CHAPTER 36

QUESTION 36-16 Multiple choice (PAS 16)

1. Property, plant and equipment are defined as
Tangible assets held for sale in the ordinary course of the business.
Tangible assets held to earn rentals or for capital appreciation.
Tangible assets held for use in the production or supply of goods or services or for
administrative purposes.
Tangible assets held for use in the production or supply of goods or services, for rentals to
others, or for administrative purposes and expected to be used during more than one
reporting period
Answer: D
2. Which of the following is not a characteristic of property, plant and equipment?
The property, plant and equipment are tangible assets.
The property, plant and equipment are used in business.
The property, plant and equipment are expected to be used over a period of more than one
year.
The property, plant and equipment are subject to depreciation.
Answer: D
3. Spare parts and servicing equipment that can be used only in connection with an item of
property, plant and equipment are accounted for as property, plant and equipment and depreciated
over
Their useful life
The useful life of the related asset
Their useful life or the useful life of the related asset, whichever is longer
Their useful life or the useful life of the related asset whichever is shorter
Answer: D
4. What valuation model should an entity use to measure property, plant and equipment?
The revaluation model or the fair value model
The cost model or the revaluation model
The cost model or the fair value through profit or loss model
The cost model or the fair value model
Answer: B
5. The cost of property, plant and equipment comprise all of the following, except
Purchase price
Import duties and nonrefundable purchase taxes
Any cost directly attributable in bringing the asset to the location and condition for the
intended use
Initial estimate of the cost of dismantling the asset for which the entity has no present
obligation.
Answer: D
6. Costs directly attributable to bring the asset to the location and condition for the intended use
include all, except
Cost of employee benefit not arising directly from the acquisition of property, plant and
equipment
Cost of site preparation
Initial delivery and handling cost
Installation and assembly cost
Answer: A
7. Which cost should be expensed immediately?
Cost of opening new facility
Cost of introducing a new product or service, including cost of advertising and promotional
activities
Cost of conducting business in a new location
All of these are expensed immediately
Answer: D
8. Which cost should be expensed immediately?
Administrative overhead
Initial operating cost
Cost of relocating or recognizing part or all of an entity’s operation
All of these are expensed immediately
Answer: D
QUESTION 36-17 Multiple choice (IAA)
1. A nonmonetary exchange is recognized at fair value of the asset exchanged unless
Exchange has commercial substance.
Fair value is not determinable.
The assets are similar in nature.
The assets are dissimilar.
Answer: B
2. In an exchange with commercial substance
Gain or loss is recognized entirely.
Gain or loss is not recognized.
Only gain should be recognized.
Only loss should be recognized.
Answer: A
3. The cost of property, plant and equipment acquired in an exchange measure at the
Fair value of the asset given plus cash payment.
Fair value of the asset received plus cash payment.
Carrying amount of the asset given plus cash payment
Carrying amount of the asset received plus the cash payment
Answer: A
4. Which exchange has commercial substance?
Exchange of assets with no difference in future cash flows.
Exchange by entities in the same line of business.
Exchange of assets with difference in future cash flows.
Exchange of assets that causes the entities to remain in essentially the same economic
position.
Answer: C
5. For a momentary exchange, the configuration of cash flows includes which of the following?
The implicit rate, maturity date of loan and amount of loan
The risk, timing and amount of cash flows of the asset
The entity-specific value of the asset
The estimated present value of the assets exchange
Answer: B
6. If an entity is able to determine reliably the fair value of the asset received and the fair value of
the asset given in an exchange transaction, the cost is measured at
Fair value of asset given
Fair value of asset received
Either the fair value of asset received or the fair value of asset given
Neither the fair value of asset received nor the fair value of asset given
Answer: A
7. Which statement is true concerning acquisition of property, plant and equipment by self-
construction?
The cost of self-constructed asset is determined using the same principles as for an acquired
asset.
Any internal profit is eliminated in arriving at the cost of self-constructed asset.
The cost of abnormal amount of wasted material is not included in the cost of the asset
All of the statements are true
Answer: D
8. Which terms best describes the removal of carrying amount of property, plant and equipment
from the statement of financial position?
Derecognition
Impairment
Writeoff
Depreciation
Answer: A
9. The carrying amount of property, plant and equipment shall be derecognized
On disposal
When no future economic benefits are expected from the use of the asset
On acquisition
On disposal and when no future economic benefits are expected from the use of the asset
Answer: D
QUESTION 36-18 Multiple choice (IFRS)
1. Which of the following is not capitalized into the cost of property, plant and equipment?
Cost of excess materials from a purchasing error
Cost of testing whether the asset works correctly
Initial delivery and handling cost
Cost of preparing the site for installation
Answer: A
2. As entity purchased a machinery that it does not have to pay until after three years. The total
payment on maturity will include both principal and interest. The cost of the machine would be
the total payment multiplied by what time value of money concept?
Present value of annuity of 1
Present value of 1
Future amount of annuity of 1
Future amount of 1
Answer: B
3. The initial operating loss should be
Deferred and amortized over a reasonable period.
Expensed and charged to the income statement.
Capitalized as part of the cost of plant.
Charged to retained earnings.
Answer: B
4. An entity imported machinery to be installed in the new factory premises before year-end. What
is the proper treatment of freight and interest on the loan to fund the cost of machinery?
Both freight and interest are capitalized.
Interest may be capitalized but freight is expensed.
Freight is capitalized but interest cannot be capitalized.
Both freight and interest are expensed.
Answer: C
QUESTION 36-19 Multiple choice (AICPA Adapted)
1. The cost of property, plant and equipment comprises the purchase price and
The implied interest on the debt financing
The fair value of any noncash asset surrendered
The estimated residual value of the asset
All directly attributable costs necessary to bring the asset to the location and condition for
the intended use.
Answer: D
2. When property is acquired by issuing equity shares, which of the following is best basis for
establishing the historical cost of the acquired asset?
Historical cost of the asset to the seller
Historical cost of a similar asset
Fair value of the asset received
Fair value of shares issued
Answer: C
3. When a plant asset is acquired by deferred payment, which condition generally does not indicate
the need to consider the imputation of interest?
The interest rate stated on the deferred obligation is significantly different from the deferred
obligation.
The cash prize of the plant asset is significantly different from the deferred obligation.
The instrument representing the deferred obligation is noninterest bearing.
The face amount of the deferred obligation is equal to the fair value of the plant asset
exchanged.
Answer: D
4. If the present value of a note issued in exchange for a plant asset is less that the face amount,
the difference is
Included in the cost of the asset
Amortized as interest expense over the life of the note
Amortized as interest expense over the life of the asset
Included in interest expense in the year of issuance
Answer: B
5. An entity purchased a plant asset under a deferred payment contract. The agreement was to pay
P10, 000 per year for five years. The plant asset is initially measured at
P50,000
P50,000 plus imputed interest
Present value of P10,000 annuity for five years at an imputed interest
Future value of a P10,000 annuity for five years
Answer: C
6. An entity purchased a plant asset under a deferred payment contract. The agreement was to pay
P10, 000 at the time of purchase and P10, 000 at the end of each of the next five years. The plant
asset is measured initially at
The present value of a P10,000 ordinary annuity
P60,000
P60,000 plus imputed interest
P60,000 less imputed interest
Answer: D
7. Which of the following is the most appropriate policy as regards the allocation of joint overhead
cost to plant and equipment constructed by the entity for own use?
Assign no overhead.
Assign only variable overhead.
Assign overhead equal to the amount that would have been assigned to production that is
curtailed.
Assign a proportionate share of overhead to the construction on the same basis as that used
for the assignment to normal production.
Answer: D
8. A donated plant asset for which the fair value has been determined, and for which directly
attributable costs were incurred, shall be recorded at an amount equal to
Directly attributable costs incurred.
Fair value and directly attributable costs incurred.
Zero
Carrying amount.
Answer: B
QUESTION 36-20 Multiple choice (AICPA Adapted)
1. Vik Auto and King Clothier exchanged goods, held for resale, with equal fair value. The retail
price of the car that Vik gave up is less than the retail price of the clothes received. What profit
should Vik recognize for the nonmonetary exchange?
A profit is not recognized
A profit equal to the difference between the retail price of the clothes received and the car
A profit equal to the difference between the retail price and the cost of the car
A profit equal to the difference between the fair value and the carrying amount of the car
Answer: D
An exchange transaction that is deemed to have commercial substance is accounted for on the
basis of fair value.
The difference between the fair value and carrying amount of the asset transferred is recognized
as gain or loss.

2. Scott Company exchanged nonmonetary assets with Dale Company. No cash was exchanged.
The carrying amount of the asset surrendered by Scott exceeded both the fair value of the asset
received and Dale’s carrying amount of that asset. Scott should recognize the difference between
the carrying amount of the asset it surrendered and
The fair value of the asset it received as a loss
The fair value of the asset it received as a gain
Dale’s carrying amount of the asset it received as a loss
Dale’s carrying amount of the asset it received as a gain
Answer: A
Since no cash was exchanged, the fair value of the asset transferred and the fair value of the asset
received are equal.
Thus, the excess of the carrying amount of the asset transferred over its fair value is recognized as
loss.
3. Solen Company and Nolse Company exchange truck with fair value in excess of carrying
amount. In addition, Solen paid Nolse to compensate for the difference in truck fair value. As a
consequence of the exchange, Solen shall recognize
A gain equal to the difference between the fair value and carrying amount of the truck
given
A gain determined by the proportion of cash paid to the total consideration
A loss determined by the proportion of cash paid to the total consideration
Neither a gain nor a loss
Answer: A
The excess of the fair value of the truck given by Solen over the carrying amount is recognized as
gain

4. Slate Company and Talse Company exchanged plots of land with fair value on excess of
carrying amount. In addition, Slate received cash from Talse to compensate for the difference in
land value. As a result, of the exchange, Slate shall recognize
A gain equal to the difference between the fair value and the carrying amount of the land
given
A gain in an amount determined by the ratio of cash received to total consideration
A loss in an amount determined by the ratio of cash received to total consideration
Neither gain nor a loss
Answer: A
The excess of the fair value of the land given by Slate over the carrying amount is recognized as
gain.
QUESTION 39-9 Multiple choice (AICPA Adapted)
The cost of land usually includes all, except
Commission related to acquisition
Property tax after date of acquisition
Property tax to date of acquisition
Cost of survey
Answer B
The cost of land typically includes all, except
Grading, filling, draining and cleaning cost
Special assessment for drainage system
Private driveway and parking lot
Assumption of any lien on the property
Answer C
Fence and parking lot are reported as
Building
Land improvement
Land
Expense
Answer B
Which should be capitalized as cost of land?
Filling in dirt to level the property prior to excavation
Excavation cost
Cost incurred to construct sidewalk and fence
All of these are capitalized as cost of land
Answer A
Which cost should be charged to land improvement?
Clearing of trees and grading
Architect fee
Installation of a septic system
Cost of demolishing an old building
Answer C
QUESTION 39-10 Multiple choices (PIC Interpretation)
The single cost of acquiring land and usable old building is
Charged to the land only
Charged to the building only
Allocated between land and building based on relative fair value
Allocated between land and building based on carrying amount
Answer C
The single cost of acquiring land and an unusable old building is
Charged to the land only
Charged to the building only
Allocated between land and building based on relative fair value
Allocated between land and building based on carrying amount
Answer A
The cost of demolishing an old building to make room for make room for construction
for a new building should be
Expensed immediately
Charged to the land
Charged to the new building
Allocated between land and building based on relative fair value
Answer C
When land and old building are acquired, the cost of immediately demolishing the old
building to prepare the land for the intended use as investment property should be
Expensed immediately
Charged to the land
Accounted for as deferred charge
Charged to retained earnings
Answer B
The carrying amount of an existing old building demolished to make room for the
construction of a new building should be
Accounted for as loss
Capitalized as cost of the new building
Charged to the land
Charged to the new building if accounted for as inventory
Answer A
QUESTION 39-11 Multiple choice (AICPA Adapted)
When an entity acquired land with an old building and immediately demolished the old
building so that the land can be used for the construction of a plant, the cost incurred to
demolish the old building should be
Expensed as incurred
Added to the cost of plant
Added to the cost of land
Amortized over the estimated time period between the demolition of the building and the
completion of the plant
Answer B
If an entity purchased a lot and an old building and demolished the old building to make
room for the construction of a new building, the proper accounting treatment of the
allocated carrying amount of the old building would depend on
The significance of the cost allocated to the building in relation to the combined cost of the
lot and building
The length of tine for which the building was held prior to demolition
The contemplated future use for the old building
The intention of the management for the property when the new building was constructed
Answer D
An entity purchased land to be used as investment property. Timber was cut from the
site so development of the land could begin. The proceeds from the sale of the timber
should be
Classified ad other income
Credited to retained earnings
Deducted from the cost of land
Classified as deferred income and amortized over five years
Answer C
An entity purchased land and hotel with the plan to tear down the hotel and build a new
hotel. The allocated cost of the old hotel should be
Depreciated over the remaining life of the old hotel
Written off as loss in the year the hotel is torn downs
Capitalized as part of the cost of the land
Capitalized as parts of the cost of the new hotel
Answer B
 An entity’s forest land was condemned for use as a national park. Compensation for the
condemnation exceeded the forest land’s carrying amount. The entity purchased similar,
but larger, replacement forest land for an amount greater than condemnation award. As a
result of the condemnation and replacement, what us the net effect on the carrying amount
of forest land reported in the statement of financial position?
The amount is increased by the excess of the replacement forest land’s cost over the
condemned land’s carrying amount
The amount is increased by the excess of the replacement forest land’s cost over the
condemnation award
The amount is increased by the excess of the condemnation award over the condemned
forest land’s carrying amount
No effect, because the condemned forest land’s carrying amount is used as the replacement
forest land’s carrying amount
Answer A
QUESTION 39-12 Multiple choice (AICPA Adapted)
The term betterment refers to
An expenditure made for the new facilities which increase capacity.
An expenditure made to restore capacity after abandonment or retirement.
An expenditure made to improve existing facilities by increasing capacity.
An expenditure made to help insure continuity of service capacity.
Answer C
Which type of expenditure occurs when an entity installs a higher capacity boiler to heat
the plant?
Rearrangement
Ordinary repair and maintenance
Addition
Betterment
Answer D
An improvement made to a machine which increased the fair value and production capacity
without extending the useful life of the machine should be
Expensed immediately
Debited to accumulated depreciation
Capitalized in the machine account
Allocated between accumulated depreciation and the machine account
Answer C
Which of the following would ordinarily be treated as a revenue expenditure rather than a
capital expenditure?
Cost of servicing and overhaul to restore or maintain the originally assessed standard of
performance.
The replacement of a major component of building
An addition to an existing building
Cost of improvement that us expected to provide discernible future benefit
Answer A
A building suffered uninsured fire damages. The damaged portion of the building was
refurbished with higher quality materials. The cost and related accumulated depreciation
of the damaged portion are identifiable. What is the accounting for these events?
Capitalize the cost of republishing and record a lose in the current period equal to the
carrying amount of the damaged portion of the building
Capitalize the cost of refurbishing by adding the cost to the carrying amount of the building
Record a loss in the current period equal to the cost of refurbishing and continue to
depreciate the original cost of the building
 Record a loss in the current period equal to the sum of the cost of refurbishing and the
carrying amount of the damaged portion of the building
Answer A
An entity incurred cost to modify a building and to rearrange a production line. As a result,
an overall reduction in production cost is expected. However, the modification did not
increase the fair value of the building and the rearrangement did not extend the life of the
production line. Should the building modification cost and the production line
rearrangement cost be capitalized?
Only the building modification cost should be capitalized.
Only the production line rearrangement cost should be capitalized.
Both the building modification cost and production line rearrangement cost should be
capitalized.
The building modification cost and production line rearrangement cost should be expensed.
Answer C
Which of the following costs should not be capitalized?
Replacement of roof of building every 15 years
Cost of site preparation
Installation and assembly cost
Replacement of small spare parts annually
Answer D
Which of the following expenditure may properly be capitalized?
Expenditure for massive advertising campaign
Insurance on plant during construction
Research and development related to a long-term asset giving the entity a competitive
market advantage
Title search and other legal cost related t9 a piece of property which was not acquired
Answer B
Which of the following subsequent expenditures should be expensed immediately?
Expenditure made to increase the efficiency or effectiveness of an existing asset
Expenditure made to extend the useful life of an existing asset
Expenditure made to maintain an existing asset in operating condition
Expenditure made to add new asset
Answer C
An expenditure made in connection with a machine being used by an entity should be
Expensed if it merely extends the useful life but does not improve the quality.
Expensed if it merely improves the quality but does not extend the useful life.
Capitalized if it maintains the machine in normal operating condition.
Capitalized if it is increases the quantity of units produces by a machine.
Answer D

40-11 Multiple choice (PAS 16)

1. Which statement best describes the term depreciation?
a. The systematic allocation of the cost of an asset less residual value over the useful life.
b. The removal of an asset from the statement of financial position.
c. The amount by which the recoverable amount of an asset exceeds carrying amount.
d. The amount by which the carrying amount of an asset exceeds recoverable amount.

2. Carrying amount is
a. Cost of an asset or the amount substituted for cost in the financial statements, less
residual value.
b. Amount of cash paid or the fair value of the other consideration given to acquire an asset
at the tirne of acquisition or construction.
c. Net amount which the entity expects to obtain for an asset at the end of the useful life
after deducting the expected cost of disposal.
d. Amount at which an asset is recognized in the statement of financial position after
deducting any accumulated depreciation and accumulated impairment loss.

3. Which statement is incorrect with respect to depreciation?

a. The depreciation method shall reflect the pattern in which the asset's economc benefits
are consumed by the entity.
b. Depreciation of an asset begins when it is available for use or when it is in the location
and condition necessary for the intended use.
c. Depreciation ceases at the earlier between the date the asset is classified as held for sale
and the date the asset is derecognized.
d. Depreciation is not recognized if the fair value of an asset exceeds carrying amount.

4. Which statement is true with respect to residual value?

a. Residual value is the estimated net amount currently obtainable if the asset is at the end
of the useful life.
b. The residual value of an asset may increase to an amount equal to or greater than carrying
amount in which case the deprecation charge is zero.
c. The residual value of an asset shall be reviewed at least at each financial year-end and
any change is accounted for as a change in accounting estimate.
d. All of these statements are true.

5. The useful life of property, plant and equipment is

I. The period of time over which an asset is expected to beused by the entity.
II. The number of production or similar unite expected to be obtained from the asset by the entity.
a. I only
b. II only
 c. Both I and II
d. Neither I nor II

6. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value

7. The production method of depreciation results in

a. Constant charge over the useful life of the asset.
b. Decreasing charge over the useful life of the asset.
c. Increasing charge over the useful life of the asset.
d. Variable charge based on the expected use or output the asset.

8. Which statement is true in relation to depreciation?

a. Depreciation is not a matter of valuation.
b. Depreciation is part of the matching of revenue and expense.
c. Depreciation retains funds by reducing income tax and dividend.
d. Allof the statements are true about depreciation.
9. Economic factors that shorten the useful life of an asset include
a. Wear and tear
b. Deterioration or decay through aging or passage of time
c. Damage or destruction due to fire, flood, earthquake and other casualty
d. Obsolescence, supersession and inadequacy

10. Technical or commercial obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Change or improvement in production or change in the market demand for the product
output of the asset
d. Expiry date of related lease of the asset

ANSWER 40-11
1. a 6. d
2. d 7. d
3. d 8. d
4. d 9. d
5. c 10. c
QUESTION 40-12 Multiple choice (AICPA
Adapted)
1. Which statement is the assumption on which straight line depreciation is based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.

2. The straight line depreciation is not appropriate for

a. An entity that is neither expanding nor contracting an investment in equipment because
it is replacing equipment as the equipment depreciates.
b. Equipment on which maintenance and repairs increase substantially with age.
c. Equipment with useful life that is not affected by the amount of use.
d. Equipment used consistently every period.

3. The principal objection to the straight line method of depreciation is that it

a. Provides for the declining productivity of an aging asset
b. Ignores variation in the rate of asset use
c. Tends to result in a constant rate of return on a diminishing investment base
d. Gives smaller periodic writeoff than a decreasing charge mtethod

4. In which of the following situations is the production method of depreciation most appropriate?
a. An asset's service potential declines with use
b. An asset’s service potential declines with the passage of time
c. An asset is subject to rapid obsolescence
d. And asset incurs increasing repairs and maintenance with use

5. Which statement provides the best theoretical support for accelerated depreciation?
a. Assets are more efficient in early years and initially generate more revenue.
b. Expenses should be allocated in the manner that “smooths” earnings.
c. Repairs and maintenance costs probably would increase in later periods so depreciation
should decrease.
d. Accelerated depreciation provides easier replacement because of the time value of
money.

6. An asset has a nine-year useful life and is to be appreciated under the sum of year’s digits
method. The annual depreciation expense would be the same as that under the straight line method
in the
a. Third year
b. Fifth year
c. Seventh year
d. Ninth year
7. The composite depreciation method
a. Is applied to a group of homogeneous assets
b. Is an accelerated method of depreciation
c. Does not recognize gain or loss on the retirement of single asset in the group
d. Excludes residual value from the base of the depreciation calculation

8. An entity using the composite depreciation method for a fleet of trucks, cars and campers retired
one of the trucks and received cash from a salvage entity. The net carrying amount of these
composite asset accounts would be decreased by the
a. Cash proceeds received and original cost of the truck
b. Cash proceeds received
c. Original cost of the truck less the cash proceeds
d. Original cost of truck

9. A machine with a four-year estimated useful life and an estimated 15% residual value was
acquired at the beginning of the current year. The increase in accumulated depreciation for the
second year using the double declining balance method would be
a. Original cost x 85% x 50%
b. Original cost x 50%
c. Original cost x 85% x 50% x 50%
d. Original cost x 50% x 50%

10. A machine with a 5-year estimated useful life and an estimated residual value was acquired at
the beginning of the current year. At the end of the fourth year, accumulated depreciation using
the sum of years' digits method would be
a. Original cost less residual value multiplied by 1/15
b. Original cost less residual value multiplied by 14/15
c. Original cost multipled by 14 / 15
d. Original cost multiplied by 1 / 15

ANSWER 40-12
1. b 6. b
2. b 7. c
3. b 8. b
4. a 9. d
5. a 10. b
40-13 Multiple choice (IAA)
1. Depreciation is best described as a method of
a. Asset valuation
b. Current value allocation
c. Cost allocation
d. Useful life determination

2. Which depreciation method is not based on the passage of time?

a. Production method
b. Sum of years’ digits
c. Declining balance
d. Straight line

3. A method which excludes residual value from the base for the depreciation calculation is
a. Straight line
b. Sum of year's digits
c. Double declining balance
d. Output method

4. The double declining balance method

a. Results in a decreasing depreciation charge.
b. Means residual value is not deducted in computing the depreciation base.
c. Means the carrying amount should not be reduced below residual value.
d. All of these describe double declining balance

5. Which depreciation method applies a uniform depreciation rate each period to the carrying
amount of an asset?
a. Straight line
b. Declining balance
c. Output method
d. Sum of years' digits

6. What factor must be present to use the production method of depreciation?

a. Total units to be produced can be estimated
b. Production is constant over the life of the asset
c. Repair costs increase with use
d. Obsolescence is expected

7. The sun of years' digits method

a. Results in residual value being ignored.
b. Means the denominator is the number of years remaining at the beginning of the year.
c. Means the carrying amount should not be reduced below residual value.
d. Results in an increasing depreciation charge.
8. In order to calculate. the depreciation of asset for the third year using the sum of years’ digits
method, which of the following must be known about the asset?
 a. Acquisition cost
b. Residual value
c. Useful life
d. All must be known

9. Which depreciation method is not appropriate for situations involving a large number of similar
items, each having a small peso cost?
a. Inventory method
b. Retirement method
c. Replacement method
d. Composite method

10. Which statement regarding depreciation is true?

a. An asset must be depreciated from the date of purchase.
b. The annual depreciation charge must be constant
c. The total cost of an asset must eventually be depreciated
d. If the carrying amount of an asset is less than hi residual value, depreciation is not
charged.

ANSWER 40-13
1. c 6. a
2. a 7. c
3. c 8. d
4. d 9. d
5. b 10. d
QUESTION 41-7 Multiple choice (IAA)
1. The most common method of computing depletion is
a. Percentage depletion method
b. Decreasing charge method
c. Straight line
d. Production or output method

2. Depletion expense
a. Is usually part of cost of goods sold.
b. Includes tangible equipment in the depletable amount.
c. Excludes intangible development cost from the depletable amount.
d. Excludes restoration cost from the depletable amount.

3. Information needed to compute a depletion charge per unit includes the

a. Amount of resources sold during the period.
b. Cumulative amount of resources removed.
c. Estimated total amount of resources available for removal.
d. Amount of resources removed during the period.

4. Which accurately describes the GAAP regarding the acounting for the costs of drilling dry holes
in the oil and gas industry?
a. Successful effort method
b. Full cost method
c. Both successful effort and full cost
d. Neither successful effort nor full cost method

5. Which of the following is not part of depletable amount?

a. Acquisition cost of the mineral resource deposit
b. Exploration cost
c. Tangible equipment used to extract the mineral resource
d. Intangible development cost such as drilling and tunnel

ANSWER 41-7
1. d
2. a
3. a
4. c
5. c
QUESTION 41-8 Multiple choice (IFRS)
1. Exploration and evaluation expenditures are incurred
a. When searching for an area that may warrant detailed exploration even though the entity
has not yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained but the technical
feasibility and commercial viability of extracting a mineral resource are not yet demonstrable.
c. When a specific area is being developed and preparation, for commercial extraction are
being made.
d. In extracting mineral resource and processing the resource to make it marketable or
transportable.

2. When is an entity required to recognize exploration and evaluation expenditure as an asset?

a. When such expenditure is recoverable in future periods.
b. When the technical feasibility and commercial viability of extracting the associated
mineral resource have been demonstrated.
c. When required by the entity's accounting policy for recognizing exploration and
evaluation-asset.
d. Such expenditure is always expensed as incurred.

3. Which of the following expenditures would never qualify a8 an exploration and evaluation
asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resource
d. Expenditures for activities in relation to evaluating * technical feasibility and
commercial viability of extracting a mineral resource

4. An entity is required to consider which of the following developing accounting policy for
exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing with similar and
related issue
b. The definitions, recognition criteria and measurement concepts for assets, liabilities,
income, and expenses
c. Recent pronouncements of standard-setting bodies
d. Whether the accounting policy results in information that is relevant and reliable

5. Which of the following is not a disclosure required in relation to exploration and evaluation
expenditures?
a. Information about commercial reserve quantity
b. Accounting policy for exploration and evaluation expenditures
c. The amounts of operating and investing cash flows arising from exploration and
evaluation of mineral resources
d. Information recognized in the financial statements arising from the exploration and
evaluation of mineral resources
ANSWER 40-12
1. b
2. c
3. c
4. d
5. a
QUESTION 43-7 Multiple choice (PAS 36)

1. Which statement best describes impaiment loss?

a. The removal of an asset from the statement of financial position.

b. The amount by which carrying amount of an asset exceeds the recoverable amount.

c. The systematic allocation of cost of an asset less residual value over the useful life.

d. The amount by which the recoverable amount of an asset exceeds the carrying amount.

2. What is the recoverable amount of an asset?

a. Fair value less cost of disposal

b. Value in use

c. Fair value less cost of disposal or value in use, whichever is higher

d. Fair value less cost of disposal or value in use, whichever is lower

3. What is fair value of an asset?

a. The price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date.

b. The price that would be paid to transfer a liability in an orderly transaction between market
participants at the measurement date.

c.The discounted value of future cash flows expected to be derived from an asset.

d. The undiscounted value of future cash flows expected to be derived drom an asset.

4. Which statement bests describes value in use?

a. The present value of estimated future cash flows expected to arise from the continuing use of an
asset and from the ultimate disposal

b. The amount of cash that could currently be obtained by selling an asset in an orderly disposal

c. The amount which an entity expects to obtain for an asset at the end of the useful life

d. Undiscounted future net cash flows

5.What is the best evidence of fair value?

a. Quoted price in an active market for identical asset.

b. Quoted price in an active market for similar asset.

c. Quoted price in an inactive market for identical asset.

d. Quoted price in an inactive market for similar asset.

6. Which statement is incorrect concerning the estimate of future cash flows?

a. Future cash flows shall be based on reasonable and supportable assumptions.

b. Future cash flows shall be based on the most recent budget, usually up to a maximum of 5 years,

c. Future cash flows do not include income tax.

d. The discount rate used in estimating future cash flows shall be the current rate after tax.

7.The estimates of future cash flows in calculating value in use include all of the following, except

a. Cash inflows from the continuing use of the asset

b. Cash outflows incurred to generate the cash inflows from the continuing use of the asset

c. Net cash flows from the disposal of the asset at the end of the useful life

d. Income tax payments

8. What is a cash generating unit?

a. The smallest business segment

b. Any group of assets that generate cash flows

c. Any group of assets reported separately to management

d. The smallest group of assets that generate independent cash flows from continuing use

ANSWER 43-7

1. b

2. c

3. a

4. a

5. a

6. d

7. d

8. d

QUESTION 43-8 Multiple choice (IFRS)

1. If the fair value less cost of disposal cannot be determined

a. The asset is not impaired.

b. The recoverable amount is the value in use.

c. The net realizable value is used.

d. The carrying amount of the asset remains the same.

2. If the assets are to be disposed of

a. The recoverable amount is the fair value less cost of disposal.

b. The recoverable amount is the value in use.

c. The asset is not impaired.

d. The recoverable amount is the carrying value.

3. When deciding on the discount rate to be used, which factor should not be taken into account?

a. The time value of money.

b. Risk specific to the asset for which future cash flow estimate has not been adjusted.

c. Risk specific to the asset for which future cash flow estimate has been adjusted.

d. Pretax rate.

4. What is the allocation of an impairment loss recognized for a cash generating unit?

a. Across the assets of the units based on carrying amount.

b. Across the assets of the unit based on the fair value.

c. First, to any goodwill, and the balance to the other assets prorata based fair value.

d. First, to any goodwill, and the balance to the other assets prorata based on carrying amount.

5. An impairment loss that relates to an asset that has been revalued shall be recognized in

a. Profit or loss

b. Revaluation surplus that relates to the revalued asset

c. Opening retained earnings

d. Any reserve in equity

6. Which of the following is not relevant in determining value in use?

a. The expected future cash flows from the asset

b. The carrying amount of the asset

c. Expectation about possible variation in the amount and timing of future cash flows

d. The time value of money

7. Which of the following statements is not true with regard to impairment of asset?

a. If impairment indicators are present, the entity must conduct an impairment test.
b. The impairment test compares the carrying amount of the asset with the lower of fair value less cost
of disposal and value in use.

c. If the recoverable amount is lower than carrying amount, an impairment loss is recognized.

d. If recoverable amount is higher than carrying amount, no impairment loss is recognized.

8. When impairment testing a cash generating unit, any corporate assets should

a. Be allocated on a reasonable and consistent basis.

b. Be separately impairment tested.

c. Be included in the head office assets and impairment tested along with that cash generating unit.

d. Not be allocated to cash generating units.

ANSWER 43-8

1. b

2. a

3. c

4. d

5. b

6. b

7. b

8. a

QUESTION 43-9 Multiple choice (IFRS)

1. Impairment loss for productive asset is reported

a. As an extraordinary items.

b. As a component of discontinued operation.

c. As a component of income from continuing operations.

d. As a change in accounting estimate.

2. Long-lived assets are reviewed for impairment

a. Every three years at the end of reporting period.

b. When the asset is fully depreciated.

c. When circumstances indicate that the carrying amount of an asset might not be recoverable.

d. Every year at the end of reporting period.

3. Which condition must exist in order for an impairment loss to be recognized?

a. The carrying amount is less than fair value.

b. The carrying amount of the asset is not recoverable.

c. The carrying amount is less than value in use.

d. The carrying amount is recoverable.

4. The impairment rules for long-lived assets apply to all, except

a. Building currently used in business

b. Financial instrument

c. Land

d. Computer used to run a production process

5. Estimates of future cash flows normally would cover projections over a maximum of

a. Five years

b. Ten years

c. Fifteen years

d. Twenty years

ANSWER 43-9

1. c

2. c

3. b

4. b

5. a
TFA CHAPTER 47 (Liabilities)
QUESTION 47-9 Multiple choice (IAA)
1. Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day
period. What is the classification of the notes payable?
Current liabilities
Deferred credits
Noncurrent liabilities
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?
Dependent on the intention of management
Dependent on the actual ability to refinance
Current liability, unless specific refinancing criteria are met
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?
Current liability with separate disclosure of the note refinancing
Current liability with no disclosure required
Noncurrent liability with separate disclosure of the note refinancing
Noncurrent liability with no separate disclosure required

4. A entity has a loan due for repayment in six months’ time, but the entity has the option to
refinance or 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?
Current liability
Current asset
Noncurrent liability
 Noncurrent asset

5. At year-end, an entity classified a note payable as current liability. Under what condition could
the entity reclassify the note payable from current to noncurrent?
If the entity has the intent and ability to reclassify the note before the end of reporting
period.
If the entity has executed an agreement to refinance the note before issuance of the financial
statements.
If the entity has the intent and ability to reclassify the note before the issuance of the
financial
If the entity has executed an agreement to refinance the note before the end of
reporting period.
QUESTION 47-10 Multiple choice (AICPA Adapted)
1. The most relevant measurement of liabilities at initial recognition should always reflect
The expectation of the management
Historical cost
The credit standing of the entity
The single most likely minimum possible amount

2. Which statement best describes the term liability?

An excess of equity over current assets
Resources to meet financial commitments when due
The residual interest in the assets of the entity
A present obligation arising from past event

3. What is the relationship between present value and liability?

Present value is used to measure certain liabilities.
Present value is not used to measure liabilities.
Present value is used to measure all liabilities.
Present value is used to measure current liabilities.

4. If a long-term debt becomes callable due to the violation of a loan covenant

The debt may continue to be classified as noncurrent
The debt should be reclassified as current.
Cash must be reserved to pay the debt.
Retained earnings must be restricted.

5. What is the classification of debt callable by the creditor?

Noncurrent liability
Current liability
Current liability if the creditor intends to call the debt within one year
Current liability if it is probable that the creditor will call the debt within one year
QUESTION 47-11 Multiple Choice (IAA)
1. Advance payments from customers represent
Liabilities until the product is provided.
A component of shareholders' equity.
Assets until the product is provided.
Revenue upon receipt of the advance payment.

2. Revenue associated with gift card sales is recognized

When the gift card is sold.
No later than the last day of the reporting period.
When the probability of gift card redemption is viewed as remote.
Under no circumstances

3. All else equal, a large increase in unearned revenue in the current period would be expected to
produce what effect on revenue in a future peri0d?
Large increase in future revenue
Large decrease in future revenue
No effect
Large decrease because unearned revenue indicates collection problems

4. When a customer advance has been previously received, the appropriate journal entry includes
A debit to revenue and credit to liability
A debit to revenue and credit to asset
A debit to asset and credit to revenue
A debit to liability and credit to revenue

5. When refundable deposit is received, cash is increased with a corresponding increase in

Current liability
Revenue
Shareholders' equity
Noncurrent liability
QUESTION 47-12 Multiple choice (AICPA Adapted)
1. A department store received cash and issued a gift certificate that is redeemable in merchandise.
When the gift certificate was issued
Deferred revenue account should be decreased
Deferred revenue account should be increased
Revenue account should be decreased
Revenue account should be increased

2. 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 nonredemption of
certificates, respectively?
Decrease and No effect
Decrease and Decrease
No effect and No effect
No effect and Decrease

3. An entity received an advance payment for special order goods that are to be manufactured and
delivered within six months. How should the advance payment be reported?
Deferred charge
Contra asset account
Current liability
Noncurrent liability

4. At year-end, an entity sold refundable merchandise coupons. The entity received a certain
amount for each coupon redeemable next year for merchandise with a certain retail price. At year-
end, how should the entity report these coupon transactions?
Unearned revenue at the merchandise's retail price
Unearned revenue at the cash received
Revenue at the merchandise's price
Revenue at the cash received
5. 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 performance?
Revenue for the entire proceeds
Revenue to the extent of related costs expanded
Unearned revenue to the extent of related costs expended
Unearned revenue for the entire proceeds

6. Magazine subscriptions collected in advance should be accounted for as

A contra account to magazine subscriptions receivable
Deferred revenue in the liability section
Deferred revenue in the shareholders' equity section
Magazine subscription revenue in the income statement in the period collected

7. Under a royalty agreement with another entity, an entity will receive royalties from the
assignment of a patent for four years. The royalties received in advance should be reported as
revenue
In the period received
In the period earned
Evenly over the life of the royalty agreement
At the date of the royalty agreement

8. An entity is a retailer of home appliances and offers a service contract on each appliance sold.
Collections received for contracts should be recorded as an increase in a
Deferred revenue account
Sales contracts receivable valuation account
Shareholder’s equity valuation account
Service revenue account

9. An entity sells appliances that include a three-year warranty. Service calls under the warranty
are performed by an independent mechanic under a contract with the entity. Based on experience,
warranty costs are expected to be incurred for each machine sold.
When should the entity recognize the warranty costs?
Evenly over the life of the warranty
When the service calls are performed
 When payments are made to the mechanic
When the machines are sold

10. 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 manufactured 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?
None
Deferred revenue equal to 60% of the main contract price and payable to subcontractor
equal to 40% of the main contract price
Deferred revenue equal to 60% of the main contract price and no payable to
subcontractor
No deferred revenue but payable to subcontractor 18 reported at 40% of the main contract
price
QUESTION 47-13 Multiple Choice (IAA)
1. The cost of customer premium offer should be charged to expense
When the related product is sold.
When the premium offer expires.
Over the life cycle of the product.
When the premium is claimed.

2. The accounting concept that requires recognition of a liability for customer premium offer is
Time period
Prudence
Historical cost
Matching principle

3. Accounting for cost of incentive program for frequent customer purchases involves
Recording an expense and a liability each period.
Recording a liability and a reduction of revenue.
Recording an expense and an asset reduction.
Recording an expense and revenue each period.

4. Accounting for cost of customer incentive program

Requires probability estimation.
Follows the matching principle.
Is a loss contingency situation.
All of these are correct.

5. Providing a monetary rebate program

Is accounted for similarly to a premium offer
Creates an expense for the seller in the period of sale.
Creates a liability for the seller at the time of sale.
All of these are correct.
QUESTION 47-14 Multiple choice (IAA)
1. The accrual approach in accounting for warranty
Is required for income tax reporting.
Is frequently justified on the basis of expediency.
Finds the expense account being charged when the seller performs in compliance with the
warranty.
Should be used whenever the warranty 18 an integral and inseparable part of the sale.

2. Which of the following best describes the accrual approach of accounting for warranty cost?
Expensed when paid
Expensed when warranty claims are certain
Expensed based on estimate in year of sale
Expensed when incurred

3. Which of the following best describes the expense as incurred approach of accounting for
warranty cost?
Expensed based on estimate in year of sale
Expensed when liability is accrued
Expensed when warranty claims are certain
Expensed when incurred

4. What is the classification of the estimated warranty liability in a three-year warranty?

Noncurrent
Current
Partly current and partly noncurrent
No need for disclosure

5. Which of the following is a characteristic of the accrual of warranty but not the sale of
warranty?
Warranty liability
Warranty expense
Unearned warranty revenue
Warranty revenue
Chapter 48 PROVISION

QUESTION 48-10 Multiple choice (PAS 37)

1, Which is the correct definition of a provision?

A possible obligation arising from past event

A liability of uncertain timing or amount
A liability which cannot be easily measured
An obligation to transfer funds to an entity

2. A provision shall be recognized as liability when

An entity has a present obligation as a result of a past event.

It is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation.
The amount of the obligation can be measured reliably.
All of these are required for the recognition of a provision as liability.

3. A legal obligation is an obligation that is derived from all of the following, except

Legislation
A contract
Other operation of law
An established pattern of past practice

4. A constructive obligation is an obligation

That is derived from an entity's action that the entity will accept certain responsibilities
because of past practice, published policy or current statement.
The entity has created a valid expectation in o parties that it will discharge those
responsibilities.
I only
II only
Both I and II
Either I or II
5. It is an event that creates a legal or constructive obligation because the entity has no other
realistic alternative but to settle the obligation.

Obligating event
Past event
Subsequent event
Current event

6. An outflow of resources embodying economic benefits is regarded as "probable" when

The probability that the event will occur is greater than the probability that the event
will not occur.
The probability that the event will not occur is greater than the probability that the event
will occur.
The probability that the event will occur is the same as the probability that the event will
not occur.
The probability that the event will occur is 90% likely.

7. Where there is a continuous range of possible outcomes, and each point in that range is as likely
as any other, the range to be used is the

Minimum
Maximum
Midpoint
Sum of the minimum and maximum

8. When the provision involves a large population of items, the estimate of the amount items

Reflects the elects the weighting of all possible outcomes by their associated
probabilities.
Is determined as the individual most likely outcome.
May be the individual most likely outcome adjusted for the effect of other possible
outcomes.
Midpoint of the possible outcomes.
9. When the provision arises from a single obligation, the estimate of the amount

Reflects the weighting of all possible outcomes by their associated probabilities.

Is determined as the individual most likely outcome.
Is the individual most likely outcome adjusted for the effect of other possible
outcomes.
Midpoint of the possible outcomes.

10. Which statement is incorrect where the expenditure required to settle a provision is expected
to be reimbursed by another party?

The reimbursement shall be recognized only when it is virtually certain that the
reimbursement would be received if the entity settles the obligation.
The amount of the reimbursement shall not exceed the amount of the provision.
In the income statement, the expense relating to the provision may be presented net of the
reimbursement.
The reimbursement shall not be treated as separate asset but "netted" against the
estimated liability for the provision.
QUESTION 48-11 Multiple Choice (PAS 37)

Which statement is not true in relation to the measurement of a provision?

The risks and uncertainties that inevitably surround many events and circumstances shall
be taken into account in reaching the best estimate of a provision.
Where the effect of the time value of money is material, the amount of provision shall be
the present value of the expenditure expected to settle the obligation.
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.
Gains from expected disposal of assets shall be taken into account in measuring a
provision.
Provisions shall be discounted if the effect of the time value of money is material. Which
of the following is incorrect regarding the discount rate?
Reflects current market assessment of the time value of money.
Reflects risks specific to the liability
Does not reflect risks for which future cash flow estimates have been adjusted
Is a post-tax discount rate

Which statement is incorrect concerning recognition of a provision?

Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the
current best estimate.
A provision shall be used only for expenditures for which the provision was originally
recognized.
Provisions shall be recognized for future operating losses.
If an entity has an onerous contract, the present obligation under the contract shall be
recognized and measured as a provision.
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.
Onerous contract
Executory contract
Executed contract
Sale contract

5. The unavoidable costs under an onerous contract represent the "least net cost of exiting
from the contract" which is equal to

Cost of fulfilling the contract

Penalty arising from failure to fulfill the contract
Lower of the cost of fulfilling the contract or the penalty arising from failure to fulfill
the contract
Higher of the cost of fulfilling the contract or the penalty arising from failure to fulfill the
contract
QUESTION 48-12 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.

Restructuring
Liquidation
Recapitalization
Corporate Revamp

2. Events that quality as restructuring include all of the following, except

Sale or termination of business

Closure of business location in a region or relocation of business from one location to
another
Change in management structure such as elimination of a layer of management
Fundamental reorganization of an entity that has an immaterial and insignificant
impact on the operations.

3. Which is a cost of restructuring?

Cost of retraining or relocating continuing staff

Marketing or advertising cost distribution network
Investment in new system and distribution network
Cost of relocating business activities from one location

4.It is the abusive practice of manipulation and creative to another creative accounting by dumping
all kinds of provisions under the banner of provision for restructuring.

Big Bath provision

Creative Accounting
Cookie Jar
General reserve
QUESTION 48-13 Multiple choice (IFRS)

1.For which of the following should a provision be recognized?

Future operating losses

Obligations under insurance contracts
Reductions in fair value of financial instruments
Obligations for plant decommissioning costs

2. Provisions shall be recognized for all of the following, except

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.
Restructuring costs after a binding sale agreement has been signed.
Rectification costs relating to defective products sold
Future refurbishment costs due to introduction of a new computer system.

3. 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?

Retraining staff continuing to be employed

Relocation costs relating to staff moving to other divisions
Contractually required costs of retiring staff being made redundant from the division
being closed
Future operating losses of the division being closeup to the date of closure

4.An entity operates chemical plants. The published policies include a commitment to making
good any damage caused to the environment by the operations. The entity has always honored this
commitment.

Which of the following scenarios would give rise to an environmental provision?

 On 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.
Recent research suggests there is a possibility that the entity’s actions may damage
surrounding wildlife.
The government has outlined plans for a new law requiring all environmental damage to
be rectified.
A chemical spill from one of the entity’s plants has caused harm to the surrounding
area and wildlife.

5.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 next year. The cost
of fitting smoke detector can be measured reliably.

How should the entity treat this in the financial statements at year-end?

Recognize a provision for the current year equal to the estimated amount.
Recognize a provision for the current year equal to one-half only of the estimated amount.
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.
Ignore the event.

QUESTION 49-5 Multiple choice (LAA)

Contingent Liability will or will not become actual liabilities depending on
a. Whether probable and measurable.
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 but the amount cannot be reliably
measured.
d. The amount of the loss can be reliably measured and 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?
a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable

4. Disclosure usually is not required for

a. Contingent gain that is probable and measurable.
b. Contingent loss that is possible and measurable.
c. Contingent loss that is probable and cannot be reliably measured
d. Contingent loss that is remote and measurable

5. Reporting in the financial statements is required for

a. Loss contingency that is probable and measurable
b. Gain contingency that is probable and measurable
c. Loss contingency that is possible and measurable
d. All loss contingencies

6. 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.

7. 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.

8. Which statement is incorrect concerning a contingent liability?

a. A contingent liability is not recognized.
b. A contingent liability is disclosed only.
c. No disclosure is required for remote contingent liability.
d. A contingent liability is both probable and measurable.

9. A contingent liability
 a. Has a most probable value of zero but may require a payment if a given future
event occurs.
b. Definitely exists as a liability.
c. Is reported as current liability.
d.1s not disclosed in the financial statements.

10. Which of the following is not considered when evaluating whether or not to record a
liability for pending litigation?
a. Time period of the underlying cause of action
b. The type of litigation involved.
c. The probability of an unfavorable outcome
d. The ability to make a reliable estimate of the loss

QUESTION 49-6 Multiple choice (IAA 37)

1. Contingent asset is usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can be reliably measured
c. Occurrence is probable and measurable
d. The amount can be reliably measured

2. Which is the proper treatment of contingent asset?

a. An accrued account
b. Deferred income
c. An account receivable
d. A disclosure only

3. Gain contingency that is remote and measurable

 a. Must be disclosed in a note to financial statements
b. May be disclosed in a note to financial statements
c. Must be reported in the body of the financial statements
d. Should not be reported or disclosed.

4. A probable and measurable contingent asset should be

a. Recognized and disclosed.
b. Classified as an appropriation of retained earnings.
c. Disclosed but not recognized.
d. Neither recognized nor disclosed.

5. Which is the proper way to report a contingent asset, receipt of which is virtually certain?
a. As an asset
b. As unearned revenue
c. As a disclosure only
d. No disclosure and no accrual

QUESTION 9-7 Multiple choice (AICPA Adapted)

1. An entity did not record an accrual for a present obligation but disclose the nature of the
obligation and the range of the loss. How likely is the loss?
a. Remote
b. Reasonably possible
c. Probable
d. Certain

2. 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 possible
c. Certain
 d. Remote

3. An expropriation asset which is imminent and for which the loss can be reasonably
estimated should be
a. Accrued
b. Disclosed
c. Accrued and disclosed
d. Ignored

4. A present obligation that is probable and for which the amount can be reliably estimated
should
a. Not be accrued but disclosed.
b. Be accrued by debiting retained earnings and crediting a liability.
c. Be accrued by debiting an expense and crediting retained earnings.
d. Be accrued by debiting an expense and crediting a liability.

5. General or unspecified contingencies should

a. Be accrued in the financial statements and disclosed.
b. Not be accrued and need not be disclosed.
c. Not be accrued but should be disclosed.
d. Be accrued and need not be disclosed.
QUESTION 56-12 Multiple choice (PAS 12)
Anne Kristine P. Jusay

l. Which entities are required to apply deferred tax accounting?

Public entities
Nonpublic entities
Both public and nonpublic entities
Neither public entities nor nonpublic entities

2. It is the income for a period determined in accordance with the rules established by tax
authorities upon which income taxes are payable.
Accounting income
Taxable income
Net income
Accounting income subject to tax

3. It is the income for a period before deducting tax expense.

Accounting income
Taxable income
Gross income
Net income

4. These are differences that will result in future taxable amount in determining taxable income
of future periods.
Temporary differences
Taxable temporary differences
Deductible temporary differences
Permanent differences

5. These are differences that result in future deductible amount in determining taxable income in
future periods.
Taxable temporary differences
Deductible temporary differences
Taxable temporary and permanent differences
Deductible temporary and permanent difference

6. It is the deferred tax consequence attributable to a deductible taxable temporary difference.

Deferred tax liability
Deferred tax asset
Current tax liability
Current tax asset

7. It is the deferred tax consequence attributable to a deductible temporary difference and

operating loss carryforward.
Deferred tax liability
Deferred tax asset
Current tax liability
Current tax asset

8. It is the amount of income tax payable in respect of taxable income.

Current tax expense
Total income tax expense
Deferred tax expense
Deferred tax benefit

9. It is the aggregate amount included in the determination of net income for the period in respect
of current tax and deferred tax.
Tax expense
Current tax expense
Deferred tax expense
Deferred tax benefit

10. The deferred tax expense is equal to

Increase in deferred tax asset less increase in deferred tax liability.
Increase in deferred tax liability less increase in deferred tax asset.
Increase in deferred tax asset.
Increase in deferred tax liability.

QUESTION 56-13 Multiple choice (IFRS)

1. A deferred tax asset is recognized for deductible temporary differences and operating loss
carryforward when
It is probable that taxable income will be available against which the deferred tax asset can
be used.
It is probable that accounting income will be available against which the deferred tax asset can
be used.
It is possible that the taxable income will be available against which the deferred tax asset can be
used.
It is possible that accounting income will be available against which the deferred tax asset can be
used.

2. An entity shall offset a deferred tax asset and deferred tax liability
When the income taxes are levied by different taxing authority.
When the entity has no legal enforceable right to offset.
When the income taxes are levied by the same taxing authority and the entity has a legal
enforceable right to offset a current tax asset against a current tax liability.
Under all circumstances.

3. Which is correct about deferred tax assets and liabilities?

Current deferred tax assets are netted against current deferred tax liabilities.
All noncurrent deferred tax assets are netted against noncurrent deferred tax liabilities.
Deferred tax assets are never netted against deferred tax liabilities
Deferred tax assets are netted against deferred tax liabilities if they relate to the same tax
authority.

4. Which statement is incorrect concerning tax assets and liabilities?

Deferred tax assets and liabilities shall be discounted.
Tax assets and liabilities shall presented separately from other assets and liabilities in the
statement of financial position.
Deferred tax assets and liabilities shall be distinguished from current tax assets and liabilities.
When an entity makes a distinction between current and noncurrent assets and liabilities, it shall
classify deferred tax assets and liabilities as noncurrent.

5. All of the following must be disclosed separately, except

The tax bases of major items on which deferred tax has been calculated.
The amount of deductible temporary differences for which no deferred tax asset is recognized.
The amount of taxable temporary differences associated with investments in subsidiaries and
associates for which no deferred tax liability is recognized.
The amount of income tax relating to each component of other comprehensive income.

QUESTION 56-14 Multiple choice (AICPA Adapted)

1. Justification for the is method of determining periodic deferred tax expense is based on the
concept of
Matching of periodic expense to periodic revenue.
Objectivity in the calculation of periodic expense.
Recognition of asset and liability.
Consistency planning of tax expense measurement with actual tax planning strategies.

2. Which of the following differences would result in future taxable amount?

Expenses or losses that are deductible after they are recognized in accounting income.
Revenues or gains that are taxable before they are recognized in accounting income.
Expenses or losses that are deductible before they are recognized in accounting income.
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

Interest revenue on municipal bonds
Accrual of warranty expense
Excess of tax depreciation over accounting depreciation
Subscription received in advance

4. A temporary difference which would result in a deferred tax asset is

Tax, penalty or surcharge.
Dividend received on share investment.
Excess tax depreciation over accounting depreciation.
Rent received in advance included in taxable the time of receipt but deferred for
accounting purposes.

5. An entity, cash basis taxpayer, prepared accrual basis financial statements. In the year-end
statement of financial position, the deferred income tax liability increased compared to the prior
year. Which of the following would cause the increase in deferred tax liability?
An increase in prepaid insurance
An increase in rent receivable
An increase in warranty obligation
An increase in prepaid insurance and increase in rent receivable

6. An entity reported deferred tax asset and deferred tax liability at the end of the prior year and
at the end of the current year. For the current year, the entity should report deferred tax expense
or benefit equal to the
Decrease in the deferred tax asset
Increase in the deferred tax liability
Amount of the current liability plus the sum of the net changes in deferred tax asset and deferred
tax liability
Sum of the net changes in deferred tax asset and deferred tax liability

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 taxes that are based on these temporary differences should be
classified in the statement of financial position as
Contra account to current assets
Contra account to noncurrent assets
Current liability
Noncurrent liability

8. A deferred tax liability is computed using

Current tax law regardless of expected or enacted future tax law
Expected future tax law regardless of whether enacted or not
Current tax law unless a future enacted tax law is different
Either current or expected future tax law regardless of whether the expected future tax law is
enacted or not

9. Which statement is true regarding reporting deferred income taxes in the financial statements?
Deferred tax asset is always netted against deferred tax liability.
Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting process.
Deferred tax asset and liability may only be classified as noncurrent.
Deferred tax asset and liability are classified as current and noncurrent based on expiration date.

10. At the current year-end, an entity had a deferred tax liability that exceeded a deferred tax
asset which is expected to reverse in the next year.
Which of the following should be reported in the current year-end statement of financial
position?
The excess of the deferred tax liability over the deferred tax asset as a noncurrent liability.
The excess of the deferred tax liability over the deferred tax asset as a current liability.
The deferred tax liability as a noncurrent liability.
The deferred tax liability as a current liability.

QUESTION 56-15 Multiple choice (IAA)

1. The purpose of interperiod tax allocation is to
Allow entities to utilize carryforward loss.
Allow entities whose tax liabilities vary significantly from year to year to smooth tax payments.
Recognize an asset or liability for the tax consequences of temporary differences that exist
at year-end.
Amortize the deferred tax liability.

2. Intraperiod tax allocation

Involves the allocation of income taxes between current and future periods.
Associates tax effect with different items in the income statement.
Is not generally acceptable.
Arises because different income statement items are taxed at different rates.

3. Which is true about intraperiod tax allocation?

Intraperiod tax allocation arises because certain items are recognized for accounting and tax
purposes.
Intraperiod tax allocation is required for the effect of accounting policy.
The purpose is to allocate income tax expense evenly over a number of accounting periods.
The purpose is to relate the income tax expense to the items which affect the amount of tax.

4. All would require intraperiod tax allocation, except

Discontinued operation
Prior period error
Change in accounting estimate
Income from continuing operations

5. Tax expense should be allocated to all, except

Discontinued operation
Prior period error
Gross income
Other comprehensive income
TFA-PFA-COMPILATION-FINALS
TFA-PFA-C

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CHAPTER 36
PROPERTY, PLANT AND EQUIPMENT
Adame, Katrina Loren M.

QUESTION 36-1
Define property, plant and equipment.
ANSWER 36-1
Property, plant and equipment are tangible assets which are held by an entity for use in
production or supply of goods and services, for rental to others, or for administrative purposes,
and are expired to be used during more than one period.

QUESTION 36-2
What are the major characteristics of property, plant and equipment?
ANSWER 36-2
a.The property, plant and equipment are tangible assets, meaning with physical substance.
b.The property, plant and equipment are used in business, meaning used in production or
supply of goods and services for rental purposes and for administrative purposes.
c.The property, plant and equipment are expected to be used over a period of more than one
year.

QUESTION 36-3
Explain the treatment of spare parts and servicing equipment.
ANSWER 36-3
Most spare parts and servicing equipment are usually carried as inventory and recognized as an
expense when consumed.
However, major spare parts and standby equipment qualify as property, plant and equipment
when the entity expects to use them during more than one period.
Spare parts and servicing equipment that can be used only in connection with an item of
property, plant and equipment are accounted for as property, plant and equipment and
depreciated over a time period not exceeding the useful life of the related asset.
QUESTION 36-4
QUESTION 36-6
Give examples of directly attributable costs.
ANSWER 36-6
Examples of directly attributable costs include:
a.Cost of employee benefits arising directly form the acquisition of property, plant and
equipment
b.Cost of site preparation
c.Initial delivery and handling cost
d.Installation and assembly cost
e.Professional fees
f.Cost of testing whether the asset is functioning properly

QUESTION 36-7
Give examples of costs that are expensed rather than recognized as element of cost of property,
plant and equipment.
ANSWER 36-7
Examples of costs that are expensed rather than recognized as element of cost of property, plant
and equipment are:
a.Cost of opening a new facility.
b.Cost of introducing a new product or service, including cost of advertising and
promotion.
c.Cost of conducting business in a new location or with a new class of customer, including
cost of staff training.
d.Administration and other general overhead cost.
e.Cost incurred while an item capable of operating in the manner intended by management
has yet to be brought into use or is operated at less than full capacity,
f.Initial operating loss
g.Cost of relocating or reorganizing part or all of an entity’s operations.
An exchange transaction has commercial substance when the cash flows of the asset received
differ significantly from the cash flows of the asset transferred.

QUESTION 36-14
Explain the accounting for acquisition of property, plant and equipment by donation.
ANSWER 36-14
At present, IFRS does not address donation or contribution. However, IFRS explicitly addresses
government grant.
Philippine GAAP provides that contributions received from shareholders shall be recorded at
the fair value with the credit going to donated capital.
Expenses incurred in connection with the donation, like payment of registration fees and legal
fees shall be charged to the donated capital account.
The reason is that such expenses do not increase or enhance the value of the asset.
However, the directly attributable costs incurred necessary to bring the donated asset to the
location and condition for the intended use shall be capitalized.
Philippine GAAP further provides that donations of property, plant and equipment from
nonshareholders are generally considered subsidies and therefore recognized as income.

QUESTION 36-15
Explain the cost of self-constructed property, plant and equipment.
ANSWER 36-15
The cost of self-constructed property, plant and equipment shall include direct cost of materials,
direct labor and incremental overhead specifically identifiable or traceable to the construction.
PAS 16, paragraph 22, provides that the cost of abnormal amount of wasted material, labor and
overhead incurred in the production of self-constructed asset is not included in the cost of the
asset.
Any internal profit or saving on construction is eliminated in arriving at the cost of
self-constructed asset.

QUESTION 36-16 Multiple Choice (PAS 16)

1.Property, plant and equipment are defined as:
a.Tangible assets held for sale in the ordinary course of business.
8.Which term best describes the removal of the carrying amount of property, plant and
equipment from the statement of financial position?
a.Derecognition
b.Impairment
c.Writeoff
d.Depreciation

9.The carrying amount of property, plant and equipment shall be derecognized

a.On disposal
b.When no future economic benefits are expected form the use of the asset.
c.On acquisition
d.On disposal and when no future economic benefits are expected from the use of
the asset.
QUESTION 36-18 Multiple Choice (IFRS)
1.Which of the following is not capitalized into the cost of property, plant and equipment?
a.Cost of excess materials from a purchasing error
b.Cost of testing whether the asset works correctly
c.Initial delivery and handling cost
d.Cost of preparing the site for installation

2.An entity purchased a machinery that is does not have to pay until after three years. The
total payment on maturity will include both principal and interest. The cost of the
machine would be the total payment multiplied by what time value of money concept?
a.Present value of annuity of 1
b.Present value of 1
c.Future amount of annuity of 1
d.Future amount of 1

3.The initial operating loss should be

a.Deferred and amortized over a reasonable period.
b.Expensed and charged to the income statement.
c.Capitalized as part of the cost of plant.
d.Charged to retained earnings.

4.An entity imported machinery to be installed in the new factory premises before
year-end. What is the proper treatment of freight and interest on the loan to fund the cost
of machinery?
a.Both freight and interest are capitalized
b.Interest may be capitalized but freight is expensed.
c.Freight is capitalized but interest cannot be capitalized.
d.Both freight and interest are expensed.

QUESTION 36-19 Multiple Choice (AICPA Adapted)

1.The cost of property, plant and equipment comprises the purchase price end
a.The implied interest on the debt financing
b.The fair value of any noncash asset surrendered
c.The estimated residual value of the asset
d.All directly attributable costs necessary to bring the asset to the location and
condition for the intended use

2.When property is acquired by issuing shares, which of the following is the best basis for
establishing the historical cost of the acquired asset?
a.Historical cost of the asset to the seller
b.Historical cost of similar asset
c.Fair value of the asset received
d.Fair value of shares issued

3.When a plant asset is acquired by deferred payment, which condition generally does not
indicate the need to consider the imputation of interest?
a.The interest rate stated on the deferred obligation is significantly different from
market interest rate.
b.The cash price of the plant asset is significantly different from the deferred obligation.
c.The instrument representing the deferred obligation is noninterest bearing.
d.The face amount of the deferred obligation is equal to the fair value of the plant
asset exchanged.

4.If the present value of a note issued in exchange for a plant asset is less than the face
amount, the difference is
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.

5.An entity purchased a plant asset under a deferred payment contract. The agreement was
to pay P10,000 per year for five years. The plant asset is initially measured at
a.P50,000
b.P50,000 plus imputed interest
c.Present value of P10,000 annuity for five years at an imputed interest
d.Future value of a P10,000 annuity for five years

6.An entity purchased a plant asset under a deferred payment contract. The agreement was
to pay P10,000 at the time of the purchase and P10,000 at the end of each of the next five
years. The plant asset is initially measured at
a.The present value of a P10,000 ordinary annuity
b.P60,000
c.P60,000 plus imputed interest
d.P60,000 less imputed interest

7.Which of the following is the most appropriate policy as regards the allocation of joint
overhead cost to plant and equipment constructed by the entity for own use?
a.Assign no overhead
b.Assign only variable overhead.
c.Assign overhead equal to the amount that would have been assigned to production
that is curtailed.
d.Assign a proportionate share of overhead to the construction on the same basis
as that used for the assignment to normal production

8.A donated plant asset for which the fair value has been determined, and for which
directly attributable costs were incurred, shall be recorded at an amount equal to
a.Directly attributable costs incurred.
b.Fair value and directly attributable costs incurred.
c.Zero
d.Carrying amount
QUESTION 36-20 Multiple Choice (AICPA Adapted)
1.Vik Auto and King Clothier exchanged goods, held for resale with equal fair value. The
retail price of the car that Vik gave up is less than the retail price of the clothes received.
What profit should Vik recognize for the nonmonetary exchange?
a.A profit is recognized
b.A profit equal to the difference between the retail price of the clothes received and the
car
c.A profit equal to the difference between the retail price of the clothes and cost of the
car
d.A profit equal to the difference between the fair value and the carrying amount
of the car
Explanation for answer:
An exchange transaction that is deemed to have commercial substance is accounted for
on the basis of fair value.
The difference between the fair value and carrying amount of the asset transferred is
recognized as gain or loss.

2.Scott Company exchanged nonmonetary assets with Dale Company. No cash was
exchanged. The carrying amount of the asset surrendered by Scott exceeded both the fair
value of the asset received and Dale’s carrying amount of that asset. Scott should
recognize the difference between the carrying amount of the asset is surrendered and
a.The fair value of the asset it received as a loss
b.The fair value of the asset it received as a gain
c.Dale’s carrying amount of the asset it received as a loss
d.Dale’s carrying amount of the asset it received as a gain
Explanation for answer:
Since no cash was exchanged, the fair value of the asset transferred and the fair value of
the asset received are equal.

3.Solen Company and Nolse Company exchanged truck with fair value in excess of
carrying amount. In addition, Solen paid Nolse to compensate for the difference I truck
fair value. As a consequence of the exchange, Solen shall recognize
a.A gain equal to the difference between the fair value and carrying amount of the
truck given
b.A gain determined by the proportion of cash paid to the total consideration
c.A loss determined by the proportion of cash paid to the total consideration
d.Neither a gain nor a loss
Explanation for answer:
The excess of the fair value of truck given by Solen over the carrying amount is
recognized as gain

4.Slate Company and Talse Company exchanged plots of land with fair value in excess of
carrying amount. In addition, State received cash from Talse to compensate for the
difference in land value. As a result of the exchange, Slate shall recognize
a.A gain equal to the difference between the fair value and the carrying amount of
the land given
b.A gain in an amount determined by the ratio of cash received to total consideration
c.A loss in an amount determined by the ratio of cash received to total consideration
d.Neither gain nor a loss
Explanation for answer:
The excess of the fair value of land given by Slate over the carrying amount is recognized
as gain.

40-11 Multiple choice (PAS 16)

1. Which statement best describes the term depreciation?
a. The systematic allocation of the cost of an asset less residual value over the useful life.
b. The removal of an asset from the statement of financial position.
c. The amount by which the recoverable amount of an asset exceeds carrying amount.
d. The amount by which the carrying amount of an asset exceeds recoverable amount.

2. Carrying amount is
a. Cost of an asset or the amount substituted for cost in the financial statements, less
residual value.
b. Amount of cash paid or the fair value of the other consideration given to acquire an asset
at the tirne of acquisition or construction.
c. Net amount which the entity expects to obtain for an asset at the end of the useful life
after deducting the expected cost of disposal.
d. Amount at which an asset is recognized in the statement of financial position after
deducting any accumulated depreciation and accumulated impairment loss.

3. Which statement is incorrect with respect to depreciation?

a. The depreciation method shall reflect the pattern in which the asset's economc benefits
are consumed by the entity.
b. Depreciation of an asset begins when it is available for use or when it is in the location
and condition necessary for the intended use.
c. Depreciation ceases at the earlier between the date the asset is classified as held for sale
and the date the asset is derecognized.
d. Depreciation is not recognized if the fair value of an asset exceeds carrying amount.

4. Which statement is true with respect to residual value?

a. Residual value is the estimated net amount currently obtainable if the asset is at the end
of the useful life.
b. The residual value of an asset may increase to an amount equal to or greater than carrying
amount in which case the deprecation charge is zero.
c. The residual value of an asset shall be reviewed at least at each financial year-end and
any change is accounted for as a change in accounting estimate.
d. All of these statements are true.

5. The useful life of property, plant and equipment is

I. The period of time over which an asset is expected to beused by the entity.
II. The number of production or similar unite expected to be obtained from the asset by the entity.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

6. All of the following factors are considered in determining the useful life of an asset, except
a. Expected usage of the asset
b. Expected physical wear and tear
c. Technical obsolescence
d. Residual value

7. The production method of depreciation results in

a. Constant charge over the useful life of the asset.
b. Decreasing charge over the useful life of the asset.
c. Increasing charge over the useful life of the asset.
d. Variable charge based on the expected use or output the asset.

8. Which statement is true in relation to depreciation?

a. Depreciation is not a matter of valuation.
b. Depreciation is part of the matching of revenue and expense.
c. Depreciation retains funds by reducing income tax and dividend.
d. Allof the statements are true about depreciation.
9. Economic factors that shorten the useful life of an asset include
a. Wear and tear
b. Deterioration or decay through aging or passage of time
c. Damage or destruction due to fire, flood, earthquake and other casualty
d. Obsolescence, supersession and inadequacy

10. Technical or commercial obsolescence arises from

a. Expected usage of the asset
b. Expected physical wear and tear
c. Change or improvement in production or change in the market demand for the product
output of the asset
d. Expiry date of related lease of the asset

ANSWER 40-11
1. a 6. d
2. d 7. d
3. d 8. d
4. d 9. d
5. c 10. c
QUESTION 40-12 Multiple choice (AICPA
Adapted)
1. Which statement is the assumption on which straight line depreciation is based?
a. The operating efficiency of the asset decreases in later years.
b. Service value declines as a function of time rather than use.
c. Service value declines as a function of obsolescence rather than time.
d. Physical wear and tear are more important than economic obsolescence.

2. The straight line depreciation is not appropriate for

a. An entity that is neither expanding nor contracting an investment in equipment because
it is replacing equipment as the equipment depreciates.
b. Equipment on which maintenance and repairs increase substantially with age.
c. Equipment with useful life that is not affected by the amount of use.
d. Equipment used consistently every period.

3. The principal objection to the straight line method of depreciation is that it

a. Provides for the declining productivity of an aging asset
b. Ignores variation in the rate of asset use
c. Tends to result in a constant rate of return on a diminishing investment base
d. Gives smaller periodic writeoff than a decreasing charge mtethod

4. In which of the following situations is the production method of depreciation most appropriate?
a. An asset's service potential declines with use
b. An asset’s service potential declines with the passage of time
c. An asset is subject to rapid obsolescence
d. And asset incurs increasing repairs and maintenance with use

5. Which statement provides the best theoretical support for accelerated depreciation?
a. Assets are more efficient in early years and initially generate more revenue.
b. Expenses should be allocated in the manner that “smooths” earnings.
c. Repairs and maintenance costs probably would increase in later periods so depreciation
should decrease.
d. Accelerated depreciation provides easier replacement because of the time value of
money.

6. An asset has a nine-year useful life and is to be appreciated under the sum of year’s digits
method. The annual depreciation expense would be the same as that under the straight line method
in the
a. Third year
b. Fifth year
c. Seventh year
d. Ninth year

7. The composite depreciation method

a. Is applied to a group of homogeneous assets
b. Is an accelerated method of depreciation
c. Does not recognize gain or loss on the retirement of single asset in the group
d. Excludes residual value from the base of the depreciation calculation
8. An entity using the composite depreciation method for a fleet of trucks, cars and campers retired
one of the trucks and received cash from a salvage entity. The net carrying amount of these
composite asset accounts would be decreased by the
a. Cash proceeds received and original cost of the truck
b. Cash proceeds received
c. Original cost of the truck less the cash proceeds
d. Original cost of truck

9. A machine with a four-year estimated useful life and an estimated 15% residual value was
acquired at the beginning of the current year. The increase in accumulated depreciation for the
second year using the double declining balance method would be
a. Original cost x 85% x 50%
b. Original cost x 50%
c. Original cost x 85% x 50% x 50%
d. Original cost x 50% x 50%

10. A machine with a 5-year estimated useful life and an estimated residual value was acquired at
the beginning of the current year. At the end of the fourth year, accumulated depreciation using
the sum of years' digits method would be
a. Original cost less residual value multiplied by 1/15
b. Original cost less residual value multiplied by 14/15
c. Original cost multipled by 14 / 15
d. Original cost multiplied by 1 / 15

ANSWER 40-12
1. b 6. b
2. b 7. c
3. b 8. b
4. a 9. d
5. a 10. b
40-13 Multiple choice (IAA)
1. Depreciation is best described as a method of
a. Asset valuation
b. Current value allocation
c. Cost allocation
d. Useful life determination

2. Which depreciation method is not based on the passage of time?

a. Production method
b. Sum of years’ digits
c. Declining balance
d. Straight line
3. A method which excludes residual value from the base for the depreciation calculation is
a. Straight line
b. Sum of year's digits
c. Double declining balance
d. Output method

4. The double declining balance method

a. Results in a decreasing depreciation charge.
b. Means residual value is not deducted in computing the depreciation base.
c. Means the carrying amount should not be reduced below residual value.
d. All of these describe double declining balance

5. Which depreciation method applies a uniform depreciation rate each period to the carrying
amount of an asset?
a. Straight line
b. Declining balance
c. Output method
d. Sum of years' digits

6. What factor must be present to use the production method of depreciation?

a. Total units to be produced can be estimated
b. Production is constant over the life of the asset
c. Repair costs increase with use
d. Obsolescence is expected

7. The sun of years' digits method

a. Results in residual value being ignored.
b. Means the denominator is the number of years remaining at the beginning of the year.
c. Means the carrying amount should not be reduced below residual value.
d. Results in an increasing depreciation charge.
8. In order to calculate. the depreciation of asset for the third year using the sum of years’ digits
method, which of the following must be known about the asset?
a. Acquisition cost
b. Residual value
c. Useful life
d. All must be known

9. Which depreciation method is not appropriate for situations involving a large number of similar
items, each having a small peso cost?
a. Inventory method
b. Retirement method
c. Replacement method
d. Composite method

10. Which statement regarding depreciation is true?

a. An asset must be depreciated from the date of purchase.
 b. The annual depreciation charge must be constant
c. The total cost of an asset must eventually be depreciated
d. If the carrying amount of an asset is less than hi residual value, depreciation is not
charged.

ANSWER 40-13
1. c 6. a
2. a 7. c
3. c 8. d
4. d 9. d
5. b 10. d

QUESTION 41-7 Multiple choice (IAA)

1. The most common method of computing depletion is
a. Percentage depletion method
b. Decreasing charge method
c. Straight line
d. Production or output method

2. Depletion expense
a. Is usually part of cost of goods sold.
b. Includes tangible equipment in the depletable amount.
c. Excludes intangible development cost from the depletable amount.
d. Excludes restoration cost from the depletable amount.

3. Information needed to compute a depletion charge per unit includes the

a. Amount of resources sold during the period.
b. Cumulative amount of resources removed.
c. Estimated total amount of resources available for removal.
d. Amount of resources removed during the period.

4. Which accurately describes the GAAP regarding the acounting for the costs of drilling dry holes
in the oil and gas industry?
a. Successful effort method
b. Full cost method
c. Both successful effort and full cost
d. Neither successful effort nor full cost method

5. Which of the following is not part of depletable amount?

a. Acquisition cost of the mineral resource deposit
b. Exploration cost
c. Tangible equipment used to extract the mineral resource
d. Intangible development cost such as drilling and tunnel
ANSWER 41-7
1. d
2. a
3. a
4. c
5. c
QUESTION 41-8 Multiple choice (IFRS)
1. Exploration and evaluation expenditures are incurred
a. When searching for an area that may warrant detailed exploration even though the entity
has not yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained but the technical
feasibility and commercial viability of extracting a mineral resource are not yet demonstrable.
c. When a specific area is being developed and preparation, for commercial extraction are
being made.
d. In extracting mineral resource and processing the resource to make it marketable or
transportable.

2. When is an entity required to recognize exploration and evaluation expenditure as an asset?

a. When such expenditure is recoverable in future periods.
b. When the technical feasibility and commercial viability of extracting the associated
mineral resource have been demonstrated.
c. When required by the entity's accounting policy for recognizing exploration and
evaluation-asset.
d. Such expenditure is always expensed as incurred.

3. Which of the following expenditures would never qualify a8 an exploration and evaluation
asset?
a. Expenditure for acquisition of rights to explore
b. Expenditure for exploratory drilling
c. Expenditures related to the development of mineral resource
d. Expenditures for activities in relation to evaluating * technical feasibility and
commercial viability of extracting a mineral resource

4. An entity is required to consider which of the following developing accounting policy for
exploration and evaluation activities?
a. The requirements and guidance in Standards and Interpretations dealing with similar and
related issue
b. The definitions, recognition criteria and measurement concepts for assets, liabilities,
income, and expenses
 c. Recent pronouncements of standard-setting bodies
d. Whether the accounting policy results in information that is relevant and reliable

5. Which of the following is not a disclosure required in relation to exploration and evaluation
expenditures?
a. Information about commercial reserve quantity
b. Accounting policy for exploration and evaluation expenditures
c. The amounts of operating and investing cash flows arising from exploration and
evaluation of mineral resources
d. Information recognized in the financial statements arising from the exploration and
evaluation of mineral resources

ANSWER 40-12
1. b
2. c
3. c
4. d
5. a

QUESTION 43-7 Multiple choice (PAS 36)

1. Which statement best describes impaiment loss?
a. The removal of an asset from the statement of financial position.
b. The amount by which carrying amount of an asset exceeds the recoverable amount.
c. The systematic allocation of cost of an asset less residual value over the useful life.
d. The amount by which the recoverable amount of an asset exceeds the carrying amount.
2. What is the recoverable amount of an asset?
a. Fair value less cost of disposal
b. Value in use
c. Fair value less cost of disposal or value in use, whichever is higher
d. Fair value less cost of disposal or value in use, whichever is lower
3. What is fair value of an asset?
a. The price that would be received to sell an asset in an orderly transaction between market participants at the
measurement date.
b. The price that would be paid to transfer a liability in an orderly transaction between market participants at the
measurement date.
c.The discounted value of future cash flows expected to be derived from an asset.
d. The undiscounted value of future cash flows expected to be derived drom an asset.
4. Which statement bests describes value in use?
 a. The present value of estimated future cash flows expected to arise from the continuing use of an asset and from the
ultimate disposal
b. The amount of cash that could currently be obtained by selling an asset in an orderly disposal
c. The amount which an entity expects to obtain for an asset at the end of the useful life
d. Undiscounted future net cash flows
5.What is the best evidence of fair value?
a. Quoted price in an active market for identical asset.
b. Quoted price in an active market for similar asset.
c. Quoted price in an inactive market for identical asset.
d. Quoted price in an inactive market for similar asset.
6. Which statement is incorrect concerning the estimate of future cash flows?
a. Future cash flows shall be based on reasonable and supportable assumptions.
b. Future cash flows shall be based on the most recent budget, usually up to a maximum of 5 years,
c. Future cash flows do not include income tax.
d. The discount rate used in estimating future cash flows shall be the current rate after tax.
7.The estimates of future cash flows in calculating value in use include all of the following, except
a. Cash inflows from the continuing use of the asset
b. Cash outflows incurred to generate the cash inflows from the continuing use of the asset
c. Net cash flows from the disposal of the asset at the end of the useful life
d. Income tax payments
8. What is a cash generating unit?
a. The smallest business segment
b. Any group of assets that generate cash flows
c. Any group of assets reported separately to management
d. The smallest group of assets that generate independent cash flows from continuing use

ANSWER 43-7
1. b
2. c
3. a
4. a
5. a
6. d
7. d
8. d

QUESTION 43-8 Multiple choice (IFRS)

1. If the fair value less cost of disposal cannot be determined
a. The asset is not impaired.
b. The recoverable amount is the value in use.
c. The net realizable value is used.
d. The carrying amount of the asset remains the same.
2. If the assets are to be disposed of
a. The recoverable amount is the fair value less cost of disposal.
b. The recoverable amount is the value in use.
c. The asset is not impaired.
d. The recoverable amount is the carrying value.
3. When deciding on the discount rate to be used, which factor should not be taken into account?
a. The time value of money.
b. Risk specific to the asset for which future cash flow estimate has not been adjusted.
c. Risk specific to the asset for which future cash flow estimate has been adjusted.
d. Pretax rate.
4. What is the allocation of an impairment loss recognized for a cash generating unit?
a. Across the assets of the units based on carrying amount.
b. Across the assets of the unit based on the fair value.
c. First, to any goodwill, and the balance to the other assets prorata based fair value.
d. First, to any goodwill, and the balance to the other assets prorata based on carrying amount.
5. An impairment loss that relates to an asset that has been revalued shall be recognized in
a. Profit or loss
b. Revaluation surplus that relates to the revalued asset
c. Opening retained earnings
 d. Any reserve in equity
6. Which of the following is not relevant in determining value in use?
a. The expected future cash flows from the asset
b. The carrying amount of the asset
c. Expectation about possible variation in the amount and timing of future cash flows
d. The time value of money
7. Which of the following statements is not true with regard to impairment of asset?
a. If impairment indicators are present, the entity must conduct an impairment test.
b. The impairment test compares the carrying amount of the asset with the lower of fair value less cost of disposal and
value in use.
c. If the recoverable amount is lower than carrying amount, an impairment loss is recognized.
d. If recoverable amount is higher than carrying amount, no impairment loss is recognized.
8. When impairment testing a cash generating unit, any corporate assets should
a. Be allocated on a reasonable and consistent basis.
b. Be separately impairment tested.
c. Be included in the head office assets and impairment tested along with that cash generating unit.
d. Not be allocated to cash generating units.

ANSWER 43-8
1. b
2. a
3. c
4. d
5. b
6. b
7. b
8. a

QUESTION 43-9 Multiple choice (IFRS)

1. Impairment loss for productive asset is reported
a. As an extraordinary items.
 b. As a component of discontinued operation.
c. As a component of income from continuing operations.
d. As a change in accounting estimate.
2. Long-lived assets are reviewed for impairment
a. Every three years at the end of reporting period.
b. When the asset is fully depreciated.
c. When circumstances indicate that the carrying amount of an asset might not be recoverable.
d. Every year at the end of reporting period.
3. Which condition must exist in order for an impairment loss to be recognized?
a. The carrying amount is less than fair value.
b. The carrying amount of the asset is not recoverable.
c. The carrying amount is less than value in use.
d. The carrying amount is recoverable.
4. The impairment rules for long-lived assets apply to all, except
a. Building currently used in business
b. Financial instrument
c. Land
d. Computer used to run a production process
5. Estimates of future cash flows normally would cover projections over a maximum of
a. Five years
b. Ten years
c. Fifteen years
d. Twenty years

ANSWER 43-9
1. c
2. c
3. b
4. b
5. a
QUESTION 61-7 Multiple choice (IAA)

Which of the following shareholder rights is most commonly enhanced in an issue of preference
shares?
The right to vote for the board of directors.
The right to maintain proportional interest.
The right to receive a full cash dividend before dividends are paid to other classes of share
capital.
The right to vote on major corporate issues.

Preference shares participate ratably with the ordinary shareholders in any profit distribution
beyond the prescribed preference rate.
Cumulative feature
Participating feature
Callable feature
Redeemable feature

Which feature of preference share would most likely be opposed by ordinary shareholders?
Convertible
Callable
Redeemable
Participating

Noncumulative preference dividends in arrears

Are not paid and not disclosed.
Must be paid before any other cash dividends can be distributed:
Are disclosed as liability untii paid.
Are paid to preference shareholders if sufficient funds remain after payment of ordinary
dividend.

How should cumulative preference dividends in arrears be reported?

Note disclosure
Increase in shareholders' equity
Increase in current liabilities
Increase in noncurrent liabilities

The effect of recording å 100% share dividend would be to

Decrease the current ratio, decrease working capital and decrease book value per share working
capital.
Leave inventory turnover unaffected, increase earnings per share and increase book value per
share and increase book value per share.
Leave working capital unaffected, decrease earnings per share and decrease book value per
share.
Leave working capital unaffected, decrease earnings per share and increase book value per share.
The features most frequently associated with preference shares include all of the following,
except
Callable at the option of the shareholder
Converfible into ordinary shares
Nonvoting
Preference as to assets in the event of liquidation

The cumulative feature of preference shares

Limits the amount of cumulative dividends to the par value of the preference shares.
Requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to ordinary shareholders.
Means that the shareholder can accumulate preference shares equal to the par value of ordinary
shares at which time the preference shares can be converted into ordinary shares.
Enables a preference shareholder to accumulate dividends equal to the par value of the shares.
Question 62-11 Multiple Choices (PAS 33)
1. EPS disclosures are required for
a. Entities whose ordinary shares and potential ordinary shares are
publicly traded
b. Entities that are in the process of issuing ordinary shares in the public market
c. All entities
d. Entities whose ordinary shares and potential ordinary shares
are publicly traded and entities that are in the process of issuing
ordinary shares in public market
2. EPS disclosures are
a. Required for all public and nonpublic entities
b. Required for public entities and encouraged for nonpublic entities
c. Encouraged for public entities and required for nonpublic entities d.
Encouraged for all entities
3. When an entity issues both consolidated and separate financial statements,
the EPS information is required
a. For both set of financial statements
b. In neither set of financial statements
c. Only for consolidated financial statements
d. Only for separate financial statements
4. Earnings per share shall be computed on the basis of
a. The number of shares outstanding at the end of the year
b. A weighted average of the number of shares outstanding during the
year regardless of the extent of fluctuations
c. A weighted average of the number of shares outstanding during
the year except minor fluctuations in the number of shares may
be disregarded
d. The number of shares outstanding at the middle of the year
5. Earnings per share shall be reported for all of the following
except a. Continuing operations
b. Discontinued operations
c. Net income
d. Net cash provided by operating activities
6. In computing basic earnings per share, if the preferences shares are
cumulative, the amount that should be deducted as an adjustment to the
number is the a. Preference dividends in arrears
b. Preference dividend paid during the year
c. Annual preference dividend
d. Annual ordinary dividend
7. In computing basic earnings per share, the amount of preference dividends
on noncumulative preferences share should be
a. Deducted from net income whether declared or not
b. Deducted from net income only when declared
c. Added to net income only when declared
d. Ignored
8. In computing basic earnings per share, the full amount of the required
preference dividends on cumulative preference shares for the period should be
a. Ignored
b. Deducted from net income only when declared
c. Deducted from net income whether declared or not
d. Added to net income whether declared or not
9. In computing basic loss per share. the annual preference dividend on
cumulative preference shares should be
a. Ignored
b. Deducted from the net loss whether declared or not
c. Added to the net whether declared or not
d. Added to the net loss only when declared
QUESTION 62-14 Multiple choices (PAS 33)
1. The calculation of diluted EPS assumes that shares options were exercised
and that the proceeds were used to
a. Buy ordinary shares as an investment
b. Retire preference shares
c. Buy treasury shares
d. Increase net income
2. Options and warrants are dilutive if
a. The exercise price is lower than the average market price
b. The exercise price is higher than the average market price
c. The exercise price is equal to the average market price
d. The option shares represent 20 % of ordinary shares
3. When applying the treasury share method for diluted EPS, the market price
of the ordinary share used for the assumed acquisition of treasury shares is
the a. Market price at the end of the year
b. Average market price during the year
c. Market price at the beginning of the year
d. Average market price over a two year period
4. In applying the treasury share method of computing diluted earnings per
share, when is it appropriate to use the average market price of ordinary share
during the year as the assumed repurchase price?
a. Always
b. When the average market price is higher than the exercise price
c. Never
d. When the average market price is lower than the exercise price 5. Under
the treasure share method, the number of potential ordinary shares is equal
to
a. Option shares
b. Option shares minus assumed treasury shares
c. Assumed treasury shares
d. Option shares actually issued during the year
QUESTION 62-15 Multiple Choice (IFRS)
1. All of the following must be disclosed in relation to earnings per share,
except a. Forecast earnings per share for the following year
b. Instruments that could potentially dilute basic earnings per share in the
future but not included in the diluted EPS because they are antidilutive in the
current period.
c. The weighted average number of ordinary shares used.
d. The earnings figures used in calculating EPS
2. Dilution of EPS is defined as
a. Decrease in earning per share when any financial instrument is converted
to any form of share capital
b. Decrease in share capital
c. Decrease in earnings per share when convertible instruments
are converted to ordinary shares
d. Decrease in earnings per share when share capital is converted to
debt capital\
3. If a share option is converted to March 31.
a. The potential ordinary shares are included in diluted EPS up to
March 31, and in basic EPS from the date converted to the year-end,
both weighted accordingly.
b. The ordinary shares are not included in diluted EPS
c. The ordinary shared are not included in basic EPS
d. The effects of the share option are included only in previous year’s
EPS calculation
4. In calculating whether potential ordinary shares are dilutive, the income
figure used as the control number is
a. Net income including discontinued operations
b. Income from continuing operations
c. Income before tax including discontinued operations
d. Retained earnings for the year after dividends
QUESTIOM 62-16 Multiple choice (AICPA Adapted)
1. How will the annual interest or preference dividend affect annual net
earnings available to ordinary shareholders?
a. Annual net earnings available to ordinary shareholders are reduced by
annual interest but not by preference dividends
b. Annual net earnings available to ordinary shareholders are reduced
by preference dividends but not by annual interest
c. Annual net earnings available to ordinary shareholders are reduced
by both annual interest and preference dividends
d. Annual net earnings available to ordinary shareholders are not reduced
by annual interest or preference dividends
2. The “if converted” method of computing earnings per share assumes
conversion of convertible bonds payable at
a. Beginning of the earliest period reported or at time of issuance, if later
b. Beginning of the earliest period reported regardless of time of issuance c.
Middle of the earliest period reported regardless of the time of issuance d.
Ending of the earliest period reported regardless of the time of issuance
3. The nature of diluted earnings per share involving adjustment for share
options can be described as
a. Historical because earnings are historical
b. Historical because it indicates an entity’s valuation
c. Proforma because it indicates potential changes in number of shares
d. Proforma because it indicates potential changes in earnings
4. What is the justification underlying the concept of potential ordinary shares in
an EPS computation?
a. Form over substance
b. Substance over form
c. Form and substance considered equally
d. Accounting practice
QUESTION 62-17 Multiple choice (IAA)
1. Antidilutive securities
a. Should be included in the computation of diluted earnings per share but
not basic earnings per share
b. Are those inclusion in earnings per share computation would cause
basic earnings per share to exceed diluted earnings per share.
c. Include share options and warrants whose option price is less than
the average market price
d. Should be disregarded in all EPS computations.
2. When there are multiple dilutive convertible securities, the one that should
be used first to calculate dilutive earnings per share is the security with the
a. Largest earnings adjustment
b. Largest earnings per share adjustment
c. Smallest earnings adjustment
d. Smallest earnings per share adjustment
3. For an entity having several different issues of convertible securities,
share options and warrants, the standards requires selection of the
combination of securities producing
a. The lowest possible earnings per share
b. The highest possible earnings per share
c. The earnings per share figure midway between the lowest possible and
the highest possible earnings per share
d. Any earnings per share figure between the lowest possible and the
highest possible earnings per share
4. The purpose of diluted earnings per share is to
a. Provide a comparison figure for dent holders
b. Indicate earnings shareholders shall receive in future periods
c. Distinguish between entities with a complex capital structure
d. Show the maximum possible dilution of earnings
5. In calculating diluted earnings per share, which of the following should not
be considered?
a. The weighted average number of ordinary shares outstanding
b. The amount of dividends declared on cumulative preference shares c. The
amount of cash dividends declared in ordinary shares d. The number of
ordinary shares resulting from the assumed conversion of bonds payable
outstanding
6. Which statement is correct in relation to EPS?
a. If preference share is outstanding, dividend declared on the preference
share is always deducted from net income in calculating EPS
b. EPS can never be negative
c. If income from continuing operations is less than zero, potentially
dilutive securities are antidilutive.
d. All issues convertible to ordinary shares must be included in the calculation
of diluted EPS.
7. An entity already has calculated the basic earnings per share. In
determining diluted earnings per share, the annual dividend on convertible
cumulative preference share which is dilutive should be
a. Added back to the numerator of basic EPS whether declared or not
b. Deducted from the numerator of basic EPS only of declared
c. Added back to the numerator of basic EPS only of declared
d. Deducted from the numerator of basic EPS whether declared or not
8. In determining diluted earnings per share, dividends on
nonconvertible cumulative preference shares should be
a. Disregarded
b. Added back to net income whether declared or not
c. Deducted from net income only if declared
d. Deducted from net income whether declared or not
9. In determining diluted earnings per share, interest expense, net of income
tax. On dilutive convertible bond payable should be
a. Added back to weighted average shares outstanding for diluted earnings
per share
b. Added back to net income for diluted earnings per share
c. Deducted from net income for diluted earnings per share
d. Deducted from weighted average shares outstanding for diluted earnings
per share
10.When dilutive convertible bonds are the only potential ordinary shares
a. Diluted EPS will be greater if the binds are actually converted than
not converted
b. Diluted EPS will be smaller if the bonds are actually converted than
not converted
 c. Diluted EPS will be the same whether or not the bonds are converted
d. The effect of conversion on diluted EPS cannot be determined
without additional information
TFA CHAPTER 47 (Liabilities)
QUESTION 47-9 Multiple choice (IAA)
1. Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day
period. What is the classification of the notes payable?
Current liabilities
Deferred credits
Noncurrent liabilities
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?
Dependent on the intention of management
Dependent on the actual ability to refinance
Current liability, unless specific refinancing criteria are met
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?
Current liability with separate disclosure of the note refinancing
Current liability with no disclosure required
Noncurrent liability with separate disclosure of the note refinancing
Noncurrent liability with no separate disclosure required

4. A entity has a loan due for repayment in six months’ time, but the entity has the option to
refinance or 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?
Current liability
Current asset
Noncurrent liability
Noncurrent asset

5. At year-end, an entity classified a note payable as current liability. Under what condition could
the entity reclassify the note payable from current to noncurrent?
If the entity has the intent and ability to reclassify the note before the end of reporting period.
If the entity has executed an agreement to refinance the note before issuance of the financial
statements.
If the entity has the intent and ability to reclassify the note before the issuance of the financial
If the entity has executed an agreement to refinance the note before the end of reporting
period.

QUESTION 47-10 Multiple choice (AICPA Adapted)

1. The most relevant measurement of liabilities at initial recognition should always reflect
The expectation of the management
Historical cost
The credit standing of the entity
The single most likely minimum possible amount

2. Which statement best describes the term liability?

An excess of equity over current assets
Resources to meet financial commitments when due
The residual interest in the assets of the entity
A present obligation arising from past event

3. What is the relationship between present value and liability?

Present value is used to measure certain liabilities.
Present value is not used to measure liabilities.
Present value is used to measure all liabilities.
Present value is used to measure current liabilities.

4. If a long-term debt becomes callable due to the violation of a loan covenant

The debt may continue to be classified as noncurrent
The debt should be reclassified as current.
Cash must be reserved to pay the debt.
Retained earnings must be restricted.

5. What is the classification of debt callable by the creditor?

Noncurrent liability
Current liability
Current liability if the creditor intends to call the debt within one year
Current liability if it is probable that the creditor will call the debt within one year

QUESTION 47-11 Multiple Choice (IAA)

1. Advance payments from customers represent
Liabilities until the product is provided.
A component of shareholders' equity.
Assets until the product is provided.
Revenue upon receipt of the advance payment.

2. Revenue associated with gift card sales is recognized

When the gift card is sold.
No later than the last day of the reporting period.
When the probability of gift card redemption is viewed as remote.
Under no circumstances

3. All else equal, a large increase in unearned revenue in the current period would be expected to
produce what effect on revenue in a future peri0d?
Large increase in future revenue
Large decrease in future revenue
No effect
Large decrease because unearned revenue indicates collection problems

4. When a customer advance has been previously received, the appropriate journal entry includes
A debit to revenue and credit to liability
A debit to revenue and credit to asset
A debit to asset and credit to revenue
A debit to liability and credit to revenue

5. When refundable deposit is received, cash is increased with a corresponding increase in

Current liability
Revenue
Shareholders' equity
Noncurrent liability

QUESTION 47-12 Multiple choice (AICPA Adapted)

1. A department store received cash and issued a gift certificate that is redeemable in merchandise.
When the gift certificate was issued
Deferred revenue account should be decreased
Deferred revenue account should be increased
Revenue account should be decreased
Revenue account should be increased

2. 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 nonredemption of
certificates, respectively?
Decrease and No effect
Decrease and Decrease
No effect and No effect
No effect and Decrease

3. An entity received an advance payment for special order goods that are to be manufactured and
delivered within six months. How should the advance payment be reported?
Deferred charge
Contra asset account
Current liability
Noncurrent liability

4. At year-end, an entity sold refundable merchandise coupons. The entity received a certain
amount for each coupon redeemable next year for merchandise with a certain retail price. At year-
end, how should the entity report these coupon transactions?
Unearned revenue at the merchandise's retail price
Unearned revenue at the cash received
Revenue at the merchandise's price
Revenue at the cash received

5. 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 performance?
Revenue for the entire proceeds
Revenue to the extent of related costs expanded
Unearned revenue to the extent of related costs expended
Unearned revenue for the entire proceeds

6. Magazine subscriptions collected in advance should be accounted for as

A contra account to magazine subscriptions receivable
Deferred revenue in the liability section
Deferred revenue in the shareholders' equity section
Magazine subscription revenue in the income statement in the period collected

7. Under a royalty agreement with another entity, an entity will receive royalties from the
assignment of a patent for four years. The royalties received in advance should be reported as
revenue
In the period received
In the period earned
Evenly over the life of the royalty agreement
At the date of the royalty agreement
8. An entity is a retailer of home appliances and offers a service contract on each appliance sold.
Collections received for contracts should be recorded as an increase in a
Deferred revenue account
Sales contracts receivable valuation account
Shareholder’s equity valuation account
Service revenue account

9. An entity sells appliances that include a three-year warranty. Service calls under the warranty
are performed by an independent mechanic under a contract with the entity. Based on experience,
warranty costs are expected to be incurred for each machine sold.
When should the entity recognize the warranty costs?
Evenly over the life of the warranty
When the service calls are performed
When payments are made to the mechanic
When the machines are sold

10. 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 manufactured 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?
None
Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to
40% of the main contract price
Deferred revenue equal to 60% of the main contract price and no payable to subcontractor
No deferred revenue but payable to subcontractor 18 reported at 40% of the main contract price

QUESTION 47-13 Multiple Choice (IAA)

1. The cost of customer premium offer should be charged to expense
When the related product is sold.
When the premium offer expires.
Over the life cycle of the product.
When the premium is claimed.

2. The accounting concept that requires recognition of a liability for customer premium offer is
Time period
Prudence
Historical cost
Matching principle
3. Accounting for cost of incentive program for frequent customer purchases involves
Recording an expense and a liability each period.
Recording a liability and a reduction of revenue.
Recording an expense and an asset reduction.
Recording an expense and revenue each period.

4. Accounting for cost of customer incentive program

Requires probability estimation.
Follows the matching principle.
Is a loss contingency situation.
All of these are correct.

5. Providing a monetary rebate program

Is accounted for similarly to a premium offer
Creates an expense for the seller in the period of sale.
Creates a liability for the seller at the time of sale.
All of these are correct.
QUESTION 47-14 Multiple choice (IAA)
1. The accrual approach in accounting for warranty
Is required for income tax reporting.
Is frequently justified on the basis of expediency.
Finds the expense account being charged when the seller performs in compliance with the
warranty.
Should be used whenever the warranty 18 an integral and inseparable part of the sale.

2. Which of the following best describes the accrual approach of accounting for warranty cost?
Expensed when paid
Expensed when warranty claims are certain
Expensed based on estimate in year of sale
Expensed when incurred

3. Which of the following best describes the expense as incurred approach of accounting for
warranty cost?
Expensed based on estimate in year of sale
Expensed when liability is accrued
Expensed when warranty claims are certain
Expensed when incurred

4. What is the classification of the estimated warranty liability in a three-year warranty?

Noncurrent
Current
Partly current and partly noncurrent
No need for disclosure

5. Which of the following is a characteristic of the accrual of warranty but not the sale of
warranty?
Warranty liability
Warranty expense
Unearned warranty revenue
Warranty revenue
Chapter 48 PROVISION
QUESTION 48-10 Multiple choice (PAS 37)
1, Which is the correct definition of a provision?
A possible obligation arising from past event
A liability of uncertain timing or amount
A liability which cannot be easily measured
An obligation to transfer funds to an entity
2. A provision shall be recognized as liability when
An entity has a present obligation as a result of a past event.
It is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation.
The amount of the obligation can be measured reliably.
All of these are required for the recognition of a provision as liability.
3. A legal obligation is an obligation that is derived from all of the following, except
Legislation
A contract
Other operation of law
An established pattern of past practice
4. A constructive obligation is an obligation
That is derived from an entity's action that the entity will accept certain responsibilities because of
past practice, published policy or current statement.
The entity has created a valid expectation in o parties that it will discharge those responsibilities.
I only
II only
Both I and II
Either I or II
5. It is an event that creates a legal or constructive obligation because the entity has no other
realistic alternative but to settle the obligation.
 Obligating event
Past event
Subsequent event
Current event
6. An outflow of resources embodying economic benefits is regarded as "probable" when
The probability that the event will occur is greater than the probability that the event will
not occur.
The probability that the event will not occur is greater than the probability that the event will occur.
The probability that the event will occur is the same as the probability that the event will not occur.
The probability that the event will occur is 90% likely.
7. Where there is a continuous range of possible outcomes, and each point in that range is as likely
as any other, the range to be used is the
Minimum
Maximum
Midpoint
Sum of the minimum and maximum
8. When the provision involves a large population of items, the estimate of the amount items
Reflects the elects the weighting of all possible outcomes by their associated probabilities.
Is determined as the individual most likely outcome.
May be the individual most likely outcome adjusted for the effect of other possible outcomes.
Midpoint of the possible outcomes.

9. When the provision arises from a single obligation, the estimate of the amount
Reflects the weighting of all possible outcomes by their associated probabilities.
Is determined as the individual most likely outcome.
Is the individual most likely outcome adjusted for the effect of other possible outcomes.
Midpoint of the possible outcomes.
10. Which statement is incorrect where the expenditure required to settle a provision is expected
to be reimbursed by another party?
The reimbursement shall be recognized only when it is virtually certain that the reimbursement
would be received if the entity settles the obligation.
The amount of the reimbursement shall not exceed the amount of the provision.
In the income statement, the expense relating to the provision may be presented net of the
reimbursement.
The reimbursement shall not be treated as separate asset but "netted" against the estimated
liability for the provision.

QUESTION 48-11 Multiple Choice (PAS 37)

Which statement is not true in relation to the measurement of a provision?
 The risks and uncertainties that inevitably surround many events and circumstances
shall be taken into account in reaching the best estimate of a provision.
Where the effect of the time value of money is material, the amount of provision shall
be the present value of the expenditure expected to settle the obligation.
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.
Gains from expected disposal of assets shall be taken into account in measuring a
provision.
Provisions shall be discounted if the effect of the time value of money is material. Which of the
following is incorrect regarding the discount rate?
Reflects current market assessment of the time value of money.
Reflects risks specific to the liability
Does not reflect risks for which future cash flow estimates have been adjusted
Is a post-tax discount rate

Which statement is incorrect concerning recognition of a provision?

Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current
best estimate.
A provision shall be used only for expenditures for which the provision was originally recognized.
Provisions shall be recognized for future operating losses.
If an entity has an onerous contract, the present obligation under the contract shall be recognized
and measured as a provision.
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.
Onerous contract
Executory contract
Executed contract
Sale contract
5. The unavoidable costs under an onerous contract represent the "least net cost of exiting
from the contract" which is equal to
Cost of fulfilling the contract
Penalty arising from failure to fulfill the contract
Lower of the cost of fulfilling the contract or the penalty arising from failure to fulfill the
contract
Higher of the cost of fulfilling the contract or the penalty arising from failure to fulfill the contract
QUESTION 48-12 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.
Restructuring
Liquidation
Recapitalization
Corporate Revamp
2. Events that quality as restructuring include all of the following, except
Sale or termination of business
Closure of business location in a region or relocation of business from one location to another
Change in management structure such as elimination of a layer of management
Fundamental reorganization of an entity that has an immaterial and insignificant impact on
the operations.
3. Which is a cost of restructuring?
Cost of retraining or relocating continuing staff
Marketing or advertising cost distribution network
Investment in new system and distribution network
Cost of relocating business activities from one location
4.It is the abusive practice of manipulation and creative to another creative accounting by dumping
all kinds of provisions under the banner of provision for restructuring.
Big Bath provision
Creative Accounting
Cookie Jar
General reserve
QUESTION 48-13 Multiple choice (IFRS)
1.For which of the following should a provision be recognized?
Future operating losses
Obligations under insurance contracts
Reductions in fair value of financial instruments
Obligations for plant decommissioning costs
2. Provisions shall be recognized for all of the following, except
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.
Restructuring costs after a binding sale agreement has been signed.
Rectification costs relating to defective products sold
Future refurbishment costs due to introduction of a new computer system.
3. 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?
Retraining staff continuing to be employed
Relocation costs relating to staff moving to other divisions
Contractually required costs of retiring staff being made redundant from the division being
closed
Future operating losses of the division being closeup to the date of closure
4.An entity operates chemical plants. The published policies include a commitment to making
good any damage caused to the environment by the operations. The entity has always honored this
commitment.
Which of the following scenarios would give rise to an environmental provision?
On 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.
Recent research suggests there is a possibility that the entity’s actions may damage surrounding
wildlife.
The government has outlined plans for a new law requiring all environmental damage to be
rectified.
A chemical spill from one of the entity’s plants has caused harm to the surrounding area and
wildlife.
5.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 next year. The cost
of fitting smoke detector can be measured reliably.
How should the entity treat this in the financial statements at year-end?
Recognize a provision for the current year equal to the estimated amount.
Recognize a provision for the current year equal to one-half only of the estimated amount.
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.
Ignore the event.
QUESTION 49-5 Multiple choice (LAA)
Contingent Liability will or will not become actual liabilities depending on
a. Whether probable and measurable.
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 but the amount cannot be reliably
measured.
d. The amount of the loss can be reliably measured and 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?
a. As a deferred liability
b. As an accrued liability
 c. As a disclosure only
d. As an account payable

4. Disclosure usually is not required for

a. Contingent gain that is probable and measurable.
b. Contingent loss that is possible and measurable.
c. Contingent loss that is probable and cannot be reliably measured
d. Contingent loss that is remote and measurable

5. Reporting in the financial statements is required for

a. Loss contingency that is probable and measurable
b. Gain contingency that is probable and measurable
c. Loss contingency that is possible and measurable
d. All loss contingencies

6. 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.

7. 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.

8. Which statement is incorrect concerning a contingent liability?

a. A contingent liability is not recognized.
b. A contingent liability is disclosed only.
c. No disclosure is required for remote contingent liability.
d. A contingent liability is both probable and measurable.

9. A contingent liability
a. Has a most probable value of zero but may require a payment if a given future
event occurs.
b. Definitely exists as a liability.
c. Is reported as current liability.
d.1s not disclosed in the financial statements.

10. Which of the following is not considered when evaluating whether or not to record a
liability for pending litigation?
a. Time period of the underlying cause of action
b. The type of litigation involved.
c. The probability of an unfavorable outcome
 d. The ability to make a reliable estimate of the loss

QUESTION 49-6 Multiple choice (IAA 37)

1. Contingent asset is usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can be reliably measured
c. Occurrence is probable and measurable
d. The amount can be reliably measured

2. Which is the proper treatment of contingent asset?

a. An accrued account
b. Deferred income
c. An account receivable
d. A disclosure only

3. Gain contingency that is remote and measurable

a. Must be disclosed in a note to financial statements
b. May be disclosed in a note to financial statements
c. Must be reported in the body of the financial statements
d. Should not be reported or disclosed.

4. A probable and measurable contingent asset should be

a. Recognized and disclosed.
b. Classified as an appropriation of retained earnings.
c. Disclosed but not recognized.
d. Neither recognized nor disclosed.

5. Which is the proper way to report a contingent asset, receipt of which is virtually certain?
a. As an asset
b. As unearned revenue
c. As a disclosure only
d. No disclosure and no accrual
QUESTION 9-7 Multiple choice (AICPA Adapted)

1. An entity did not record an accrual for a present obligation but disclose the nature of the
obligation and the range of the loss. How likely is the loss?
a. Remote
b. Reasonably possible
c. Probable
d. Certain

2. 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 possible
c. Certain
d. Remote

3. An expropriation asset which is imminent and for which the loss can be reasonably
estimated should be
a. Accrued
b. Disclosed
c. Accrued and disclosed
d. Ignored

4. A present obligation that is probable and for which the amount can be reliably estimated
should
a. Not be accrued but disclosed.
b. Be accrued by debiting retained earnings and crediting a liability.
c. Be accrued by debiting an expense and crediting retained earnings.
d. Be accrued by debiting an expense and crediting a liability.

5. General or unspecified contingencies should

a. Be accrued in the financial statements and disclosed.
b. Not be accrued and need not be disclosed.
c. Not be accrued but should be disclosed.
d. Be accrued and need not be disclosed.
QUESTION 56-12 Multiple choice (PAS 12)
Anne Kristine P. Jusay
l. Which entities are required to apply deferred tax accounting?
Public entities
Nonpublic entities
Both public and nonpublic entities
Neither public entities nor nonpublic entities

2. It is the income for a period determined in accordance with the rules established by tax
authorities upon which income taxes are payable.
Accounting income
Taxable income
Net income
Accounting income subject to tax

3. It is the income for a period before deducting tax expense.

Accounting income
Taxable income
Gross income
Net income

4. These are differences that will result in future taxable amount in determining taxable income
of future periods.
Temporary differences
Taxable temporary differences
Deductible temporary differences
Permanent differences

5. These are differences that result in future deductible amount in determining taxable income in
future periods.
Taxable temporary differences
Deductible temporary differences
Taxable temporary and permanent differences
Deductible temporary and permanent difference

6. It is the deferred tax consequence attributable to a deductible taxable temporary difference.

Deferred tax liability
Deferred tax asset
Current tax liability
Current tax asset

7. It is the deferred tax consequence attributable to a deductible temporary difference and

operating loss carryforward.
Deferred tax liability
Deferred tax asset
Current tax liability
Current tax asset
8. It is the amount of income tax payable in respect of taxable income.
Current tax expense
Total income tax expense
Deferred tax expense
Deferred tax benefit

9. It is the aggregate amount included in the determination of net income for the period in respect
of current tax and deferred tax.
Tax expense
Current tax expense
Deferred tax expense
Deferred tax benefit

10. The deferred tax expense is equal to

Increase in deferred tax asset less increase in deferred tax liability.
Increase in deferred tax liability less increase in deferred tax asset.
Increase in deferred tax asset.
Increase in deferred tax liability.

QUESTION 56-13 Multiple choice (IFRS)

1. A deferred tax asset is recognized for deductible temporary differences and operating loss
carryforward when
It is probable that taxable income will be available against which the deferred tax asset can
be used.
It is probable that accounting income will be available against which the deferred tax asset can
be used.
It is possible that the taxable income will be available against which the deferred tax asset can be
used.
It is possible that accounting income will be available against which the deferred tax asset can be
used.

2. An entity shall offset a deferred tax asset and deferred tax liability
When the income taxes are levied by different taxing authority.
When the entity has no legal enforceable right to offset.
When the income taxes are levied by the same taxing authority and the entity has a legal
enforceable right to offset a current tax asset against a current tax liability.
Under all circumstances.

3. Which is correct about deferred tax assets and liabilities?

Current deferred tax assets are netted against current deferred tax liabilities.
All noncurrent deferred tax assets are netted against noncurrent deferred tax liabilities.
Deferred tax assets are never netted against deferred tax liabilities
Deferred tax assets are netted against deferred tax liabilities if they relate to the same tax
authority.
4. Which statement is incorrect concerning tax assets and liabilities?
Deferred tax assets and liabilities shall be discounted.
Tax assets and liabilities shall presented separately from other assets and liabilities in the
statement of financial position.
Deferred tax assets and liabilities shall be distinguished from current tax assets and liabilities.
When an entity makes a distinction between current and noncurrent assets and liabilities, it shall
classify deferred tax assets and liabilities as noncurrent.

5. All of the following must be disclosed separately, except

The tax bases of major items on which deferred tax has been calculated.
The amount of deductible temporary differences for which no deferred tax asset is recognized.
The amount of taxable temporary differences associated with investments in subsidiaries and
associates for which no deferred tax liability is recognized.
The amount of income tax relating to each component of other comprehensive income.

QUESTION 56-14 Multiple choice (AICPA Adapted)

1. Justification for the is method of determining periodic deferred tax expense is based on the
concept of
Matching of periodic expense to periodic revenue.
Objectivity in the calculation of periodic expense.
Recognition of asset and liability.
Consistency planning of tax expense measurement with actual tax planning strategies.

2. Which of the following differences would result in future taxable amount?

Expenses or losses that are deductible after they are recognized in accounting income.
Revenues or gains that are taxable before they are recognized in accounting income.
Expenses or losses that are deductible before they are recognized in accounting income.
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

Interest revenue on municipal bonds
Accrual of warranty expense
Excess of tax depreciation over accounting depreciation
Subscription received in advance

4. A temporary difference which would result in a deferred tax asset is

Tax, penalty or surcharge.
Dividend received on share investment.
Excess tax depreciation over accounting depreciation.
Rent received in advance included in taxable the time of receipt but deferred for
accounting purposes.
5. An entity, cash basis taxpayer, prepared accrual basis financial statements. In the year-end
statement of financial position, the deferred income tax liability increased compared to the prior
year. Which of the following would cause the increase in deferred tax liability?
An increase in prepaid insurance
An increase in rent receivable
An increase in warranty obligation
An increase in prepaid insurance and increase in rent receivable

6. An entity reported deferred tax asset and deferred tax liability at the end of the prior year and
at the end of the current year. For the current year, the entity should report deferred tax expense
or benefit equal to the
Decrease in the deferred tax asset
Increase in the deferred tax liability
Amount of the current liability plus the sum of the net changes in deferred tax asset and deferred
tax liability
Sum of the net changes in deferred tax asset and deferred tax liability

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 taxes that are based on these temporary differences should be
classified in the statement of financial position as
Contra account to current assets
Contra account to noncurrent assets
Current liability
Noncurrent liability

8. A deferred tax liability is computed using

Current tax law regardless of expected or enacted future tax law
Expected future tax law regardless of whether enacted or not
Current tax law unless a future enacted tax law is different
Either current or expected future tax law regardless of whether the expected future tax law is
enacted or not

9. Which statement is true regarding reporting deferred income taxes in the financial statements?
Deferred tax asset is always netted against deferred tax liability.
Deferred taxes of one jurisdiction are offset against another jurisdiction in the netting process.
Deferred tax asset and liability may only be classified as noncurrent.
Deferred tax asset and liability are classified as current and noncurrent based on expiration date.

10. At the current year-end, an entity had a deferred tax liability that exceeded a deferred tax
asset which is expected to reverse in the next year.

Which of the following should be reported in the current year-end statement of financial
position?
The excess of the deferred tax liability over the deferred tax asset as a noncurrent liability.
The excess of the deferred tax liability over the deferred tax asset as a current liability.
The deferred tax liability as a noncurrent liability.
The deferred tax liability as a current liability.

QUESTION 56-15 Multiple choice (IAA)

1. The purpose of interperiod tax allocation is to
Allow entities to utilize carryforward loss.
Allow entities whose tax liabilities vary significantly from year to year to smooth tax payments.
Recognize an asset or liability for the tax consequences of temporary differences that exist
at year-end.
Amortize the deferred tax liability.

2. Intraperiod tax allocation

Involves the allocation of income taxes between current and future periods.
Associates tax effect with different items in the income statement.
Is not generally acceptable.
Arises because different income statement items are taxed at different rates.

3. Which is true about intraperiod tax allocation?

Intraperiod tax allocation arises because certain items are recognized for accounting and tax
purposes.
Intraperiod tax allocation is required for the effect of accounting policy.
The purpose is to allocate income tax expense evenly over a number of accounting periods.
The purpose is to relate the income tax expense to the items which affect the amount of tax.

4. All would require intraperiod tax allocation, except

Discontinued operation
Prior period error
Change in accounting estimate
Income from continuing operations

5. Tax expense should be allocated to all, except

Discontinued operation
Prior period error
Gross income
Other comprehensive income
TFA 1
Chapter 63 – Cash and Accrual Basis
Maridel L. Merhan
QUESTION 63-5 Multiple Choice (IAA)
1. Under IFRS
a. The cash basis of accounting is accepted
b. Events are recorded in the period the events occur
c. Net income is lower under the cash basis than accrual
d. All of the choices are correct
2. Accrual accounting adheres to which the following?
a. Matching principle
b. Historical cost principle
c. Matching principle and historical cost principle
d. Neither matching principle nor historical cost
3. Which statement does not describe a deferral?
a. Deferral of revenue occurs when cash is received and recognized in
financial income
b. Deferral typically results in the recognition of a liability or prepaid expense
c. Cash collected in advance of services being rendered
d. Cash paid up front for a one-year insurance policy
4. Under accrual, a deferral is a transaction that impacts
a. Cash and the income statement at the same time
b. The income statement before impacting cash
c. Cash before impacting the income statement
d. The statement of financial position before impacting cash
5. Which statement is true about accrual and cash basis?
a. Under accrual, if the earning process is not complete, revenue is
nevertheless recorded
b. Under cash basis, if cash has been collected, revenue is recorded regardless
of earning process
c. Under cash basis, revenue is recognized when the receivable is initially recorded
d. All of these statements are true
6. Under the accrual basis of accounting, cash receipts and disbursements may
a. Precede, coincide with, or follow the period in which revenue and expenses
are recognized
b. Precede or, coincide with but never follow the period in which revenue and
expenses are recognized
c. Coincide with or follow but never precede the period in which revenue and
expenses are recognized
d. Only coincide with the period in which revenue and expenses are recognized

7. Which statement regarding accrual versus cash basis of accounting is true?

a. The cash basis is appropriate for some smaller entities

b. The cash basis is less useful in predicting the timing and amounts of future
cash flows
c. Application of the cash basis results in an income statement reporting revenue
and expenses
d. The cash basis requires a complete set of records
8. Under cash basis of accounting
a. Revenue is recorded when earned
b. Accounts receivable should be recognized
c. Depreciation of an asset having an economic life of more than one year is
not recognized
d. The matching principle is ignored
9. Total net income over the life of an entity is
a. Higher under cash basis than under accrual basis
b. Lower under cash basis than under accrual basis
c. The same number the cash basis and accrual basis
d. Not susceptible to measurement
10. Under cash basis, revenue is recorded
a. When earned and realized
b. When earned and realizable
c. When earned
d. When realized
QUESTION 63-6 Multiple Choice (AICPA Adapted)
1. Compared to cash basis net income for the current year, an entity’s accrual basis
net income increased when it
a. Declared a cash dividend in the prior year that it paid in the current year b. Wrote off
more accounts receivable that it reported as uncollectible accounts expense in the current
year
c. Had lower accrued expenses at the end of the current year than the beginning
of year
d. Sold used equipment for cash at a gain in the current year
2. Prior to the current year, an entity used the cash basis of accounting. At the current
year end, the entity changed to the accrual basis. The entity cannot determine the
beginning balance of supplies inventory. What is the effect of the inability to determine
beginning supplies inventory on the accrual basis net income and year-end accrual basis
owners’ equity?
Net Income Owners’ equity
a. No effect No effect
b. No effect Overstated
c. Overstated No effect
d. Overstated Overstated
3. An entity wants to convert the financial statements from accrual basis to cash basis.
Both supplies inventory and office salaries payable increased. To obtain cash basis net
income, how should these increases be added to or deducted from accrual basis net
income?
Supplies inventory Office salaries payable
a. Deducted Deducted
b. Deducted Added
c. Added Deducted
d. Added Added
4. Compared to the accrual basis of accounting, the cash basis understates income by the
net decrease during the accounting period of
a. Both accounts receivable and accrued expenses
b. Accrued expenses but not of accounts receivable
c. Neither accounts receivable nor of accrued expenses
d. Accounts receivable but not of accrued expenses
5. The inventory and accounts payable balances increased. Should these increases be
added to or deducted from cash payments to suppliers to arrive at cost of goods sold for
the current year?
Increase in Inventory Increase in Accounts Payable
a. Added Deducted
b. Added Added
c. Deducted Deducted
d. Deducted Added
QUESTION 63-7 Multiple Choice (AICPA Adapted)
1. The premium on a three-year insurance policy expiring on December 31, 2021 was paid
in total on January 1, 2019. If the entity has six-month operating cycle, then on December
31, 2019, the prepaid insurance reported as a current asset would be for
a. 6 months
b. 12 months
c. 18 months
d. 24 months
2. The premium on a three-year insurance policy expiring on December 31, 2021 was
paid in total on January 1, 2019. The original payment was initially debited to a prepaid
asset account. The appropriate adjusting entry had been recorded on December 31, 2019.
The balance in the prepaid asset account on December 31, 2019 should be
a. Zero
b. The same as it would have been if the original payment had been debited initially
to an expense account
c. The same as the original payment
d. Higher than if the original payment had been debited initially to an expense account
3. The premium on a three-year insurance policy expiring on December 31, 2021 was
paid in total on January 1, 2019. If the original payment was recorded as a prepaid asset,
how would total assets and shareholders’ equity be affected during 2019?
a. Total assets would decrease and shareholders’ equity would increase
b. Both total assets and shareholders’ equity would decrease
c. Both total assets and shareholders’ equity would increase
d. Neither total assets nor shareholders’ equity would change
4. The premium on a four-year insurance policy expiring on December 31, 2022 was paid
in total on January 1, 2019. If the original payment was recorded as a prepaid asset,
the balance in prepaid asset on December 31, 2020 would be
a. Lower than the balance on December 31, 2019
b. Lower than the balance on December 31, 2021
c. The same as the balance on December 31, 2021
d. The same as the original payment
5. At the beginning of the current year, an entity signed a 5-year contract enabling it to use
a patented manufacturing process beginning in the current year. A royalty is payable
for each product produced, subject to a minimum annual fee. Any royalties in excess of
the minimum will be paid annually. On the contract date, the entity prepaid a sum equal
to
two years’ minimum annual fees. In the current year, only minimum fees were
incurred. The royalty prepayment shall be reported in the current year-end financial
statement as
a. An expense only
b. A current asset and an expense
c. A current asset and noncurrent asset
d. A noncurrent asset
TFA 1
Chapter 65
Reinalyn L. Mendoza and Sherwin Paña
QUESTION 65-11 Multiple Choice (PAS 7)
1. The primary purpose of a statement of cash flows is to provide relevant information about
a. Differences between net income and associated cash receipts and
disbursements b. An entity’s ability to generate positive net cash flows
c. The cash receipts and cash disbursements of an entity during
a period d. An entity’s ability to meet cash operating needs
2. Cash receipts from royalties and commissions are
a. Cash outflows for operating activities
b. Cash inflows from operating activities
c. Cash inflows from investing activities
d. Cash outflows for financing activities
3. Cash flows arising from trading securities are
a. Classified as operating activities
b. Classified as investing activities
c. Classified as financing activities
d. Not reported in the cash flow statement
4. Cash payments to acquire equity instruments are
a. Cash outflows for financing activities
b. Cash inflows from investing activities
c. Cash outflows from investing activities
d. Cash inflows for financing activities
5. Cash receipts from issuing shares are
a. Cash inflows from investing activities
b. Cash outflows from investing activities
c. Cash inflows for financing activities
d. Cash outflows for financing activities
6. Interest payments to lenders are classified as
a. Operating activities
b. Borrowing activities
c. Lending activities
d. Financing activities
7. Dividend payments to shareholders are classified as
a. Cash outflows from investing activities
b. Cash inflows from investing activities
c. Cash inflows for financing activities
d. Cash outflows for financing activities
8. Interest received and dividend received may be classified alternatively as cash flow from
a. Operating activities
b. Investing activities
c. Financing activities
d. Revenue activities
9. Bank overdrafts that are repayable on demand and the bank balance often fluctuates from
positive to overdrawn shall be classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Component of cash and cash equivalents
10. Cash advances and loans made by a financial institution are usually classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Component of cash and cash equivalents
QUESTION 65-12 Multiple Choice (IFRS)
1. Which of the following shall be presented under cash flows from investing activities?
a. Employee costs
b. Property revaluation
c. Redemption of debentures
d. Development costs capitalized in the period
2. All of the following can be classified as cash and cash equivalents, except:
a. Redeemable preference shares acquired and due in 60 days
b. Treasury bills due for repayment in 90 days
c. Equity investments
d. A bank overdraft
3. Which classification of the cash flow arising from the proceeds from an earthquake
disaster settlement would be most appropriate?
a. Cash flows from operating activities
b. Cash flows from investing activities
c. Cash flows from investing activities
d. Does not appear in the statement of cash flows
4. An entity purchased a building and the seller accepted payment partly in equity shares
and partly in debentures of the entity. The transaction shall be treated in the statement of
cash flows as which of the following?
a. The purchase of the building is investing cash outflow and the issuance of shares
and the debentures are financing cash inflows.
b. The purchase of the building is investing cash outflow and the issuance of
debentures is financing cash inflow while the issuance of shares is investing cash
inflow. c. The transaction does not belong in a statement of cash flows and shall
be disclosed only in the notes to financial statements.
d. The transaction should be ignored totally since it is a noncash

transaction. 5. Under IFRS, an entity can report finance costs in the

statement of cash flows

a. In operating activities
b. Either in operating activities or financing activities
c. In financing activities
d. In investing activities or financing activities
6. Under IFRS, the dividend received from share investments can be classified as
a. Either an operating activity or a financing activity
b. Either an operating activity or investing activity
c. Only as an investing activity
d. Only an operating activity
7. Cash advances and loans from bank overdraft should reported in the statement of cash
flows as
a. Operating activities
b. Investing activities
c. Financing activities
d. Other significant noncash activities
8. How should repayment of a long – term loan comprising repayment of the
principal amount and interest due to date be treated in a statement of cash flows?
a. The repayment of the principal loan is an investing cash flow and the interest payment
is either an operating cash flow or a financing cash flow.
b. The repayment of the principal loan is a financing cash flow and the interest
payment is either an operating cash flow or a financing cash flow.
c. The repayment of the principal loan is a financing cash flow and the interest payment
is either an operating cash flow or investing cash flow.
d. The repayment of the principal loan is a financing cash flow and the interest payment
is netted against interest received on bank deposits and the net amount of interest is
shown as operating cash flow.
QUESTION 65-13 Multiple Choice (AICPA Adapted)
1. How should a gain from sale of equipment for cash be reported in a statement of cash
flows using the indirect method?
a. In investing activities as a reduction of the cash inflow from the sale
b. Investing activities as a cash outflow
c. In operating activities as a deduction from income
d. In operating activities as an addition to income
2. How should a loss on sale of machinery be presented in a statement of cash flows
using indirect method?
a. A deduction from net income
b. An addition to net income
c. As inflow and outflow of cash
d. An outflow of cash
3. In a statement of cash flows using indirect approach for operating activities, an
increase in inventory is presented as
a. Outflow of cash
b. Inflow and outflow of cash
c. Addition to net income
d. Deduction from net income
4. Supplemental disclosure required only when the statement of cash flows is prepared
using the indirect method include
a. A schedule reconciling net income with net cash flows from operating
activities b. Amounts paid for interest and taxes
c. Amounts deducted for depreciation and amortization
d. Significant noncash investing and financing activities
5. Which of the following should not be disclosed in the statement of cash flows using
the indirect method?
a. Interest paid
b. Income taxes paid
c. Cash flows per share
d. Dividends paid on preference shares
6. In a statement of cash flows, which of the following should be reported as a cash flow
from financing activities?
a. Payment to retire mortgage note
b. Interest payment on mortgage note
c. Dividend payment
d. Payment to retire mortgage note and dividend payment
7. In a statement of cash flows, depreciation is treated as an adjustment to net income
because depreciation
a. Is a direct source of cash
b. Reduces income but does not involve cash outflow
c. Reduces net income and involves an inflow of cash
d. Is an inflow of cash for replacement of asset
8. In a statement of cash flows using indirect method, a decrease in prepaid expenses is
a. Reported as an outflow and inflow of cash
b. Reported as an outflow of cash
c. Deducted from net income
d. Added to net income
9. Dividends received from an equity investee should be presented in the statement of
cash flows as
a. Deduction from cash flows from operating activities
b. Addition to cash flows from investing activities
c. Addition to cash flows from operating activities
d. Deduction from cash flows from investing activities
10. What is the treatment of a three – month Treasury bill?
a. Not reported
b. An outflow for financing activities
c. An outflow for lending activities
d. An outflow for investing activities
QUESTIONS 65-14 Multiple Choice (AICPA Adapted)
1. In a statement of cash flows, if used equipment is sold at a gain, the amount shown as
a cash flow from investing activities equals the carrying amount of the equipment. a.
Plus the gain
b. Plus the gain and less the amount of tax
c. Plus both the gain and the amount of tax
d. With no addition or subtraction
2. In a statement of cash flows, if used equipment is sold at a loss, the amount shown as
a cash flow from investing activities equals the carrying amount of the equipment. a.
Less the loss and the amount of tax
b. Less both the loss and the amount of tax
c. Less the loss
d. With no addition or subtraction
3. An entity’s wage payable increased from the beginning to the end of the year. In
the statement of the cash flows in which the operating activities section is prepared under
the direct method, the cash paid for wages would be
a. Salary expense plus wages payable at the beginning of the year
b. Salary expense plus the increase in wages payable
c. Salary expense less the increase in wages payable
d. The same as salary expense
4. An entity’s accounts receivable decreased from the beginning to the end of the year.
In the statement of cash flows, the cash collected from customers would be
a. Sales revenue plus accounts receivable at the beginning of the year
b. Sales revenue plus the decrease in accounts receivable
c. Sales revenue less the decrease in accounts receivable
d. The same as sales revenue
5. All of the following could potentially be classified as either operating or investing
cash flow, except
a. Interest received
b. Dividend received
c. Taxes paid specifically identified with investing
d. Dividend paid
6. Making and collecting loans are
a. Operating activities
b. Investing activities
c. Financing activities
d. Liquidity activities
7. Noncash investing and financing activities are
a. Reported in the statement of cash flows only if the direct method is used. b.
Reported in the statement of cash flows only if the indirect method I used. c. Disclosed
in a note or separate schedule accompanying the statement of cash flows. d. Not
reported.
8. At the beginning of the current year, an entity signed a building lease that is reported as
a finance lease. The entity paid the monthly lease payment when due. How should the
entity report the effect of the lease payment in the financing activities section of the
statement of cash flows?
a. An inflow equal to the present value of future lease payment at the beginning of the
year less principal and interest payment.
b. An outflow equal to the principal and interest payment on the lease
c. An outflow equal to the principal payment only
d. The lease payment should not be reported in the financing activities section
QUESTION 65-15 Multiple Choice (IAA)
1. When preparing a statement of cash flows using the indirect method, the
amortization of patent is reported as
a. Increase in cash flows from investing activities.
b. Reduction in cash flows from investing activities.
c. Increase in cash flows from operating activities.
d. Reduction in cash flows from operating activities.
2. When preparing a statement of cash flows using the direct method,
amortization of goodwill is
a. Shown as an increase in cash flows from operating activities.
b. Shown as a reduction in cash flows from operating activities.
c. Included with supplemental disclosure of noncash transactions.
d. Not reported in the statement of cash flows or related disclosure.
3. The amortization of bond discount related to long-term debt is presented in a
statement of cash flows prepared using the indirect method as
a. Inflow and outflow of cash
b. Outflow of cash
c. Deduction from net income
d. Addition to net income
4. The amortization of bond premium related to long-term debt is presented in the
statement of cash flows as
a. A positive adjustment to net income in determining cash flow from operating
activities. b. A use of cash in determining cash flows from investing activities.
c. A source of cash in determining cash flows from financing activities.
d. A negative adjustment to net income in determining cash flows from
operating activities.
5. Which statement about the method of preparing the statement of cash flows is
true? a. The indirect method starts with income before income tax.
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement
of cash flows.
d. All of these statements are true.
6. Which of the following is not disclosed in the statement of cash flows prepared under
the direct method?
a. The major classes of gross cash receipts and gross cash payments.
b. The amount of income taxes paid.
c. A reconciliation of net income to net cash flow from operations.
d. A reconciliation of ending retained earnings to net cash flow from operations.
7. The statement of cash flows reports all of the following, except
a. The net change in cash for the period.
b. The cash flows from operations during the period.
c. The free cash flow generated during the period.
d. Investing transactions.
8. Free cash flow is calculated as net cash provided by operating activities
less a. Capital expenditures
b. Dividends and depreciation
c. Capital expenditures and dividends
d. Capital expenditures and depreciation