Drill # 1 FAR- Current Liabilities

MCQ - Theory
Liabilities
1. For a liability to exist
A. The exact amount must be known.
B. The identity of the party owed must be known.
C. A past transaction or event must have occurred.
D. An obligation to pay cash in the future must exist. S&S 19e

2. Which of the following statements best describes the term "liability"?

A. An excess of equity over current assets
B. A present obligation of the entity arising from past events
C. Resources to meet financial commitments as they fall due
D. The residual interest in the assets of the entity after deducting all of the liabilities

3. Liabilities are
A. Deferred credits
B. Any accounts with credit balances
C. Obligations to transfer ownership shares
D. Present obligations arising from past events and result in an outflow of resources

4. 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.

5. Which of the following is not considered a characteristic of a 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 KW&W 1e

6. Which of the following is not a liability?

A. Deposit received from customer C. Unearned revenue FA 2 © 2014 B. Stock
dividend payable D. Zero interest-bearing note payable

7. Which of the following does not meet the definition of a liability?

A. An obligation that is estimated in amount
B. A note payable with no specified maturity date
C. An obligation to provide goods or services in the future
D. The signing of a three-year employment contract at a fixed annual salary

8. What is the relationship between present value and the concept of a

liability? A. Present value is used to measure all liabilities.
B. Present value is not used to measure liabilities.
C. Present value is used to measure certain liabilities.
Drill # 1 FAR- Current Liabilities

D. Present value is only used to measure noncurrent liabilities. FA 2 © 2014

9. The conceptually appropriate method of measuring a liability is to

A. Record as a liability the amount of cash actually received when a liability was 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 the liability was initially incurred. C.
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. FA 2 © 2014
D. 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.

10. The fair value of a liability is defined as

A. The appraised value of the liability.
B. The carrying amount of the liability on the date of transaction.
C. The price that would be received to assume the liability in an orderly transaction
between market participants.
D. The amount that would be paid when transferring a liability in an orderly
transaction between market participants. FA 2 © 2014

11. Which of the following statements in relation to liabilities is not valid?

A. Current liabilities shall not be offset against assets that are to be applied to their
liquidation.
B. Unasserted claims are never accrued because to do so would require an entity to
implicitly admit liability.
C. Estimated liabilities shall be accrued because these are known to exist and are
only uncertain as to amount.
D. Commitments to make future purchases shall be accrued if losses become
probable and if the amount is reasonably measurable. TOA © 2013

Financial liability
12. The initial fair value of a financial liability is defined as the
A. Amount for which a liability is paid.
B. Amount for which a liability is paid in an orderly transaction.
C. Amount for which a liability is paid between market participants.
D. Amount for which a liability is paid in an orderly transaction between market
participants at the measurement date. TOA © 2013

13. An entity shall measure initially a financial liability not designated at fair value through
profit loss at
A. Fair value
B. Face amount
C. Fair value plus directly attributable transaction costs.
D. Fair value minus directly attributable transaction costs. FA 2 © 2014

14. Transaction costs directly attributable to the issue of a financial liability include all of the
following, except
A. Financing costs
B. Transfer taxes and duties
C. Levies by regulatory agencies
D. Fees and commissions paid to agents FA 2 © 2014
Drill # 1 FAR- Current Liabilities

15. 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 C. Either I or II
B. II only D. Neither I nor II FA 2 © 2014

16. 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 the nominal interest
rate.
A. I and II only C. II and III only
B. I and III only D. I, II and III FA 2 © 2014 17. 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. FA 2 © 2014

Current liabilities
18. What is the relationship between current liabilities and an operating
cycle? A. There is no relationship between the two.
B. Current liabilities are the result of operating transactions.
C. Current liabilities cannot exceed the amount incurred in one operating cycle. D.
Liquidation of current liabilities is reasonably expected within the operating cycle or one
year, whichever is longer. KW&W 1e

19. Which of the following is a characteristic of a current liability but not a noncurrent
liability? A. Unavoidable obligation.
B. The obligating event creating the liability has already occurred.
C. Settlement is expected within the normal operating cycle or within 12 months,
whichever is longer.
D. Present obligation requires settlement by probable future transfer or use of cash,
goods or services. FA 2 © 2014

Accrued liabilities
20. 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. When the appliances are sold
B. Evenly over the life of the warranty
C. When the service calls are performed
D. When payments are made to the mechanic FA 2 © 2014

Deferred revenue
21. A department store received cash and issued a gift certificate that is redeemable in
Drill # 1 FAR- Current Liabilities

merchandise. When the gift certificate was issued

A. Revenue account should be increased
B. Revenue account should be decreased
C. Deferred revenue account should be increased
D. Deferred revenue account should be decreased FA 2 © 2014
22. A retail store received cash and issued gift certificates that are redeemable in
merchandise. How would the deferred revenue account be affected by the redemption
and non-redemption of certificates, respectively?
AICPA 0590 A. B C. D. Redemption of certificates No effect No effect Decrease
Decrease Non-redemption of certificates No effect Decrease No effect Decrease

23. 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
A. Service revenue account
B. Deferred revenue account
C. Shareholders' equity valuation account
D. Sales contracts receivable valuation account AICPA 1190

24. Magazine subscriptions collected in advance should be treated as

A. Deferred revenue in the liability section
B. Deferred revenue in the shareholders' equity section
C. A contra account to magazine subscriptions receivable
D. Magazine subscription refund in the income statement in the period collected FA 2 © 2014

25. For a fixed amount a month, an entity visits the customers' premises and performs insect
control services. If customers experience problems between regularly scheduled visits,
the entity makes service calls at no additional charge. Instead of paying monthly,
customers may pay a certain annual fee in advance. For a customer who pays the
annual fee in advance, the entity should recognize the related revenue
A. When the cash is collected
B. At the end of the fiscal year
C. Evenly over the contract year as the services are performed
D. At the end of the contract year after all of the services have been performed

1. Eliot Company reported the following liabilities on December 31, 2014:

Accounts payable and accrued interest 1,000,000 12% note payable issued
November 1, 2013 maturing July 1, 2015 2,000,000 10% debentures payable,
next annual principal installment
of P500,000 due February 1, 2015 7,000,000 On December 31, 2014, the entity
consummated a noncancelable agreement with the lender to refinance the 12% note
payable on a long-term basis. On December 31, 2014, what total amount should be
reported as current liabilities?
A. 1,500,000 C. 3,000,000
B. 2,500,000 D. 3,500,000 FA 2 © 2014

2. Burma Company disclosed the following information about liabilities at year-

end: Accounts payable, after deducting debit balances in
suppliers' accounts amounting to P100.000 4,000,000 Accrued expenses
1,500,000 Credit balances of customers' accounts 500,000 Stock dividend
payable 1,000,000 Claims for increase in wages and allowance by
Drill # 1 FAR- Current Liabilities

employees of the entity, covered in a pending lawsuit 400,000 Estimated

expenses in redeeming prize coupons
presented by customers 600,000 What total amount should be presented as
current liabilities at year-end?
A. 6,600,000 C. 7,100,000
B. 6,700,000 D. 7,700,000 FA 2 © 2014

3. Mill Company revealed the following account balances on December 31, 2014:
Accounts payable 1,500,000 Bonds payable, due 2015 2,500,000 Discount on
bonds payable 300,000 Dividends payable 800,000 Note payable, due 2016
2,000,000 What total amount should be reported as current liabilities?
A. 4,500,000 C. 6,500,000
B. 5,100,000 D. 7,800,000 FA 2 © 2014

4. Gar Company disclosed the following liability account balances on December 31,
2014: Accounts payable 1,900,000 Bonds payable 3,400,000 Premium on bonds
payable 200,000 Deferred tax liability 400,000
Dividends payable 500,000 Income tax payable 900,000 Note payable,
due January 31, 2015 600,000
The deferred tax liability is based on temporary differences that will reverse in 2016. In
the December 31, 2014 statement of financial position, what total amount should be
reported as current liabilities?
A. 3,900,000 C. 4,300,000
B. 4,100,000 D. 7,100,000 FA 2 © 2014

5. Brite Company had the following liabilities on December 31, 2014:

Accounts payable 550,000 Unsecured note payable, 8%, due July 1,
2015 4,000,000 Accrued expenses 350,000 Contingent liability 450,000
Deferred tax liability 250,000 Senior bonds payable, 7%, due March 31, 2015
5,000,000 What total amount should be reported as current liabilities?
A. 4,900,000 C. 10,150,000
B. 9,900,000 D. 10,350,000

6. Gumamela Company provided the following data on December 31, 2014:

Trade accounts payable, including cost of goods
received on consignment of P150.000 1,350,000 Accrued taxes payable
125,000 Customers' deposit 100,000 Manila Company as guarantor 200,000 Bank
overdraft 55,000 Accrued electric and power bills 60,000 Reserve for
contingencies 150,000 What total amount should be reported as current liabilities?
A. 1,540,000 C. 1,740,000
B. 1,650,000 D. 1,840,000 FA 2 © 2014

Accrued expenses
7. Aubrey Company has a 12-month accounting period ending December 31. On April 1,
2013, it introduced a new contractual bonus scheme covering the year to March 31
each year. It is reasonably anticipated that the bonuses for the year to March 31, 2014
will amount to P900,000. What amount of liability for bonuses should be recorded on
December 31, 2013?
A. 0 C. 675,000
B. 225,000 D. 900,000 P1 © 2013
Drill # 1 FAR- Current Liabilities

8. Ronald Company has an incentive compensation plan under which a branch manager
received 10% of the branch income after deduction of the bonus but before deduction of
income tax. Branch income for the current year before the bonus and income tax was
Pi,650,000. The tax rate was 30%. What is the bonus for the current year?
A. 126,000 C. 165,000
B. 150,000 D. 180,000 FA 2 © 2014

9. Tobruk Company has an agreement to pay its sales manager a bonus of 5% of the
income after bonus and after tax. The income for the year before bonus and tax is
P5,250,000. The income tax rate is 30% of income after bonus. What is the bonus for
the year? A. 177,536 C. 250,000
B. 186,548 D. 262,500 P1 © 2013

10. The bonus agreement of Christian Company provides that the general manager shall
receive an annual bonus of 10% of the net income after bonus and tax. The income tax
rate is 30%. The general manager received P280,000 for the current year as bonus.
What is the income before bonus and tax?
A. 2,800,000 C. 4,000,000
B. 3,720,000 D. 4,280,000 FA 2 © 2014

“Whenever you feel like giving up, just remember that COCA COLA only sold 25 bottles in the
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