TOA QUIZZER 3

Multiple Choice 8. It is the amount of income tax paid or payable for

Identify the choice that best completes the statement or answers the question.
the year as determined in applying the provisions
____ 1. Which entities are required to apply deferred tax accounting? of the enacted tax law to the taxable income.
I. Public entities a. Current tax expense c. Deferred tax benefit
II. Nonpublic entities b. Deferred tax expense d. Income tax expense
a. I only c. Both I and II
b. II only d. Neither I nor II
9. The deferred tax expense is equal to
a. Increase in deferred tax asset less the increase in deferred
____ 2. It is the excess of taxable revenue over tax tax liability.
b. Increase in deferred tax liability minus the increase in
deductible expenses and exemptions for the year deferred tax asset.
as defined by the Bureau of Internal Revenue. c. Increase in deferred tax asset.
a. Taxable income c. Accounting income subject d. Increase in deferred tax liability.
to tax
b. Accounting income per d. Comprehensive income
book 10. It is the aggregate amount included in the
determination of net profit for the period in
____ 3. It is the net profit for a period before deducting respect of current tax and deferred tax.
a. Tax expense c. Deferred tax expense
tax expense. b. Current tax expense d. Deferred tax benefit
a. Accounting profit c. Gross profit
b. Taxable profit d. Net profit

11. It is the amount attributable to an asset or liability

____ 4. This is a difference between the tax basis of an asset or liability for tax purposes.
and its carrying amount that will result in taxable or deductible a. Carrying amount c. Measurement base
amounts in the future years when the carrying amount of the b. Tax base d. Taxable amount
asset or liability is recovered or settled.
I. Temporary difference
II. Permanent difference 12. A deferred tax liability shall be recognized for all
a. I only c. Both I and II a. Permanent differences c. Taxable temporary
b. II only d. Neither I nor II differences
b. Temporary differences d. Deductible temporary
differences
____ 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 13. A deferred tax asset shall be recognized for all
settled. deductible temporary differences and operating
II. Temporary difference that will result in future loss carryforward when
deductible amount in determining taxable a. It is probable that taxable income will be available against
which the deferred tax asset can be used
income of future periods when the carrying b. It is probable that accounting income will be available
amount of the asset or liability is recovered or against which the deferred tax asset can be used
settled. c. It is possible that taxable income will be available against
which the deferred tax asset can be used
a. Both I and II c. II only
d. It is possible that accounting income will be available
b. I only d. Neither I nor II
against which the deferred tax asset can be used

____ 6. It is the deferred tax consequence attributable to 14. Which statement is incorrect concerning tax assets and
a taxable temporary difference. liabilities?
a. Deferred tax liability c. Current tax liability
a. Deferred tax assets and liabilities shall be discounted.
b. Deferred tax asset d. Current tax asset
b. Tax assets and liabilities shall presented separately from
other assets and liabilities in the statement of financial
position.
____ 7. It is the deferred tax consequence attributable to c. Deferred tax assets and liabilities shall be distinguished
a deductible temporary difference and operating from current tax assets and liabilities.
d. When an entity makes a distinction between current and
loss carryforward. noncurrent assets and liabilities, it shall not classify
a. Deferred tax liability c. Current tax liability deferred tax assets and liabilities as current.
b. Deferred tax asset d. Current tax asset
 II. The tax base for a machine for tax purposes is
____ 15. An entity shall offset a deferred tax asset and deferred tax
liability when greater than the carrying amount in the
I. The deferred tax asset and deferred tax liability relate to financial statements up to the end reporting
income taxes levied by the same taxing authority.
period. This will give rise to a deferred tax
II. The entity has a legal enforceable right to
asset.
offset a current tax asset against a current tax a. I only c. Both I and II
liability. b. II only d. Neither I nor II
a. I only c. Both I and II
b. II only d. Neither I nor II
21. Justification for the method of determining
____ 16. The following statements relate to deferred tax assets or periodic deferred tax expense is based on the
liabilities. Which statement is true? concept of
I. Deferred tax liabilities are the amounts of income taxes a. Matching of periodic expense to periodic revenue.
payable in future periods in respect of taxable temporary b. Objectivity in the calculation of periodic expense.
differences. c. Recognition of assets and liabilities.
II. Deferred tax assets are the amounts of income taxes d. Consistency of tax expense measurement with actual tax
recoverable in future periods in respect of deductible planning strategies.
permanent differences.
a. I only c. Both I and II
b. II only d. Neither I nor II 22. Which of the following differences would result in
future taxable amount?
a. Expenses or losses that are deductible after they are
____ 17. Deferred tax assets are the amount of income recognized in accounting income.
taxes recoverable in future periods in respect of b. Revenues or gains that are taxable before they are
a. The carryforward of unused tax losses only recognized in accounting income.
b. Taxable temporary differences and carryforward of unused c. Expenses or losses that are deductible before they are
tax losses recognized in accounting income.
c. Deductible temporary differences and carryforward of d. Revenues or gains that are recognized in accounting
unused tax losses income but are never included in taxable income.
d. Permanent differences

23. A temporary difference which would result in a

____ 18. All of the following must be disclosed separately, except? deferred tax liability is
a. The tax bases of major items on which deferred tax has a. Interest revenue on municipal bonds.
been calculated. b. Accrual of warranty expense.
b. The amount of deductible temporary differences for which c. Excess of tax depreciation over accounting depreciation.
no deferred tax asset is recognized. d. Subscription received in advance.
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 24. A temporary difference which would result in a
other comprehensive income. deferred tax asset is
a. Tax penalty or surcharge
b. Dividend received on share investment
____ 19. The following statements relate to classification of items under c. Excess tax depreciation over accounting depreciation
PAS 12. Which statement is true? d. Rent received in advance included in taxable income at the
I. Interest expense accrued but included in taxable profit on a time of receipt but deferred for accounting purposes
cash basis shall be classified under deductible temporary
differences.
II. Where accumulated depreciation on an asset is 25. An entity, cash basis taxpayer, prepares accrual basis financial
statements. In its year-end statement of financial position, the
greater than accumulated tax depreciation, entity’s deferred income tax liabilities increased compared to
the amount shall be classified under the prior year. Which of the following changes would cause this
increase in deferred tax liabilities?
deductible temporary differences. I. An increase in prepaid insurance
a. I only c. Both I and II II. An increase in rent receivable
b. II only d. Neither I nor II
III. An increase in warranty obligation
a. I only c. II and III
____ 20. Which statement is true in accordance with PAS 12? b. I and II d. III only
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.
____ 26. An entity reported deferred tax assets and c. Current tax law unless a future enacted tax law is different.
d. Either current or expected future tax law regardless of
deferred tax liabilities at the end of the prior year whether the expected future tax law is enacted or not.
and at the end of the current year. For the current
year, the entity should report deferred income tax
31. The purpose of interperiod tax allocation is to
expense or benefit equal to the a. Allow reporting entities to fully utilize tax losses carried
a. Decrease in the deferred tax assets forward from a previous year.
b. Increase in the deferred tax liabilities b. Allow reporting entities whose tax liabilities vary
c. Amount of the current liability plus the sum of the net significantly from year to year to smooth payments to taxing
changes in deferred tax assets and deferred tax liabilities agencies.
d. Sum of the net changes in deferred tax assets and deferred c. Recognize an asset or liability for the tax consequences of
tax liabilities temporary differences that exist at the end of the reporting
period.
d. Amortize the deferred tax liability shown in the statement of
____ 27. Because an entity uses different methods to financial position.
depreciate equipment for accounting and income
tax purposes, the entity has temporary differences 32. The result of interperiod tax allocation is that
that will reverse during the next year and add to a. Wide fluctuations in an entity’s tax liability payments are
eliminated.
taxable income. Deferred income taxes that are b. Tax expense shown in the income statement is equal to the
based on these temporary differences shall be deferred taxes shown in the statement of financial position.
c. Tax liability shown in the statement of financial position is
classified in the entity’s statement of financial equal to the taxes shown in the previous year’s statement
position as of financial position plus the income tax expense shown in
a. Contra account to current assets the income statement.
b. Contra account to noncurrent assets d. Tax expense shown in the income statement is equal to
c. Current liability income taxes payable for the current year plus or minus the
d. Noncurrent liability change in the deferred tax asset or liability balances for the
year.

____ 28. At the most recent year-end, an entity had a 33. Which of the following is an example of a temporary difference
deferred tax liability arising from accelerated that would result in a deferred tax liability?
depreciation that exceeded a deferred asset a. Use of straight line depreciation for accounting purposes
relating to rent received in advance which is and an accelerated rate for income tax purposes.
b. Rent revenue collected in advance when included in
expected to reverse in the next year. Which of the taxable income before it is included in pretax accounting
following shall be reported in the entity’s most income.
c. Use of a shorter depreciation period for accounting
recent year-end statement of financial position? purposes than is used for income tax purposes.
a. The excess of the deferred tax liability over the deferred tax d. Investment losses recognized earlier for accounting
asset as a noncurrent liability. purposes than for tax purposes.
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. 34. Which of the following is the most likely item to result in a
d. The deferred tax liability as a current liability.
deferred tax asset?
a. Using accelerated depreciation for tax purposes but
straight line depreciation for accounting purposes
____ 29. An entity’s financial reporting basis of its plant b. Using the cost recovery revenue method of recognizing
assets exceeded the tax basis because it uses a construction revenue for tax purposes but using percentage
of completion method for financial reporting purposes
different method of reporting depreciation for c. Prepaid expense
financial reporting purposes and tax purposes. If it d. Unearned revenue
has no other temporary differences, the entity
shall report a 35. An example of a “deductible temporary
a. Current tax asset c. Deferred tax liability
b. Deferred tax asset d. Current tax payable 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.
____ 30. A deferred tax liability is computed using b. Accelerated depreciation is used for tax puposes but
a. Current tax law regardless of expected or enacted future straight line depreciation is used for accounting purposes.
tax law. c. Warranty expenses are recognized on the accrual basis for
b. Expected future tax law regardless of whether enacted or financial accounting purposes but recognized for tax
not. purposes as the warranty conditions are met.
 d. The cost recovery method of recognizing construction 42. A provision shall be recognized as liability when (choose the
revenue is used for tax purposes but the percentage of incorrect one)
completion method is used for financial accounting
purposes. 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.
____ 36. A deferred tax liability arising from the use of an c. It is possible that an outflow of resources embodying economic
benefits will be required to settle the obligation.
accelerated method of depreciation for tax d. The amount of the obligation can be measured reliably.
purposes and the straight line method for
financial reporting purposes would be classified in 43. A constructive obligation is an obligation
the statement of financial position as
a. A current liability I. Arising from contract, legislation or operation of law.
b. A noncurrent liability
c. A current liability for the portion of the temporary difference II. That is derived from an entity’s action that the entity will accept
reversing within a year and a noncurrent liability for the certain responsibilities because of past practice, published
remainder policy or current statement and as a result, the entity has created
d. An offset to the accumulated depreciation reported in the a valid expectation in other parties that it will discharge those
statement of financial position responsibilities.

a. I only c. Both I and II

b. II only d. Neither I nor II
____ 37. An item that would create a permanent difference
in pretax financial income and taxable income
44. It is an event that creates a legal or constructive obligation because
would be the entity has no other realistic alternative but to settle the obligation.
a. Using accelerated depreciation for tax purposes and
straight line depreciation for book purposes. a. Obligating event c. Subsequent event
b. Purchasing equipment previously leased with an operating b. Past event d. Current event
lease in prior years.
c. Using the percentage of completion method on long-term
construction contracts. 45. An outflow of resources embodying economic benefits is regarded as
d. Paying fines for violation of laws. “probable” when

a. The probability that the event will occur is greater than the
____ 38. Recognizing tax benefit in a loss year due to a loss probability that the event will not occur.
b. The probability that the event will not occur is greater than the
carryforward requires probability that the event will occur.
a. Only a footnote disclosure. c. The probability that the event will occur is the same as the
b. Creating a new carryforward for the next year. probability that the event will not occur.
c. Creating a deferred tax asset. d. The probability that the event will occur is 90% likely.
d. Creating a deferred tax liability.

46. Where there is a continuous range of possible outcomes, and each

____ 39. Intraperiod tax allocation point in that range is as likely as any other, the range to be used is the
a. Involves the allocation of income taxes between current a. Minimum
and future periods. b. Maximum
b. Associates tax effect with different items in the income c. Midpoint
statement. d. Summation of the minimum and maximum
c. Arises because certain revenue and expenses appear in
the financial statements either before or after they are
included in the income tax return. 47. Where the provision being measured involves a large population of
d. Arises because different income statement items are taxed items, the obligation is estimated by “weighting” all possible
at different rates. outcomes by their associated probabilities. The name for this
statistical method of estimation is

____ 40. In computing the change in deferred tax asset or a. Expected value c. Current value
b. Present value d. Extrapolation
liability, which tax rate is used?
a. Current tax rate c. Enacted future tax rate
b. Estimated future tax rate d. Prior tax rate 48. Which statement is incorrect in the measurement of a provision?

a. The risks and uncertainties that inevitably surround many events

____ 41. It is an existing liability of uncertain timing or uncertain amount. and circumtances shall be taken into account in reaching the best
estimate of a provision.
a. Provision c. Accrued liability b. Where te effect of the time value of money is material, the
b. Contingent liability d. Note payable 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 redundant from the division being closed
events will occur. d. Future operating losses of the division being closed up to the date
d. Gains from expected disposal of assets shall be taken into of closure
account in measuring a provision.

55. An entity operates chemical plants. Its published policies include a

____ 49. Which statement is incorrect where some or all of the expenditure commitment to making good any damage caused to the environment
required to settle a provision is expected to be reimbursed by another by its operations. It has always honored this commitment. Which of
party? the following scenarios relating to the entity would give rise to an
environmental provision?
a. The reimbursement shall be recognized only when it is virtually
certain that the reimbursement would be received if the entity a. On past experience it is likely that a chemical spill which would
settles the obligation. result in having to pay fines and penalties will occur in the next
b. The amount of the reimbursement shall not exceed the amount of year.
the provision. b. Recent research suggests there is a possibility that the entity’s
c. The amount of the reimbursement may exceed the amount of the actions may damage surrounding wildlife.
provision. c. The government has outlined plans for a new law requiring all
d. In the income statement, the expense relating to the provision environmental damage to be rectified.
may be presented net of the reimbursement. d. A chemical spill from one of the entity’s plants has caused harm
to the surrounding area and wildlife.

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

56. When can a “provision” be recognized?
a. Provisions shall be reviewed at each balance sheet date and
adjusted to reflect the current best estimate. a. When there is a legal obligation arising from a past obligating
b. A provision shall be used only for expenditures for which the event, the probability of the outflow of resources is more than
provision was originally recognized. remote but less than probable, and a reliable estimate can be
c. Provisions shall be recognized for future operating losses. made of the amount of the obligation.
d. If an entity has an onerous contract, the present obligation under b. When there is a constructive obligation as a result of a past
the contract shall be recognized and measured as a provision. 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,
____ 51. A legal obligation is an obligation that is derived from all of the the outflow of resources is probable, and an approximate amount
following, except can be set aside toward the obligation.
d. When management decides that it is essential that a provision be
a. Legislation made for unforeseen circumtances and keeping in mind this year
b. A contract the profits were enough but next year there may be losses.
c. Other operation of law
d. An established pattern of past practice
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
____ 52. For which of the following should a provision be recognized? competitor if the competitor succeeds in the lawsuit is determinable
with reliability, and according to the legal counsel it is less than
a. Future operating losses probable but more than remote that an outflow of the resources would
b. Obligations under insurance contracts be needed to meet the obligation. The entity that was sued shall at
c. Reductions in fair value of financial instruments year-end.
d. Obligations for plant decommissioning costs
a. Recognize a provision for this possible obligation.
b. Make a disclosure of the possible obligation in footnotes to the
____ 53. Provisions shall be recognized for all of the following, except financial statements.
c. Make no provision or disclosure and wait until the lawsuit is
a. Cleaning-up costs of contaminated land when an oil entity has a finally decided and then expense the amount paid on settlement,
published policy that it will undertake to clean up all if any.
contamination that it causes. d. Set aside, as an appropriation, a contingency reserve, an amount
b. Restructing costs after a binding sale agreement has been signed. based on the best estimate of the possible liability.
c. Rectification costs relating to defective products already sold.
d. Future refurbishment costs due to introduction of a new computer
system. 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
____ 54. An entity is closing one of its operating divisions, and the conditions number of meetings with representatives of the insurance company.
for making restructing provision have been met. The closure will Finally, before year-end, it was decided that the entity would receive
happen in the first quarter of the next financial year. At the current compensation for 90% of its claim. The entity received a letter that
year-end, the entity has announced the formal plan publicly and is the settlement check for that amount had been mailed, but it was not
calculating the restructing provision. Which of the following costs received before year-end. How should the entity treat this in its
should be included in the restructuring provision? financial statements?
a. Disclose the contingent asset in the footnotes.
a. Retraining staff continuing to be employed b. Wait until next year when the settlement check is actually
b. Relocation costs relating to staff moving to other divisions received and not recognize or disclose this receivable at all since
c. Contractually required costs of retraining staff being made at year-end it is a contingent asset.
 c. Record 90% of the claim as a receivable as it is virtually certain a. Amount is reasonably estimate and event occurs infrequently.
that the contingent asset will be received. b. Amount is reasonably estimable and occurrence of event is
d. Record 100% of the claim as a receivable at year-end as it is probable.
virtually certain that the contingent asset will be received, and c. Event is unusual in nature and accurrence of event is probable.
adjust the 10% next year when the settlement check is actually d. Event is unusual in nature and event occurs infrequently.
received.

63. Which statement is incorrect concerning contingent liability?

____ 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 a. A contingent liability is not recognized in the fianncial
move them to Australia. The decision was based on a detailed formal statements.
plan of restructuring as required by PAS 37. This decision was b. A contingent liability is disclosed only.
conveyed to all workers and management personnel at the c. If the contingent liability is remote, no disclosure is required.
headquarters in Europe. The cost of this restructuring plan can be d. A contingent liability is both probable and measurable.
estimtaed reliably. How should the entity treat this restructuring in its
financial statements for the year-end December 31?
64. It is a possible asset that arises from past event and whose existence
a. Because the entity has not announced the restructuring to those will be confirmed only by the occurence or nonoccurrence of one or
affected by the decision and thus has not raised an expectation more uncertain future events not wholly within the control of the
that the entity will actually caryy out the restructuring and as no entity.
constructive obligation has arisen, only disclose the restructuring
decision and the cost of restructuring. a. Contingent asset c. Suspense account
b. Recognize a provision for restructuring since the board of b. Other asset d. Current asset
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 65. Which statement is incorrect concerning a contingent asset?
chairman’s statement in the annual report since it is a decision of
the board of directors. a. A contingent asset is not recognized in the financial statements
d. Because the restructuring has not commenced before year-end, because this may result to recognition of income that may never
based on prudence, wait until next year and do nothing in this be realized.
year’s financial statements. b. When the realization of income is virtually certain, the related
asset is no longer contingent asset and its recognition is
appropriate.
____ 60. An entity has been served a legal notice at year-end by the c. A contingent asset is only disclosed when the occurrence of the
Department of Environment and Natural Resources to fit smoke future event is possible or remote.
detectors in its factory on or before middle of next year. The cost of d. The related gain arising from the contingent asset is recognized
fitting smoke detector can be measured reliably. How should the usually when it is realized.
entity treat this in its financial statements at year-end?

a. Recognize a provision for the current year equal to the estimated 66. Which of the following should be disclosed in the financial
amount. statements as a contingent liability?
b. Recognize a provision for the current year equal to one-half only
of the estimated amount. a. The entity has accepted liability prior to the year-end for unfair
c. No provision is recognized at year-end because there is no dismissal of an employee and is to pay damages.
present obligation for the future expenditure since the entity can b. The entity has received a letter from a supplier complaining
avoid the future expenditure by changing the method of about an old unpaid invoice.
operations but disclosure is required. c. The entity is involved in a legal case which it may possibly lose,
d. Ignore this for purposes of the financial statements at year-end. although this is not probable.
d. The entity has not yet paid certain claims under sales warranties.

____ 61. A contingent liability is a

67. Are the following statements in relation to a contingent liability true
I. Possible obligation that arises from past event and whose or false?
existence will be confirmed only by the occurrence or
nonoccurrence of one or more uncertain future events not Statement 1 An obligation as a result of the entity creating a valid
wholly within the control of the entity. expectation that it will discharge its
responsibilities is a contingent liability.
II. Present obligation that arises from past event and it is probable
that an outflow of resources embodying economic benefits will Statement 2 A present obligation that arises from past event but
be required to settle the obligation and the amount of the cannot be reliably measured is a contingent
obligation and the amount of the obligation can be measured liability.
reliably.
Statement 1 Statement 2
a. I only c. Both I and II
a. False False
b. II only d. Neither I nor II
b. False True
c. True False
d. True True
____ 62. The present obligation is not a contingent liability but shall be
recognizede as a provision when
____ 68. The likelihood that the future event will or will not occur can be c. In the notes to the finanical statements.
expressed by a range of outcome. Which range means that the future d. In the statement of financial position.
event occurring is very slight?

a. Probable 75. At year-end, an entity was a competitor for patent infringement. The
b. Reasonably possible award from the probable favorable outcome could be reasonably
c. Certain estimated. The entity’s financial statements shall report the expected
d. Remote award as
a. Receivable and revenue
b. Receivable and reduction of patent
____ 69. An entity did not record an accrual for a present obligation but c. Receivable and deferred revenue
disclose the nature of the obligation and the range of the loss. How d. Disclosure only
likely is the loss?

a. Remote c. Probable 76. Contingent liabilities will or will not become actual liabilities
b. Reasonably possible d. Certain depending on

a. Whether they are probable and estimable .

____ 70. A present obligation that is probable and for which the amount can be b. The degree of uncertainty.
reasonably estimated shall c. The present condition suggesting a liability.
a. Not be accrued but shall be disclosed in the notes to the financial d. The outcome of a future event.
statements.
b. Be accrued by debiting an appropriated retained earnings account
and crediting a liability account. 77. A contingent liability shall be recorded when
c. Be accrued by debiting an expense account and crediting an
appropriated retained earnings account. a. Any lawsuit is actually filed against an entity.
d. Be accrued by debiting an expense account and crediting a b. It is certain that funds are available to pay the amount of the
liability account. claim.
c. It is probable that a liability has been incurred even though the
amount of the loss can be reasonably estimated.
____ 71. Contingent assets are usually recognized when d. The amount of the loss can be reasonably estimated and it is
probable prior to issuance of financial statements that a liability
a. Realized has been incurred.
b. Occurrence is reasonably possible and the amount can be
reasonably estimated
c. Occurrence is probable and the amount can be reasonably 78. How should a contingent liability be reported in the financial
estimated statements when it is “reasonably possible” that the entity will have to
d. The amount can be reasonably estimated pay the liability at a future date?

a. As a deferred liability
____ 72. Which of the following is the proper accounting treatment of a b. As an accrued liability
contingent asset? c. As a disclosure only
d. As an account payable with an additional disclosure explaining
a. An accrued account the nature of the transaction
b. Deferred earnings
c. An account receivable with an additional disclosure explaining
the nature of the transaction 79. Disclosure usually is not required for
d. A disclosure only
a. Contingent gains that are probable and can be reasonably
estimated.
____ 73. When the occurrence of a contingent asset is probable and its amount b. Contingent losses that are reasonably possible and cannot be
can be reasonably estimated, the contingent asset shall be reasonably estimated.
c. Contingent losses that are probable and cannot be reasonably
a. Recognized in the statement of financial position and disclosed. estimated.
b. Classified as an appropriation of retained earnings. d. Contingent losses that are remote and can be reasonably
c. Disclosed but not recognized in the statement of financial estimated.
position.
d. Neither recognized in the statement of financial position nor
disclosed. 80. Which of the following liabilities is not contingent?

a. A liability to replace a specific defective television set already

____ 74. An entity operates a plant in a foreign country. It is probable that the returned to the manufacturer.
plant will be expropriated. However the foreign government has b. A liability to pay pension benefits if a specific employee lives to
indicated that the entity will receive a definite amount of retirement.
compensation for the plant. The amount of compensation is less than c. A liability to pay any adverse judgment for a product liability
the fair value but exceeds the carrying amount of the plant. The case currently on appeal.
contingent asset shall be reported 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
a. As a valuation allowance as a part of shareholders’ equity. sold.
b. As a fixed asset valuation allowance account.
 being arbitrated
____ 81. Gain contingencies that are remote and can be reasonably estimated d. Pending lawsuit

a. Must be disclosed in a note to the financial statements.

b. May be disclosed in a note to the financial statements. 87. A retail store received cash and issued a gift certificate that is
c. Must be reported in the body of the financial statements. redeemable in merchandise. When the gift certificate was issued, a
d. Should not be reported or disclosed.
a. Deferred revenue account should be decreased
b. Deferred revenue account should be increased
____ 82. A contingent liability c. Revenue account should be decreased
d. Revenue account should be increased
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 88. Magazine subscription collected in advance are treated as
indeterminate.
c. Is commonly associated with loss carry-forward. a. A contra account to magazine subscription receivable
d. Is not disclosed in the financial statements. 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
____ 83. An item that is not a contingent liability is period collected

a. Premium offer to customer for labels or box tops

b. Acommodation endorsement on customer note 89. An entity receives an advance payment for special order goods that
c. Additional compensation that may be payable on a dispute now are to be manufactured and delivered within six months. The advance
being arbitrated payment shall be reported in the entity’s statement of financial
d. Pending lawsuit position as a

a. Deferred charge c. Current liability

____ 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?
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. An increase in expenses and no effect on liabilities. a. Deferred revenue account

b. An increase in both expenses and liabilities. b. Sales contracts receivable valuation account
c. No effect on expenses and an increase in liabilities. c. Shareholder’s equity valuation account
d. No effect on either expenses or liabilities. d. Service revenue account

____ 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
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 26. D
Answer Section 54. C
27. D
MULTIPLE CHOICE 55. D
28. C
1. C 56. B
29. C
2. A 57. B
30. C
3. A 58. C
31. C
4. A 59. A
32. D
5. B 60. C
33. A
6. A 61. A
34. D
7. B 62. B
35. C
8. A 63. D
36. B
9. B 64. A
37. D
10. A 65. C
38. C
11. B 66. C
39. B
12. C 67. B
40. C
13. A 68. D
41. A
14. A 69. B
42. C
15. C 70. D
43. B
16. A 71. A
44. A
17. C 72. D
45. A
18. A 73. C
46. C
19. C 74. C
47. A
20. B 75. D
48. D
21. C 76. D
49. C
22. C 77. D
50. C
23. C 78. C
51. D
24. D 79. D
52. D
25. B 80. A
53. D
81. D 88. B

82. A 89. C

83. A 90. A

84. B 91. B

85. B 92. B

86. A 93. D

87. B 94. C
95. D