. Increase in deferred tax asset less increase in deferred tax liability.
b. Increase in deferred tax liability less increase in deferred tax asset.
c. Increase in deferred tax asset.
d. Increase in deferred tax liability.
Answers: Chapter 15-1
1. C
6. A
2. C
7. A
3. C
8. B
4. A
9. A
5. B
10. B
Problem 15-2 Multiple Choice
1. It is the amount attributable to an asset or liability for tax purposes.
a. Carrying Amount
b. Tax Base
c. Measurement Base
d. Taxable Amount
2. A deferred tax liability shall be recognized for all
a. Permanent Differences
b. Temporary Differences
c. Taxable Temporary Differences
d. Deductible Temporary Difference
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
5. Which of the following statements is incorrect concerning tax assets and
liabilities?
a. Deferred tax assets and liabilities shall be discounted.
b. Tax assets and liabilities shall be presented separately from other assets and
liabilities in the statement of financial position.
c. Deferred tax assets and liabilities shall be distinguished from current tax assets
and liabilities.
d. When an entity makes a distinction between current and noncurrent assets and
liabilities, it shall not classify deferred tax assets and liabilities, it shall not
classify deferred tax assets and liabilities as current.
Answers 15-2
1. B
2. C
3. A
4. C
5. A
Problem 15-3 Multiple Choice
1. Which of the following statements in relation to deferred tax assets or liabilities is
true?
I. Deferred tax liabilities are the amounts of income taxes payable in future periods
in respect of taxable temporary.
II. Deferred tax assets are the amounts of income taxes recoverable in future
periods in respect of deductible permanent differences.
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
3. All of the following must be disclosed separately, except?
a. The tax bases of major items on which deferred tax has been included.
b. The amount of deductible temporary differences for which no deferred tax asset
is recognized.
c. The amount of taxable temporary differences associated with investments in
subsidiaries and associates for which no deferred
d. The amount of income tax relating to each component of other comprehensive
income.
4. Which of the following statements in relation to deductible temporary differences is
true?
I. Interest expense accrued but included in taxable profit on cash basis shall be
included under deductible temporary difference.
II. Where accumulated depreciation on an asset is greater than accumulated tax
depreciation, the amount shall be classified under deductible temporary
differences.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
5. Which of the following statement is true in relation to deferred tax?
I. Development costs have been capitalized and amortized but were deducted in
determining taxable profit in period in which they were incurred.
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
Problem 15-4 Multiple choice
1. Justification for the method of determining periodic deferred tax expense is based
on the concept of
a. Matching of periodic expense to periodic revenue.
b. Objectivity in calculation of periodic expense.
c. Recognition of assets and liabilities.
d. Consistency of tax expense measurement with actual tax planning strategies.
2. Which of the following differences would result in future taxable amount?
a. Expenses or losses that are deductible after they are recognized in accounting
income.
b. Revenues or gains that are taxable before they are recognized in accounting
income.
c. Expenses or losses that are deductible before they are recognized in accounting
income.
d. Revenues or gains that are recognized in accounting income but are never
included in taxable income.
3. A temporary difference which would result in a deferred tax liability is
a. Interest revenue on municipal bonds.
b. Accrual of warranty expense.
c. Excess tax depreciation over accounting depreciation.
d. Subscription received in advance.
4. A temporary difference which would result in a deferred tax asset is
a. Tax, penalty or surcharge
b. Dividend received on share investment.
c. Excess tax depreciation over accounting depreciation.
d. Rent received in advance included in taxable income at the time of receipt but
deferred for accounting purposes.
5. An entity, cash basis taxpayer, prepares accrual basis financial statements. In its
year-end statement of financial position, the entity’s 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
7. Because an entity uses different methods to depreciate equipment for accounting
and income tax purposes, the entity has temporary differences that will reverse
during the next year and add to taxable income. Deferred income taxes that are
based on these temporary differences shall be classified in the entity’s statement of
financial position as
a. Contra account to current assets
b. Contra account to noncurrent assets
c. Current liability
d. Noncurrent liability
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 entity’s 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.
Answers: Problem 15-4
1. C
2. C
3. C
4. D
5. B
6. D
7. D
8. C
9. C
10. C
Problem 15-5 Multiple Choice
1. The purpose of inter-period tax allocation is to
a. Allow reporting entities to fully utilize tax losses carried forward from a
previous year.
b. Allow reporting entities whose tax liabilities vary significantly from year to
year to smooth payments to taxing agencies.
c. Recognize an asset or liability for the tax consequences of temporary
differences that exist at the end of the reporting period.
d. Amortize the deferred tax liability shown on the statement of financial
position.
2. The result of inter-period tax allocation is that
a. Wide fluctuations in an entity’s tax liability payments are eliminated.
b. Tax expense shown in the income statement is equal to the deferred taxes
shown
in the statement of financial position.
c. Tax liability shown in the statement of financial position is equal to the
deferred
taxes shown in the statement of financial position plus the income tax expense
shown in the income statement.
d. Tax expense shown in the income statement is equal to income taxes payable
for
the current year plus or minus the change in the deferred tax asset or liability
balances for the year.
3. Which of the following is an example of a temporary difference that would result
in a deferred tax liability?
a. Use of straight line depreciation for accounting purposes and an accelerated rate
for income tax purposes.
b. Rent revenue collected in advance when included in taxable income before it is
included in pretax accounting income.
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
5. An example of deductible temporary difference occurs when
a. The installment sales method is used for tax purposes but the accrual method of
recognizing sales revenue is used for financial accounting purposes.
b. Accelerated depreciation is used for tax purposes but straight line depreciation
is
used for accounting purposes.
c. Warranty expenses are recognized on the accrual basis for financial accounting
purposes but recognized for tax purposes as the warranty conditions are met.
d. The cost recovery method of recognizing construction revenue is used for tax
purposes but the percentage of completion method is used for financial
accounting purposes.
6. A deferred tax liability arising from the use of an accelerated method of
depreciation
for tax purposes and the straight line method for financial reporting purposes would
be classified as
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
Problem 15-6 Multiple choice
1. All of the following would require intraperiod tax allocation, except
a. Discontinued operation
b. Prior period error
c. Change in accounting income
d. Income from continuing operations
2. Income tax expense should be allocated to all of the following, except
a. Discontinued operations
b. Prior period error
c. Gross profit
d. Other comprehensive income
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.
4. Which of the following statements is true about intraperiod tax allocation?
a. It arises because certain revenue and expense items appear in the income
statement either before or after they are included in the tax return.
b. It is required for the cumulative effect of accounting changes but not for prior
period errors.
c. The purpose is to allocate income tax expense evenly over a number of
accounting periods.
d. The purpose is to relate the income tax expense to the items which affect the
amount of tax.
5. Which of the following statements is correct about the presentation of deferred tax
assets and liabilities?
a. Current deferred tax assets are netted against current deferred tax liabilities.
b. All noncurrent deferred tax assets are netted against noncurrent deferred tax
liabilities.
c. Deferred tax assets are never netted against deferred tax liabilities.
d. Deferred tax assets are netted against deferred tax liabilities if they relate to the
same tax authority.
Answers Problem 15-6
1. C
2. C
3. B
4. D
5. D
Problem 16-1 Multiple choice
1. These are all forms of consideration given by an entity in exchange for services
rendered by employees
a. Employee benefits
b. Employee compensation
c. Fringe benefits
d. Salaries and wages
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
3. Postemployment employee benefits include all of the following, except
a. Long-term disability benefits
b. Retirement benefits, such as pensions
c. Postemployment life insurance
d. Postemployment medical care
4. It is a benefit plan under which an entity pays a fixed contribution into a separate
fund and will have no legal or constructive obligation to pay further contribution if
the fund becomes insufficient to pay employee benefits
a. Postemployment benefit plan
b. Defined contribution plan
c. Defined benefit plan
d. Multiemployer plan
5. Which is incorrect concerning the recognition and measurement of a defined
contribution plan?
a. The contribution shall be recognized as expense in the period it is payable.
b. Any unpaid contributions at the end of the period shall be recognized as
accrued
liability.
c. Any excess contribution shall be recognized as prepaid expense but only to the
extent that the prepayment will lead to a reduction in future payments or a cash
refund.
d. An entity shall not disclose the amount recognized as expense for a defined
contribution plan.
6. Which is incorrect concerning the recognition and measurement of a defined
benefit plan?
a. Actuarial assumptions are required to measure the obligation and expense and
there is a possibility of actuarial gains and losses.
b. The obligation is measured on a discounted basis.
c. The defined benefit plan must be fully funded.
d. The expense recognized for a defined benefit plan is not necessarily the
amount
of contribution due for the period.
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
8. A multiemployer plan is defined as
a. A defined contribution plan or a defined benefit plan.
b. A defined contribution plan that pools the assets contributed by various
entities.
c. A defined benefit plan that provides benefits to employees of more than one
entity.
d. A defined contribution plan or defined benefit plan that pools the assets
contributed by various entities that are not under common control and uses
those assets to provide benefits to employees of more than one entity.
9. What is a postemployment benefit plan under the Philippine law?
a. Social Security System only
b. R.A 7641
c. Both Social Security System and R.A 7641
d. Neither Social Security System nor R.A 7641
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
Answers : Problem 16-1
1. A
2. B
3. A
4. B
5. D
6. C
7. A
8. D
9. C
10. A
Problem 16-2 Multiple choice
1. The components of defined benefit cost include all of the following, except
a. Service cost
b. Net interest
c. Remeasurements
d. Contribution to the plan
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
3. Which of the following components of defined benefit cost shall be recognized
through other comprehensive income?
a. Service cost
b. Past service cost
c. Net Interest
d. Remeasurements
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
c. Past service cost
d. Employee benefit cost
6. Which of the following statements is true in relation to the recognition of past
service cost?
a. Vested and unvested past service cost shall be amortized over the remaining
vesting period.
b. Vested and unvested past service cost shall be recognized as expense and
unvested past service cost shall be amortized over the remaining vesting period.
c. Vested and unvested past service cost shall be recognized in retained earnings.
d. Vested and unvested past service cost shall be expensed immediately.
7. What is the meaning of “net interest” in relation to a defined benefit cost?
a. Interest expense on defined benefit liability.
b. Interest income on the fair value of plan assets.
c. The difference between interest expense on defined benefit liability and interest
income of the fair value of plan assets.
d. Interest expense on defined benefit liability less applicable income tax.
8. Which of the following should be included in plan assets?
a. Assets held by a long-term employee benefit fund
b. Qualifying insurance policy
c. Both assets held by a long-term employee benefit fund and qualifying
insurance
policy.
d. Neither assets held by a long-term employee benefit fund nor qualifying
insurance policy.
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 entity’s 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
Problem 16-3 Multiple Choice
1. These are the entity’s best estimate of the variable that will determine the ultimate
cost of providing postemployment benefits.
a. Actuarial assumption
b. Demographic assumption
c. Financial assumption
d. Actuarial assumption
2. Which of the following statements is incorrect concerning the actuarial
assumption?
a. Actuarial assumptions shall be unbiased and mutually compatible
b. Actuarial assumptions are unbiased if they are neither imprudent nor
excessively conservative
c. Actuarial assumptions comprise of demographic assumptions and financial
assumptions
d. Postemployment benefit obligations shall be measured on a basis that reflects
current salary and ignores future salary
3. The discount used in making actuarial assumptions shall be determined by
reference to
a. Market yield at the end of reporting period on high quality bonds
a. Stated rate on high quality bonds
b. Market yield at the end of reporting period on government bonds
c. Stated rate on government bonds
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.
Actuarial gains and losses
Actual gains and losses
Actual return on plan assets
Gains and losses
5. Demographic actuarial assumptions include all of the following, except
a.
b.
c.
d.
Rate of employee turnover
Disability and early retirement
The proportion of plan members eligible for benefits
Discount rate
6. Financial actuarial assumptions include all of the following, except
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.
Unexpected high or low rate of employee turnover
Change in assumptions concerning benefit payments
Change in discount rate
Change in the present value of the defined benefit obligation due to
introduction, amendment, curtailment or settlement of the benefit plan
8. What is the treatment of actuarial gains and losses?
a. As remeasurements recognized immediately in other comprehensive income
and subsequently recycled to profit or loss
b. As remeasurements recognized immediately in profit or loss
c. As remeasurements recognized immediately in retained earnings
d. As remeasurements recognized immediately in other comprehensive income
and permanently excluded from profit or loss
9. What is the treatment of gain or loss on the settlement of benefit plan?
a. As separate component of income from continuing operations
b. As component of discounted operation
c. As component of service cost included in determining employee benefit
expense
d. As component of other comprehensive income
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.
Answers: Problem 16-3
1. A
6. D
2. D
7. D
3. A
8. D
4. A
9. C
5. D
10. D
Problem16-4 Multiple choice
1. An entity contributes to an industrial pension plan that provides a pension
arrangement for the employees. A large number of other employers also contribute
to the pension plan, and the entity makes contributions in respect of each employee.
These contributions are kept separate from corporate assets and are used together
with any investment income to purchase annuities for retired employees. The only
obligation of the entity is to pay the annual contributions. This pension scheme is a
a.
b.
c.
d.
Multiemployer plan and a defined contribution scheme
Multiemployer plan and a defined benefit scheme
Defined contribution plan only
Defined benefit plan only
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
3. An entity operates a defined benefit plan and changes it to a defined contribution
plan. The net pension liability after the amendment decreased compared to the net
pension liability before the amendment. How should the entity account for this
change?
a. The entity recognizes gain
b. The entity does not recognize gain
c. The entity recognizes a gain to be amortized overt the remaining service
period of the employees
d. The entity recognizes the gain as component of other comprehensive income
4. Which of these events will not cause a change in a defined benefit obligation
a. Change in mortality rate or the proportion of employees taking early
retirement
b. Change in the estimated salaries or benefits that will occur in the future
c. Change in the estimated employee turnover
d. Change in the return on plan assets
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
Answers: Problem 16-4
1. A
2. B
3. A
4. D
5. A
Problem 16-5 Multiple choice
1. Which of the following statements characterizes defined contribution plans?
a. Defined contribution plans are more complex
b. The employer’s obligation is satisfied by making the appropriate amount of
periodic contribution
c. The investment risk is borne by the employer
d. Contribution are made in equal amounts by employer and employees
2. Which of the following statements characterizes defined
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.
Current service cost
Past service cost
Net interest
Benefit plan
4. In a defined benefit plan, the process of funding refers to
a. Determining the defined benefit obligation
b. Determining the accumulated benefit obligation
c. Making the periodic contributions to a funding agency to ensure that funds are
available to meet retirees’ claims
d. Determining the amount that might be reported for pension expense
5. The defined benefit obligation is the measure of pension obligation that
a. Is required to be used for reporting the current service cost component of
pension expense
b. Requires pension expense to be determined solely on the basis of the plan
formula applied to years of service to date and based on existing salary level
c. Requires the longest possible period for funding to maximize the tax
deduction
d. Is not sanctioned under international financial reporting standards for
reporting the current service cost component of pension expense
6. In computing the current service cost component of pension expense
a.
The accumulated benefit obligation provides a more realistic measure of the
pension obligation on a going concern basis
b. An entity should employ an actuarial funding method to report pension
expense that best reflects the cost of benefit to employees
c. The defined benefit obligation using future compensation level provides a
realistic measure of present pension obligation and expenses
d. All of these
7. When an entity amends a pension plan, past service cost should be
a.
b.
c.
d.
Treated as a prior period adjustment because no future periods are benefited
Amortized over the remaining service period of employees
Recoded in other comprehensive income
Reported as an expense in the period the plan is amended
8. Vested benefits
a.
b.
c.
d.
Usually require a certain minimum number of years of service
Are those that the employee is entitled to receive even if fired
Are not contingent upon additional service under the plan
Are defined by all of these
9. A pension liability is reposted when
a. The defined benefit obligation exceeds the fair value of plan assets
b. The accumulated benefit obligation is less than the fair value of plan assets
c. The pension expense reported for the period is greater than the funding
amount for the same period
d. Cumulative other comprehensive income exceeds the fair value of plan assets
10. A pension asset is reported when
a. The accumulated benefit obligation exceeds fair value of plan assets
b. The accumulated benefit obligation exceeds the fair value of plan assets but a
past service cost exists
c. Plan assets at fair value exceed the accumulated benefit obligation
d. Plan assets at fair value exceed the defined benefit obligation
Problem 16-5
1. B
6. C
2. B
7. D
3. D
8. D
4. C
9. A
5. A
10. D
Problem 16-6 Multiple choice
1. In accounting for a defined benefit plan
a. An appropriate funding must be established to ensure that enough fund would
be available at retirement
b. The employer responsibility is simply to make a contribution each year
c. The expense recognized each period is equal to the cash contribution to the
plan
d. The liability is determined based upon variable that reflect current salary
levels
2. The formula in a defined benefit plan
a. Requires that the benefit of gain or the risk of loss from the assets contributed
to the plan should be borne by the employee
b. Define the benefits that the employee will receive at the time of retirement
c. Requires that the defined benefit cost and funding must the same
d. Defines the contribution to be made by the employer and no promise is made
concerning the ultimate benefits to be paid out to the employees
3. Which of the following is not a characteristic of a defined contribution plan
a. The employer contribution each period is based on a formula
b. The benefit to be received are usually determined by an employee’s highest
salary
c. The accounting for a defined contribution plan is straightforward and
uncomplicated
d. The benefit of gain or the risk of loss from the assets contributed to the plan
are borne by the employee
4. A formula in a defined contribution plan
a. Define the benefit that the employee will receive at the time of retirement
b. Ensures that the defined benefit cost and funding are different
c. Requires an employer to contribute a certain sum each period based on the
formula
d. Ensures that enough fund would be available at retirement
5. Which measure requires the use of future salaries in the computation of benefit
obligation?
a.
b.
c.
d.
Vested benefit obligation
Accumulated benefit obligation
Projected benefit obligation
Current benefit obligation
6. In determining the present value of the projected benefit obligation, all of the
following should be considered, except
a.
b.
c.
d.
Retirement and mortality rate
Discount rate
Benefit formula of the plan
Actual return on plan assets
7. The interest on the projected benefit obligation
a.
b.
c.
d.
Reflect the incremental borrowing rate of the employer
Reflect the rate at which retirement benefit could be effectively settled
Is the same as the actual return on plan assets
May be stated implicitly or explicitly
8. The return on plan assets
a. Is equal to the change in the fair value of the plan assets during the year.
b. Includes interest, dividends and change in fair value of the plan assets.
c. Is equal to the discount rate times the fair value of the plan assets at the
beginning of the period.
d. Is equal to the expected rate of return times the fair value of the plan assets at
the beginning of the period.
9. In accounting for defined benefit plan, any difference between the defined benefit
cost and the contribution to the plan should be reported as
a.
b.
c.
d.
An offset to the liability for the past service cost.
Pension asset or pension liability.
Other comprehensive income.
Component of retained earnings.
10. What is the relationship of the amount funded and the amount reported for the
defined benefit cost?
a.
b.
c.
d.
Defined benefit cost must equal the amount funded.
Defined benefit cost is less than the amount funded.
Defined benefit cost is more than the amount funded.
Defined benefit cost may be more than, equal to or less than the amount
funded.
Answers: Problem 16-6
1. A
2. B
3. D
4. A
5. C
6. D
7. B
8. D
9. A
10. C
Problem 16-7 Multiple choice
1. The report of a defined contribution plan shall contain
I. A statement of net assets available for benefits
II. A description of the funding policy
a.
b.
c.
d.
I only
II only
Both I and II
Either I and II
2. The report of a defined contribution plan shall contain
I. A statement showing net assets available for benefits, the present value of
promised benefits and the resulting excess or deficit.
II. A statement showing net assetsavailable for benefits, including a note
disclosing
the present value of promised benefits.
a.
b.
c.
d.
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. Retirement benefit plan investments shall be carried at
a. Fair value
b. Historical cost
c. Amortized cost
d. Value in use
5. In rare circumstances, when retirement benefit plan has attributes of both defined
contribution plan and defined benefit plan, is deemed
a.
b.
c.
d.
Defined benefit plan
Defined contribution plan
Neither defined benefit plan nor defined contribution plan
Both defined benefit plan nor defined contribution plan
Problem 17-1 Multiple choice
1. Short-term employee benefits include all of the following except
a. Wages, salaries and social security contribution
b. Short-term compensated balances
c. Profit sharing and bonuses payable in more than twelve months after the end
of the period in which the employees render the related services.
d. Nonmonetary benefits, such as medical care , housing, car and free subsidized
goods.
2. Which is not a characteristics of short-term employee benefits?
a. No actuarial assumptions are required to measure the benefit obligation.
b. There is no possibility of any actuarial gain or loss.
c. Short-term employee benefit by definition are payable no later than twelve
months after the end of the reporting period.
d. Short-term employee benefit obligations are measured on a discounted basis.
3. These are compensated or paid absences that are carried forward and can be used in
future periods and the employees are entitled to cash payment for unused
entitlement on leaving the entity.
a.
b.
c.
d.
Accumulating and vesting
Accumulating and nonvesting
Nonaccumulating and vesting
Nonaccumulating and nonvesting
4. Which of the following criteria is not required for the recognition of a liability for
compensated absences?
a.
b.
c.
d.
The amount of obligation must be estimable.
Payment of the obligation must be probable.
Payment of the obligation will required the use of current assets.
The compensation either vest with the employee or can be carried forward to
subsequent years.
5. The vested benefits
a.
b.
c.
d.
Are employee benefits that are not conditional on future employment.
Are benefits to be paid to the retired employees in the current period.
Are benefits to be paid to the retired employees in the subsequent year.
Are benefits accumulated in the hands of a trustee.
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
7. Which of the following statements best describes “ other long-term employee
benefits”
a. Benefits that are not expected to be settled wholly within twelve months at the
end of reporting period in which service is rendered.
b. Benefits that are expected to be settled wholly within twelve months at the end
of reporting period in which service is rendered.
c. Benefits payable as a result of an entity’s decision to terminate an employee’s
employment before the normal retirement date.
d. Benefits which are payable after completion of employment.
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 entity’s decision to
terminate employee’s employment before the normal retirement date, or an
employee’s 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
10. Which of the following statements is incorrect in relation to termination benefits?
a. The event that gives rise to an obligation for termination benefit is the
termination of employment.
b. A benefit that is in any way dependent on proving service in the future is a
termination benefit.
c. A benefit resulting from termination of employment at the request of an
employee without entity offer is not a termination benefit.
d. A benefit resulting from mandatory termination is a postemployment rather
than a termination benefit.
Problem 17-2 Multiple Choice
1. The employees are each entitled to 20 days of paid holiday leave per calendar year.
Unused holiday leave cannot be carried forward and does not vest. The holiday
leave is
a.
b.
c.
d.
A short-term employee benefit
A postemployment benefit
Other long-term employee benefit
A termination benefit
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.
A short-term employee benefit
A postemployment benefit
Other long-term employee benefit
A termination benefit
3. An entity made a public announcement of a commitment to a voluntary redundancy
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.
A short-term employee benefit
A postemployment benefit
Other long-term employee benefit
A termination benefit
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.
A short-term employee benefit
A postemployment benefit
Other long-term employee benefit
A termination benefit
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.
A short-term employee benefit
A postemployment benefit
Other long-term employee benefit
A termination benefit
Problem 17-3 Multiple choice
1. In accounting for paid absences, the difference between vested rights and
accumulated rights is
a. Vested rights are normally for a longer period of employment than
accumulated rights
b. Vested rights are not contingent upon an employee’s future service.
c. Vested rights are legal and binding obligations whereas accumulated rights
expire at the end of reporting period.
d. Vested rights carry a stipulated amount whereas accumulated rights are
nonmonetary.
2. A liability for paid absences should
a. Be accrued during the period when the compensated time is expected to be
used by employees.
b. Be accrued during the period following vested.
c. Be accrued during the period when earned.
d. Not be accrued unless a written contractual obligation exist.
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.
4. What are compensated balances?
a.
b.
c.
d.
Unpaid time off
A form of health care
Payroll deductions
Paid time off
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.