TOA3

TOA QUIZZER 3

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____          1.      Which entities are required to apply deferred tax accounting?

I.  Public entities

II. Nonpublic entities

a.	I only	c.	Both I and II
b.	II only	d.	Neither I nor II

____          2.      It is the excess of taxable revenue over tax deductible expenses and exemptions for the year as defined by the Bureau of Internal Revenue.

a.	Taxable income	c.	Accounting income subject to tax
b.	Accounting income per book	d.	Comprehensive income

____          3.      It is the net profit for a period before deducting tax expense.

a.	Accounting profit	c.	Gross profit
b.	Taxable profit	d.	Net profit

____          4.      This is a difference between the tax basis of an asset or liability and its carrying amount that will result in taxable or deductible amounts in the future years when the carrying amount of the asset or liability is recovered or settled.

I.   Temporary difference

II.  Permanent difference

a.	I only	c.	Both I and II
b.	II only	d.	Neither I nor II

____          5.      Taxable temporary difference is the

I.   Temporary difference that will result in future taxable amount in determining taxable income of future periods when the carrying amount of the asset or liability is recovered or settled.

II.   Temporary difference that will result in future deductible amount in determining taxable income of future periods when the carrying amount of the asset or liability is recovered or settled.

a.	Both I and II	c.	II only
b.	I only	d.	Neither I nor II

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

a.	Deferred tax liability	c.	Current tax liability
b.	Deferred tax asset	d.	Current tax asset

____          7.      It is the deferred tax consequence attributable to a deductible temporary difference and operating loss carryforward.

a.	Deferred tax liability	c.	Current tax liability
b.	Deferred tax asset	d.	Current tax asset

____          8.      It is the amount of income tax paid or payable for the year as determined in applying the provisions of the enacted tax law to the taxable income.

a.	Current tax expense	c.	Deferred tax benefit
b.	Deferred tax expense	d.	Income tax expense

____          9.      The deferred tax expense is equal to

a.	Increase in deferred tax asset less the increase in deferred tax liability.
b.	Increase in deferred tax liability minus the increase in deferred tax asset.
c.	Increase in deferred tax asset.
d.	Increase in deferred tax liability.

____          10.    It is the aggregate amount included in the determination of net profit for the period in respect of current tax and deferred tax.

a.	Tax expense	c.	Deferred tax expense
b.	Current tax expense	d.	Deferred tax benefit

____          11.    It is the amount attributable to an asset or liability for tax purposes.

a.	Carrying amount	c.	Measurement base
b.	Tax base	d.	Taxable amount

____          12.    A deferred tax liability shall be recognized for all

a.	Permanent differences	c.	Taxable temporary differences
b.	Temporary differences	d.	Deductible temporary differences

____          13.    A deferred tax asset shall be recognized for all deductible temporary differences and operating loss carryforward when

a.	It is probable that taxable income will be available against which the deferred tax asset can be used
b.	It is probable that accounting  income will be available against which the deferred tax asset can be used
c.	It is possible that taxable income will be available against which the deferred tax asset can be used
d.	It is possible that accounting income will be available against which the deferred tax asset can be used

____          14.    Which statement is incorrect concerning tax assets and liabilities?

a.	Deferred tax assets and liabilities shall be discounted.
b.	Tax assets and liabilities shall presented separately from other assets and liabilities in the statement of financial position.
c.	Deferred tax assets and liabilities shall be distinguished from current tax assets and liabilities.
d.	When an entity makes a distinction between current and noncurrent assets and liabilities, it shall not classify deferred tax assets and liabilities as current.

____          15.    An entity shall offset a deferred tax asset and deferred tax liability when

I.   The deferred tax asset and deferred tax liability relate to income taxes levied by the same taxing authority.

II.  The entity has a legal enforceable right to offset a current tax asset against a current tax liability.

a.	I only	c.	Both I and II
b.	II only	d.	Neither I nor II

____          16.    The following statements relate to deferred tax assets or liabilities. Which statement is true?

I.   Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.

II.  Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of deductible permanent differences.

a.	I only	c.	Both I and II
b.	II only	d.	Neither I nor II

____          17.    Deferred tax assets are the amount of income taxes recoverable in future periods in respect of

a.	The carryforward of unused tax losses only
b.	Taxable temporary differences and carryforward of unused tax losses
c.	Deductible temporary differences and carryforward of unused tax losses
d.	Permanent differences

____          18.    All of the following must be disclosed separately, except?

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

____          19.    The following statements relate to classification of items under PAS 12. Which statement is true?

I.   Interest expense accrued but included in taxable profit on a cash basis shall be classified  under deductible temporary differences.

II.  Where accumulated depreciation on an asset is greater than accumulated tax depreciation, the amount shall be classified under deductible temporary differences.

a.	I only	c.	Both I and II
b.	II only	d.	Neither I nor II

____          20.    Which statement is true in accordance with PAS 12?

I.    Development costs have been capitalized and will be amortized but were deducted in determining taxable profit in the period in which they were incurred. This will give rise to a deferred tax asset.

II.   The tax base for a machine for tax purposes is greater than the carrying amount in the financial statements up to the end reporting period. This will give rise to a deferred tax asset.

a.	I only	c.	Both I and II
b.	II only	d.	Neither I nor II

____          21.    Justification for the method of determining periodic deferred tax expense is based on the concept of

a.	Matching of periodic expense to periodic revenue.
b.	Objectivity in the calculation of periodic expense.
c.	Recognition of assets and liabilities.
d.	Consistency of tax expense measurement with actual tax planning strategies.

____          22.    Which of the following differences would result in future taxable amount?

a.	Expenses or losses that are deductible after they are recognized in accounting income.
b.	Revenues or gains that are taxable before they are recognized in accounting income.
c.	Expenses or losses that are deductible before they are recognized in accounting income.
d.	Revenues or gains that are recognized in accounting income but are never included in taxable income.

____          23.    A temporary difference which would result in a deferred tax liability is

a.	Interest revenue on municipal bonds.
b.	Accrual of warranty expense.
c.	Excess of tax depreciation over accounting depreciation.
d.	Subscription received in advance.

____          24.    A temporary difference which would result in a deferred tax asset is

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

____          25.    An entity, cash basis taxpayer, prepares accrual basis financial statements. In its year-end statement of financial position, the entity’s deferred income tax liabilities increased compared to the prior year. Which of the following changes would cause this increase in deferred tax liabilities?

I.     An increase in prepaid insurance

II.    An increase in rent receivable

III.   An increase in warranty obligation

a.	I only	c.	II and III
b.	I and II	d.	III only

____          26.    An entity reported deferred tax assets and deferred tax liabilities at the end of the prior year and at the end of the current year. For the current year, the entity should report deferred income tax expense or benefit equal to the

a.	Decrease in the deferred tax assets
b.	Increase in the deferred tax liabilities
c.	Amount of the current liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities
d.	Sum of the net changes in deferred tax assets and deferred tax liabilities

____          27.    Because an entity uses different methods to depreciate equipment for accounting and income tax purposes, the entity has temporary differences that will reverse during the next year and add to taxable income. Deferred income taxes that are based on these temporary differences shall be classified in the entity’s statement of financial position as

a.	Contra account to current assets
b.	Contra account to noncurrent assets
c.	Current liability
d.	Noncurrent liability

____          28.    At the most recent year-end, an entity had a deferred tax liability arising from accelerated depreciation that exceeded a deferred asset relating to rent received in advance which is expected to reverse in the next year. Which of the following shall be reported in the entity’s most recent year-end statement of financial position?

a.	The excess of the deferred tax liability over the deferred tax asset as a noncurrent liability.
b.	The excess of the deferred tax liability over the deferred tax asset as a current liability.
c.	The deferred tax liability as a noncurrent liability.
d.	The deferred tax liability as a current liability.

____          29.    An entity’s financial reporting basis of its plant assets exceeded the tax basis because it uses a different method of  reporting depreciation for financial reporting purposes and tax purposes. If it has no other temporary differences, the entity shall report a

a.	Current tax asset	c.	Deferred tax liability
b.	Deferred tax asset	d.	Current tax payable

____          30.    A deferred tax liability is computed using

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

____          31.    The purpose of interperiod tax allocation is to

a.	Allow reporting entities to fully utilize tax losses carried forward from a previous year.
b.	Allow reporting entities whose tax liabilities vary significantly from year to year to smooth payments to taxing agencies.
c.	Recognize an asset or liability for the tax consequences of temporary differences that exist at the end of the reporting period.
d.	Amortize the deferred tax liability shown in the statement of financial position.

____          32.    The result of interperiod tax allocation is that

a.	Wide fluctuations in an entity’s tax liability payments are eliminated.
b.	Tax expense shown in the income statement is equal to the deferred taxes shown in the statement of financial position.
c.	Tax liability shown in the statement of financial position is equal to the taxes shown in the previous year’s statement of financial position plus the income tax expense shown in the income statement.
d.	Tax expense shown in the income statement is equal to income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year.

____          33.    Which of the following is an example of a temporary difference that would result in a deferred tax liability?

a.	Use of straight line depreciation for accounting purposes and an accelerated rate for income tax purposes.
b.	Rent revenue collected in advance when included in taxable income before it is included in pretax accounting income.
c.	Use of a shorter depreciation period for accounting purposes than is used for income tax purposes.
d.	Investment losses recognized earlier for accounting purposes than for tax purposes.

____          34.    Which of the following is the most likely item to result in a deferred tax asset?

a.	Using accelerated depreciation for tax purposes but straight line depreciation for accounting purposes
b.	Using the cost recovery revenue method of recognizing construction revenue for tax purposes but using percentage of completion method for financial reporting purposes
c.	Prepaid expense
d.	Unearned revenue

____          35.    An example of a “deductible temporary difference” occurs when

a.	The installment sales method is used for tax purposes but the accrual method of recognizing sales revenue is used for financial accounting purposes.
b.	Accelerated depreciation is used for tax puposes but straight line depreciation is used for accounting purposes.
c.	Warranty expenses are recognized on the accrual basis for financial accounting purposes but recognized for tax purposes as the warranty conditions are met.
d.	The cost recovery method of recognizing construction revenue is used for tax purposes but the percentage of completion method is used for financial accounting purposes.

____          36.    A deferred tax liability arising from the use of an accelerated method of depreciation for tax purposes and the straight line method for financial reporting purposes would be classified in the statement of financial position as

a.	A current liability
b.	A noncurrent liability
c.	A current liability for the portion of the temporary difference reversing within a year and a noncurrent liability for the remainder
d.	An offset to the accumulated depreciation reported in the statement of financial position

____          37.    An item that would create a permanent difference in pretax financial income and taxable income would be

a.	Using accelerated depreciation for tax purposes and straight line depreciation for book purposes.
b.	Purchasing equipment previously leased with an operating lease in prior years.
c.	Using the percentage of completion method on long-term construction contracts.
d.	Paying fines for violation of laws.

____          38.    Recognizing tax benefit in a loss year due to a loss carryforward requires

a.	Only a footnote disclosure.
b.	Creating a new carryforward for the next year.
c.	Creating a deferred tax asset.
d.	Creating a deferred tax liability.

____          39.    Intraperiod tax allocation

a.	Involves the allocation of income taxes between current and future periods.
b.	Associates tax effect with different items in the income statement.
c.	Arises because certain revenue and expenses appear in the financial statements either before or after they are included in the income tax return.
d.	Arises because different income statement items are taxed at different rates.

____          40.    In computing the change in deferred tax asset or liability, which tax rate is used?

a.	Current tax rate	c.	Enacted future tax rate
b.	Estimated future tax rate	d.	Prior tax rate

____          41.    It is an existing liability of uncertain timing or uncertain amount.

a.	Provision	c.	Accrued liability
b.	Contingent liability	d.	Note payable

____          42.    A provision shall be recognized as liability when (choose the incorrect one)

a.	An entity has a present obligation as a result of a past event.
b.	It is probable that an outflow of resources embodying economic benefits will be recquired to settle the obligation.
c.	It is possible that an outflow of resources embodying economic benefits will be required to settle the obligation.
d.	The amount of the obligation can be measured reliably.

____          43.    A constructive obligation is an obligation

I.   Arising from contract, legislation or operation of law.

II.  That is derived from an entity’s action that the entity will accept certain responsibilities because of past practice, published policy or current statement and as a result, the entity has created a valid expectation in other parties that it will discharge those responsibilities.

a.	I only	c.	Both I and II
b.	II only	d.	Neither I nor II

____          44.    It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle the obligation.

a.	Obligating event	c.	Subsequent event
b.	Past event	d.	Current event

____          45.    An outflow of resources embodying economic benefits is regarded as “probable” when

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

____          46.    Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the range to be used is the

a.	Minimum
b.	Maximum
c.	Midpoint
d.	Summation of the minimum and maximum

____          47.    Where the provision being measured involves a large population of items, the obligation is estimated by “weighting” all possible outcomes by their associated probabilities. The name for this statistical method of estimation is

a.	Expected value	c.	Current value
b.	Present value	d.	Extrapolation

____          48.    Which statement is incorrect in the measurement of a provision?

a.	The risks and uncertainties that inevitably surround many events and circumtances shall be taken into account in reaching the best estimate of a provision.
b.	Where te effect of the time value of money is material, the amount of a provision shall be the present value of the expenditure expected to settle the obligation.
c.	Future events that may affect the amount required to settle the obligation shall be reflected in the amount of that the future events will occur.
d.	Gains from expected disposal of assets shall be taken into account in measuring a provision.

____          49.    Which statement is incorrect where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party?

a.	The reimbursement shall be recognized only when it is virtually certain that the reimbursement would be received if the entity settles the obligation.
b.	The amount of the reimbursement shall not exceed the amount of the provision.
c.	The amount of the reimbursement may exceed the amount of the provision.
d.	In the income statement, the expense relating to the provision may be presented net of the reimbursement.

____          50.    Which statement is incorrect concerning recognition of a provision?

a.	Provisions shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate.
b.	A provision shall be used only for expenditures for which the provision was originally recognized.
c.	Provisions shall be recognized for future operating losses.
d.	If an entity has an onerous contract, the present obligation under the contract shall be recognized and measured as a provision.

____          51.    A legal obligation is an obligation that is derived from all of the following, except

a.	Legislation
b.	A contract
c.	Other operation of law
d.	An established pattern of past practice

____          52.    For which of the following should a provision be recognized?

a.	Future operating losses
b.	Obligations under insurance contracts
c.	Reductions in fair value of financial instruments
d.	Obligations for plant decommissioning costs

____          53.    Provisions shall be recognized for all of the following, except

a.	Cleaning-up costs of contaminated land when an oil entity has a published policy that it will undertake to clean up all contamination that it causes.
b.	Restructing costs after a binding sale agreement has been signed.
c.	Rectification costs relating to defective products already sold.
d.	Future refurbishment costs due to introduction of a new computer system.

____          54.    An entity is closing one of its operating divisions, and the conditions for making restructing 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 restructing provision. Which of the following costs should be included in the restructuring provision?

a.	Retraining staff continuing to be employed
b.	Relocation costs relating to staff moving to other divisions
c.	Contractually required costs of retraining staff being made redundant from the division being closed
d.	Future operating losses of the division being closed up to the date of closure

____          55.    An entity operates chemical plants. Its published policies include a commitment to making good any damage caused to the environment by its operations. It has always honored this commitment. Which of the following scenarios relating to the entity would give rise to an environmental provision?

a.	On past experience it is likely that a chemical spill which would result in having to pay fines and penalties will occur in the next year.
b.	Recent research suggests there is a possibility that the entity’s actions may damage surrounding wildlife.
c.	The government has outlined plans for a new law requiring all environmental damage to be rectified.
d.	A chemical spill from one of the entity’s plants has caused harm to the surrounding area and wildlife.

____          56.    When can a “provision” be recognized?

a.	When there is a legal obligation arising from a past obligating event, the probability of the outflow of resources is more than remote but less than probable, and a reliable estimate can be made of the amount of the obligation.
b.	When there is a constructive obligation as a result of a past obligating event, the outflow of resources is probable, and a reliable estimate can be made of the amount of the obligation.
c.	When there is a possible obligation arisinf from the past event, the outflow of resources is probable, and an approximate amount can be set aside toward the obligation.
d.	When management decides that it is essential that a provision be made for unforeseen circumtances and keeping in mind this year the profits were enough but next year there may be losses.

____          57.    A competitor has sued an entity for unauthorized use of its patented technology. The amount that the entity may be required to pay to the competitor if the competitor succeeds in the lawsuit is determinable with reliability, and according to the legal counsel it is less than probable but more than remote that an outflow of the resources would be needed to meet the obligation. The entity that was sued shall at year-end.

a.	Recognize a provision for this possible obligation.
b.	Make a disclosure of the possible obligation in footnotes to the financial statements.
c.	Make no provision or disclosure and wait until the lawsuit is finally decided and then expense the amount paid on settlement, if any.
d.	Set aside, as an appropriation, a contingency reserve, an amount based on the best estimate of the possible liability.

____          58.    A factory owned by an entity was destroyed by fire. The entity lodged an insurance claim for the value of the factory building and plant, and an amount equal to one year’s net profit. During the year, there were a number of meetings with representatives of the insurance company. Finally, before year-end, it was decided that the entity would receive compensation for 90% of its claim. The entity received a letter that the settlement check for that amount had been mailed, but it was not received before year-end. How should the entity treat this in its financial statements?

a.	Disclose the contingent asset in the footnotes.
b.	Wait until next year when the settlement check is actually received and not recognize or disclose this receivable at all since at year-end it is a contingent asset.
c.	Record 90% of the claim as a receivable as it is virtually certain that the contingent asset will be received.
d.	Record 100% of the claim as a receivable at year-end as it is virtually certain that the contingent asset will be received, and adjust the 10% next year when the settlement check is actually received.

____          59.    The board of directors of an entity decided on December 15 of the current year to wind up internation operations in the Far East and move them to Australia. The decision was based on a detailed formal plan of restructuring as required by PAS 37. This decision was conveyed to all workers and management personnel at the headquarters in Europe. The cost of this restructuring plan can be estimtaed reliably. How should the entity treat this restructuring in its financial statements for the year-end December 31?

a.	Because the entity has not announced the restructuring to those affected by the decision and thus has not raised an expectation that the entity will actually caryy out the restructuring and as no constructive obligation has arisen, only disclose the restructuring decision and the cost of restructuring.
b.	Recognize a provision for restructuring since the board of directors has approved it and it has been announced in the headquarters of the entity in Europe.
c.	Mention the decision to restructure and the cost involved in the chairman’s statement in the annual report since it is a decision of the board of directors.
d.	Because the restructuring has not commenced before year-end, based on prudence, wait until next year and do nothing in this year’s financial statements.

____          60.    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 its financial statements at year-end?

a.	Recognize a provision for the current year equal to the estimated amount.
b.	Recognize a provision for the current year equal to one-half only of the estimated amount.
c.	No provision is recognized at year-end because there is no present obligation for the future expenditure since the entity can avoid the future expenditure by changing the method of operations but disclosure is required.
d.	Ignore this for purposes of the financial statements at year-end.

____          61.    A contingent liability is a

I.   Possible obligation that arises from past event and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity.

II.  Present obligation that arises from past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and the amount of the obligation and the amount of the obligation can be measured reliably.

a.	I only	c.	Both I and II
b.	II only	d.	Neither I nor II

____          62.    The present obligation is not a contingent liability but shall be recognizede as a provision when

a.	Amount is reasonably estimate and event occurs infrequently.
b.	Amount is reasonably estimable and occurrence of event is probable.
c.	Event is unusual in nature and accurrence of event is probable.
d.	Event is unusual in nature and event occurs infrequently.

____          63.    Which statement is incorrect concerning contingent liability?

a.	A contingent liability is not recognized in the fianncial statements.
b.	A contingent liability is disclosed only.
c.	If the contingent liability is remote, no disclosure is required.
d.	A contingent liability is both probable and measurable.

____          64.    It is a possible asset that arises from past event and whose existence will be confirmed only by the occurence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity.

a.	Contingent asset	c.	Suspense account
b.	Other asset	d.	Current asset

____          65.    Which statement is incorrect concerning a contingent asset?

a.	A contingent asset is not recognized in the financial statements because this may result to recognition of income that may never be realized.
b.	When the realization of income is virtually certain, the related asset is no longer contingent asset and its recognition is appropriate.
c.	A contingent asset is only disclosed when the occurrence of the future event is possible or remote.
d.	The related gain arising from the contingent asset is recognized usually when it is realized.

____          66.    Which of the following should be disclosed in the financial statements as a contingent liability?

a.	The entity has accepted liability prior to the year-end for unfair dismissal of an employee and is to pay damages.
b.	The entity has received a letter from a supplier complaining about an old unpaid invoice.
c.	The entity is involved in a legal case which it may possibly lose, although this is not probable.
d.	The entity has not yet paid certain claims under sales warranties.

____          67.    Are the following statements in relation to a contingent liability true or false?

Statement 1   An obligation as a result of the entity creating a valid expectation that it will  discharge its responsibilities is a contingent liability.

Statement 2   A present obligation that arises from past event but cannot be reliably measured is a contingent liability.

   

 Statement 1           Statement 2

a.	False                   False
b.	False                   True
c.	True                    False
d.	True                    True

____          68.    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

____          69.    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	c.	Probable
b.	Reasonably possible	d.	Certain

____          70.    A present obligation that is probable and for which the amount can be reasonably estimated shall

a.	Not be accrued but shall be disclosed in the notes to the financial statements.
b.	Be accrued by debiting an appropriated retained earnings account and crediting a liability account.
c.	Be accrued by debiting an expense account and crediting an appropriated retained earnings account.
d.	Be accrued by debiting an expense account and crediting a liability account.

____          71.    Contingent assets are usually recognized when

a.	Realized
b.	Occurrence is reasonably possible and the amount can be reasonably estimated
c.	Occurrence is probable and the amount can be reasonably estimated
d.	The amount can be reasonably estimated

____          72.    Which of the following is the proper accounting treatment of a contingent asset?

a.	An accrued account
b.	Deferred earnings
c.	An account receivable with an additional disclosure explaining the nature of the transaction
d.	A disclosure only

____          73.    When the occurrence of a contingent asset is probable and its amount can be reasonably estimated, the contingent asset shall be

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

____          74.    An entity operates a plant in a foreign country. It is probable that the plant will be expropriated. However the foreign government has indicated that the entity will receive a definite amount of compensation for the plant. The amount of compensation is less than the fair value but exceeds the carrying amount of the plant. The contingent asset shall be reported

a.	As a valuation allowance as a part of shareholders’ equity.
b.	As a fixed asset valuation allowance account.
c.	In the notes to the finanical statements.
d.	In the statement of financial position.

____          75.    At year-end, an entity was a competitor for patent infringement. The award from the probable favorable outcome could be reasonably estimated. The entity’s financial statements shall report the expected award as

a.	Receivable and revenue
b.	Receivable and reduction of patent
c.	Receivable and deferred revenue
d.	Disclosure only

____          76.    Contingent liabilities will or will not become actual liabilities depending on

a.	Whether they are probable and estimable .
b.	The degree of uncertainty.
c.	The present condition suggesting a liability.
d.	The outcome of a future event.

____          77.    A contingent liability shall be recorded when

a.	Any lawsuit is actually filed against an entity.
b.	It is certain that funds are available to pay the amount of the claim.
c.	It is probable that a liability has been incurred even though the amount of the loss can be reasonably estimated.
d.	The amount of the loss can be reasonably estimated and it is probable prior to issuance of financial statements that a liability has been incurred.

____          78.    How should a contingent liability be reported in the financial statements when it is “reasonably possible” that the entity will have to pay the liability at a future date?

a.	As a deferred liability
b.	As an accrued liability
c.	As a disclosure only
d.	As an account payable with an additional disclosure explaining the nature of the transaction

____          79.    Disclosure usually is not required for

a.	Contingent gains that are probable and can be reasonably estimated.
b.	Contingent losses that are reasonably possible and cannot be reasonably estimated.
c.	Contingent losses that are probable and cannot be reasonably estimated.
d.	Contingent losses that are remote and can be reasonably estimated.

____          80.    Which of the following liabilities is not contingent?

a.	A liability to replace a specific defective television set already returned to the manufacturer.
b.	A liability to pay pension benefits if a specific employee lives to retirement.
c.	A liability to pay any adverse judgment for a product liability case currently on appeal.
d.	A liability to pay for books received by a college bookstore under terms that allow for the return for full refund of any books not sold.

____          81.    Gain contingencies that are remote and can be reasonably estimated

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

____          82.    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 but its amount or due date is indeterminate.
c.	Is commonly associated with loss carry-forward.
d.	Is not disclosed in the financial statements.

____          83.    An item that is not a contingent liability is

a.	Premium offer to customer for labels or box tops
b.	Acommodation endorsement on customer note
c.	Additional compensation that may be payable on a dispute now being arbitrated
d.	Pending lawsuit

____          84.    An entity has a self-insurance plan. Each year, the entity appropriated retained earnings for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of an accident in the current year, the entity is a defendant in a lawsuit in which it will probably have to pay measurable amount of damages. What are the effects of this lawsuit’s probable outcome on the entity’s financial statements for the current year?

a.	An increase in expenses and no effect on liabilities.
b.	An increase in both expenses and liabilities.
c.	No effect on expenses and an increase in liabilities.
d.	No effect on either expenses or liabilities.

____          85.    On January 31, 2009 an explosion occurred at an entity’s plant causing extensive property damage to area buildings. Although no claims had yet been assertes against the entity by March 15,2010, the entity’s management and counsel concluded that it is likely that claims will be asserted and that it is reasonably possible the entity will be responsible for damages. The management believed that P1,250,000 would be reasonable estimate of its liability. The entity’s P5,000,000 comprehensive public liability policy has a P250,000 deductible clause. In the December 31, 2009 financial statements which were issued on March 31, 2010, how should this item be reported?

a.	As an accrued liability of P250,000
b.	As a footnote disclosure indicating the possible loss of P250,000
c.	As a footnote disclosure indicating the possible loss of P1,250,000
d.	No footnote disclosure or accrual is necessary

____          86.    A retail store received cash and issued gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following transactions?

a.	Premium offer to customers for labels or box tops
b.	Acommodation endorsement on customer note
c.	Additional compensation that may be payable on a dispute now being arbitrated
d.	Pending lawsuit

____          87.    A retail store received cash and issued a gift certificate that is redeemable in merchandise. When the gift certificate was issued, a

a.	Deferred revenue account should be decreased
b.	Deferred revenue account should be increased
c.	Revenue account should be decreased
d.	Revenue account should be increased

____          88.    Magazine subscription collected in advance are treated as

a.	A contra account to magazine subscription receivable
b.	Deferred revenue in the liability section
c.	Deferred revenue in the shareholders’ equity section
d.	Magazine subscription refunds in the income statement in the period collected

____          89.    An entity receives an advance payment for special order goods that are to be manufactured and delivered within six months. The advance payment shall be reported in the entity’s statement of financial position as a

a.	Deferred charge	c.	Current liability
b.	Contra asset account	d.	Noncurrently liability

____          90.    An entity is a retailer of home appliances and offers service contract on each appliance sold. The entity sells appliances on installment contracts, but all service contracts must be paid in full at the time of sale. Collections received for service contracts shall be recorded as an increases in a

a.	Deferred revenue account
b.	Sales contracts receivable valuation account
c.	Shareholder’s equity valuation account
d.	Service revenue account

____          91.    Under a royalty agreement with another entity, a entity will receive royalties from the assignment of a patent for four years. The royalties received in advance shall be reported as revenue

a.	In the period received
b.	In the period earned
c.	Evenly over the life of the royalty agreement
d.	At the date of the royalty agreement

____          92.    In June of the current year, an entity sold refundable merchandise coupons. The entity received a certain amount for each coupon redeemable from July 1 to December 31 of the current year, for merchandise with a certain retail price. At June 30 of the current year, how should the entity report these coupon transactions?

a.	Unearned revenue at the merchandise’s retail price.
b.	Unearned revenue at the cash received
c.	Revenue at the merchandise’s retail price
d.	Revenue at the cash received

____          93.    How would the proceeds received from the advance sale of  nonrefundable tickets for a theatrical performance be reported in the seller’s financial statements before the performance?

a.	Revenue for the entire proceeds
b.	Revenue to the next extent of related costs expended
c.	Unearned revenue to the extent of related costs expended
d.	Unearned revenue for the entire proceeds

____          94.    On March 31 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 entity’s March 31 statement of financial position?

a.	None
b.	Deferred revenue equal to 60% of the main contract price and payable to subcontractor equal to 40% of the main contract price.
c.	Deferred revenue equal to 60% of the main contract price and no payable to subcontractor.
d.	No deferred revenue but payable to subcontractor is reported at 40% of the main contract price.

____          95.    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 these warranty costs?

a.	Evenly over the life of the warranty
b.	When the service calls are performed
c.	When payments are made to the mechanic
d.	When the machines are sold

TOA QUIZZER 3

Answer Section

MULTIPLE CHOICE

   1.        C

   2.        A

   3.        A

   4.        A

   5.        B

   6.        A

   7.        B

   8.        A

   9.        B

   10.      A

   11.      B

   12.      C

   13.      A

   14.      A

   15.      C

   16.      A

   17.      C

   18.      A

   19.      C

   20.      B

   21.      C

   22.      C

   23.      C

   24.      D

   25.      B

   26.      D

   27.      D

   28.      C

   29.      C

   30.      C

   31.      C

   32.      D

   33.      A

   34.      D

   35.      C

   36.      B

   37.      D

   38.      C

   39.      B

   40.      C

   41.      A

   42.      C

   43.      B

   44.      A

   45.      A

   46.      C

   47.      A

   48.      D

   49.      C

   50.      C

   51.      D

   52.      D

   53.      D

   54.      C

   55.      D

   56.      B

   57.      B

   58.      C

   59.      A

   60.      C

   61.      A

   62.      B

   63.      D

   64.      A

   65.      C

   66.      C

   67.      B

   68.      D

   69.      B

   70.      D

   71.      A

   72.      D

   73.      C

   74.      C

   75.      D

   76.      D

   77.      D

   78.      C

   79.      D

   80.      A

   81.      D

   82.      A

   83.      A

   84.      B

   85.      B

   86.      A

   87.      B

   88.      B

   89.      C

   90.      A

   91.      B

   92.      B

   93.      D

   94.      C

   95.      D