Liabilities and Obligations – Test Bank | 11th Edition

View Product website:

https://selldocx.com/docx/liabilities-and-obligations-test-bank-11th-edition-1106

Testbank

to accompany

Accounting

11^th edition

by

Hoggett et al.

© John Wiley & Sons Australia, Ltd 2020

Chapter 16: Liabilities

Multiple-choice questions

1. Which of the following is not an essential characteristic of a liability under the Conceptual Framework?

a. A legal debt.

b. A present obligation.

c. An outflow of resources embodying economic benefits.

d. A past transaction or event.

General Feedback:

Learning objective 16.1: define liabilities.

2. The essential characteristics of a liability under the definition in the Conceptual Framework are:
I. Settlement requiring an outflow of resources embodying economic benefits.
II. A present obligation to an external party.
III. A legal debt.
IV. The obligation must have resulted from past events.

a. I and IV

b. III and IV

c. I, II and III

d. I, II and IV

General Feedback:

Learning objective 16.1: define liabilities.

3. Which of the following would not be defined as a liability under the Conceptual Framework?

a. A loan from a financial institution.

b. An arrangement to pay a quarterly bonus commission to salespersons for achieving sales over a certain level.

c. Money owing to a supplier for goods purchased.

d. Salaries owing to managers.

General Feedback:

Learning objective 16.1: define liabilities.

4. Which of the following criteria, specified in the Conceptual Framework, must be met before a liability can be recognised in the accounting records?
I. The liability is beyond a reasonable doubt.
II. It is sufficiently probable to provide relevant information to users that the future sacrifices associated with the item will occur.
III. The liability has a cost or value that can be measured with sufficient reliability to meet the faithful representation requirement.

a. I and II

b. I and III

c. II and III

d. I, II and III

General Feedback:

Learning objective 16.2: describe when liabilities are recognised.

5. As specified in the Conceptual Framework, which criteria must be met before a liability can be recognised in the accounting records?

a. There must be sufficient certainty of measurement and probability to provide relevant, useful information that demonstrates faithful representation.

b. The liability must be beyond a reasonable doubt and the amount of the liability must be able to be recognised with sufficient reliably to be relevant to users.

c. It must be probable that future sacrifices associated with the item will flow from the entity and the liability must be beyond a reasonable doubt.

d. There must have been a past event and there must be a present obligation to a specific entity.

General Feedback:

Learning objective 16.2: describe when liabilities are recognised.

6. A contingent liability is reported:

a. in the notes to the financial statements.

b. in the statement of financial position.

c. in the statement of changes in equity.

d. in the statement of financial performance.

General Feedback:

Learning objective 16.3: explain the nature of provisions and contingent liabilities.

7. Which of the following are contingent liabilities?
I. Borrowings from a financial institution
II. An agreement to act as guarantor for borrowings
III. An unresolved lawsuit brought against a newspaper for defamation

a. I, II, III

b. I, II

c. I, III

d. II, III

General Feedback:

Learning objective 16.3: explain the nature of provisions and contingent liabilities.

8. Under IAS 37/AASB 137, which of the following provisions is not regarded as a liability?

a. Provision for doubtful debts

b. Provision for onerous contracts

c. Provision for long-service leave

d. Provision for warranties

General Feedback:

Learning objective 16.3: explain the nature of provisions and contingent liabilities.

9. The key difference between provisions and liabilities is:

a. whether the obligation is current or non-current.

b. the uncertainty regarding the amount or timing of the future sacrifice of economic resources.

c. the party that the obligation is owed to.

d. whether there is an obligation.

General Feedback:

Learning objective 16.3: explain the nature of provisions and contingent liabilities.

10. Where are contingent liabilities required to be disclosed in the financial reports?

a. in the liability section of the statement of financial position

b. in the financial expense section of the statement of financial performance.

c. as deductions from the asset accounts they relate to.

d. in the notes to the financial reports

General Feedback:

Learning objective 16.3: explain the nature of provisions and contingent liabilities.

11. The key characteristic of contingent liabilities is:

a. the liability will be confirmed only by the occurrence or non-occurrence of a future event not completely within the control of an entity.

b. the liability does not exist beyond a reasonable doubt.

c. the timing of the future sacrifice of economic benefits is uncertain.

d. a legal dispute must exist at balance date.

General Feedback:

Learning objective 16.3: explain the nature of provisions and contingent liabilities.

12. Which of the following does not fit the IAS 37/AASB 137 definition of a provision as a liability of uncertain timing or amount?

a. Provision for environmental damage

b. Provision for warranties

c. Provision for long-service leave

d. Provision for depreciation

General Feedback:

Learning objective 16.3: explain the nature of provisions and contingent liabilities.

13. Which of the following would be defined as contingent liabilities?
I. A bank overdraft
II. A loan from a financial institution
III. An agreement to act as guarantor for another firm's borrowings
IV. An unresolved lawsuit brought against the entity for breach of health and safety regulations

a. I and III

b. II, III

c. I and IV

d. III and IV

General Feedback:

Learning objective 16.3 ~ explain the nature of provisions and contingent liabilities.

14. On 1 June 2022 McIntyre Ltd issued a three-month, $30 000 bill payable to Northgate Savings in order to borrow $28 000. If the bill payable is still outstanding at 30 June 2022, the end of the financial year, which of the following will be reported on McIntyre Ltd's financial statements concerning the bill?

a. Interest expense: Yes; Unexpired interest on bills: Yes; Bills payable: Yes.

b. Interest expense: No; Unexpired interest on bills: No; Bills payable: No.

c. Interest expense: Yes; Unexpired interest on bills: No; Bills payable: No.

d. Interest expense: No; Unexpired interest on bills: Yes; Bills payable: Yes.

General Feedback:

Learning objective 16.4: discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

15. Which of the following are a possible basis for classifying liabilities?
I. Source
II. Liquidity
III. Timing of settlement
IV. Whether secured or unsecured

a. I, II, III and IV

b. II and IV only

c. I and II only

d. II, III and IV only

General Feedback:

Learning objective 16.4: discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

15. Which of the following are a possible basis for classifying liabilities?
I. Source
II. Liquidity
III. Timing of settlement
IV. Whether secured or unsecured

a. I, II, III and IV

b. II and IV only

c. I and II only

d. II, III and IV only

General Feedback:

Learning objective 16.4: discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

17. Which of the following is not normally regarded as a current liability?

a. Mortgage

b. Bank overdraft

c. Accounts payable

d. GST collected

General Feedback:

Learning objective 16.4: discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

18. Which of the following would not typically be classified as a non-current liability?

a. Provision for long service leave

b. Accounts payable

c. Mortgage payable

d. Unsecured notes payable

General Feedback:

Learning objective 16.4: discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

19. The classification of liabilities into current and non-current, is useful as it helps decision-makers assess the firm's ability to meet all of the following except:

a. profitability.

b. dividends.

c. commitments which are part of the operating cycle.

d. capital repayments.

General Feedback:

Learning objective 16.4: discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

20. A current liability is:

a. arising from past events that will be confirmed by the occurrence of future events.

b. expected to be paid within six months of the reporting date.

c. expected to be paid beyond one year of the reporting date.

d. expected to be paid within one year of the reporting date.

General Feedback:

Learning objective 16.4: discuss why and how liabilities are classified, and distinguish between current and non-current liabilities.

21. Which of the following statements concerning long-service leave is correct?

a. Long-service leave entitlements were recently abolished by the Australian government.

b. Long-service leave is paid at the employees' average rate of pay over the period for which the leave has accrued.

c. Long-service leave relates to an insurance scheme whereby employees are compensated for injuries, loss of limbs and loss of life while at work.

d. Long-service leave does not have to be paid to an employee until the required period of employment has been completed, e.g. 10 years, 15 years

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

22. Which of the following statements relating to employee benefits is incorrect?

a. If an employee benefit meets the Conceptual Framework's definition of a liability, then it is recognised as a liability; if it meets the definition of an expense, then it is recognised as an expense.

b. Wages and salaries, annual leave and sick leave are recorded at their nominal amounts.

c. Employee benefits are defined as all forms of consideration given by an entity in exchange for services rendered by employees.

d. Long-term employee benefits are recorded at their recoverable amount.

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

23. The following are employee benefits except for:

a. GST paid

b. Non-monetary fringe benefits

c. Employer's contribution to superannuation

d. Wages and salaries

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

24. Hanson Co. had previously purchased inventory from Jones Ltd for $18 000. On 1 October, Hanson gave Jones a 120-day bill of exchange to cover the amount of the account payable plus interest at 8% p.a. The correct accounting entry in Hanson Co.'s books to record the issue of the bill is:

a. DR Accounts payable $18 000; DR Unexpired interest $473; CR Bills payable $18 473

b. DR Bills payable $18 000; DR Unexpired interest $473; CR Accounts payable $18 473

c. DR Accounts payable $18 000; CR Bills payable $18 000

d. DR Bills payable $18 473; CR Accounts payable $18 473

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

25. Which statement relating to sick leave is correct?

a. Sick leave is to be paid at the lowest award rate rather than the normal salary rate.

b. Upon termination of employment, employees are generally entitled to be paid pro-rata for sick leave not taken.

c. When sick leave is actually taken by employees an entry is made to debit sick leave expense and credit the Australian Tax Office.

d. Accounting for sick leave is determined by the conditions attached to the employment contract

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

26. McTavish's regular and overtime gross pay combined, for the week ending 30 November, was $1250. Amounts were deducted for income tax $243.70, union fees $12 and donations to charity $25. McTavish contributes 5% of his gross pay to a superannuation fund as a personal contribution. His net pay for the week is:

a. $906.80

b. $844.30

c. $1006.30

d. $969.30

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.
Feedback: $906.80 = $1250 - $243.70 - $12 - $25 - $62.50

27. Uncle Bob's Car Sales provides a one-year labour and parts warranty with every car sold. It is expected that 1500 cars will be sold during the year. Past records show that about 6% of cars require warranty repairs at an average cost of $300 per car. What is the accounting entry to record the expected warranty expense for the year?

a. DR Provision for warranties $27 000; CR Bank $27 000

b. No entry is required

c. DR Provision for warranties $27 000; CR Warranty expense $27 000

d. DR Warranty expense $27 000; CR Provision for warranties $27 000

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

28. Hastings Star Company estimates that the amount of monthly salaries on which four weeks annual leave is payable is $83 200. What is the correct accounting entry to accrue annual leave at the end of the month?

a. DR Annual leave payable $6 400; CR Annual leave expense $6 400

b. DR Annual leave payable $6 400; CR Bank $6 400

c. No accounting entry is required

d. DR Annual leave expense $6 400; CR Annual leave payable $6 400

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them
Feedback: Annual leave expense = $6400 ($83 200 x 4/52).

29. Which statement relating to annual leave under Australian awards is incorrect?

a. The entitlement to annual leave accrues to an employee on a day-to-day basis throughout the year.

b. The entry to recognise annual leave each month is a debit to annual leave expense and a credit to bank.

c. Employees are normally entitled to four weeks paid annual leave per annum.

d. Employees are entitled to be paid pro-rata for annual leave not taken on termination of employment.

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them

30. Which of the following is not part of the net pay calculation?

a. Workers compensation insurance

b. Overtime pay

c. Bonus

d. Uniform/clothing allowance

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them

31. What type of accounts are:
I. Warranty expense; and
II. Provision for warranties

a. I. Expense; II. Liability

b. I. Expense; II Asset

c. I. Liability; II. Expense

d. I. Expense; II. Equity

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

32. Which statement relating to workers' compensation insurance is incorrect?

a. The premium is based on a percentage of the wages and salaries bill for the coming year.

b. When workers' compensation insurance is paid in advance, the journal entry is: DR Prepaid workers' compensation insurance; CR Bank.

c. It is compulsory for all employers to take out workers' compensation insurance.

d. The percentage rate of premium is the same rate for all employers.

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

33. T. Bailey's regular and overtime pay for the week ending 25 February was $850. Amounts were deducted for: income tax $113.70, union fees $5 and loan repayments of $50. T. Bailey's employer contributes 9.5% of his gross pay to a superannuation fund on his behalf. What is T. Bailey's net take home pay for the week?

a. $681.30

b. $600.55

c. $736.30

d. $850.00

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.
Feedback: $850 - $113.70 - $5 - $50

34. Which of the following statements in relation to IAS 19/AASB 119 Employee Benefits is not true?

a. Wages and salaries, annual leave and sick leave are to be reported at their nominal amounts.

b. The principles for recognition of employee benefits as expenses or liabilities are consistent with those in the Conceptual Framework.

c. Employee benefits include wages and salaries, non-monetary fringe benefits, annual leave and superannuation.

d. The controls that need to be provided when operating a payroll system are outlined.

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them

35. Cross Stitch Pty Ltd made the following journal entry to accrue payroll for the week ended 14 February.

(I) What was the amount of gross salaries earned by the employees of Cross Stitch Pty Ltd for the week; and (II) how much cash will be paid to them for salaries for the week?

a. (I) $155 000, (II) $155 000

b. (I) $280 000, (II) $280 000

c. (I) $155 000, (II) $280 000

d. (I) $280 000, (II) $155 000

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them

36. Which of the following items is not normally a payroll ancillary cost for an employer in Australia?

a. Long-service leave

b. Medical and hospital insurance

c. Workers' compensation insurance

d. Annual leave

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

37. Colllins Pty Ltd made this journal entry to accrue payroll for the week ended 28 February 2022:

The cash payable to Collins Pty Ltd's employees for the week is:

a. $64 300

b. $97 000

c. $63 800

d. $73 500

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them

38. Which statement relating to workers' compensation insurance is incorrect?

a. It is mandatory for all employers to obtain this cover.

b. It relates to an insurance scheme, imposed by law, whereby the employer purchases insurance which may be used to compensate employees for job related injuries and loss of wages.

c. The premium is deducted from employees' salaries and wages.

d. The premium is based on a percentage of the total wages and salaries bill for the coming year.

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

39. Under Australian awards, which statement relating to annual leave is correct?

a. Employees are entitled to be paid pro-rata for annual leave not taken if their employment terminates.

b. Employees are generally entitled to five weeks paid annual leave a year.

c. An employee is not entitled to annual leave until he/she has worked with the same employer for a minimum of twelve months.

d. Annual leave is only recognised in the financial statements when it is actually paid to an employee.

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

40. True Blue Retailers provides a one year labour and parts warranty with every appliance sold. At the beginning of 2023, the provision to cover warranty claims had a balance of $9 000. On 30 April 2023, $1300 was paid out for repairs on appliances under warranty. The correct accounting entry to record the payment of the claims is:

a. DR Provision for warranties $1300; CR Bank $1300

b. DR Provision for warranties $1300; CR Warranty expense $1300

c. DR Warranty expense $1300; CR Provision for warranties $1300

d. DR Warranty expense $1300; CR Bank $1300

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them

41. In relation to long-service leave, which of the following statements are correct?
I. The entry to accrue long-service leave is:
DR Long-service leave expense; CR Provision for long-service leave.
II. The leave is paid at the rate of pay applicable when the leave is taken.
III. Employees only starts to accrue long service leave after being employed for a predetermined length of time (often 10 years).

a. None of the other options

b. II and III only

c. I and II only

d. I, II and III

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.
Feedback: Employees accrue long service leave from the beginning of employment.

42. What types of accounts are:
I. GST payable; and
II. GST receivable.

a. I. Liability; II. Negative liability

b. I. Asset; II. Liability

c. I. Liability; II. Asset

d. I. Negative liability; II. Liability

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

43. Which statement in relation to payroll ancillary costs is incorrect?

a. Examples of payroll ancillary costs are annual leave, sick leave and long-service leave.

b. Payroll ancillary costs equal gross wages less deductions.

c. Payroll ancillary costs are employee benefits set down in various awards and contracts in addition to benefits relating directly to hours worked.

d. Workers compensation insurance is a payroll ancillary cost not actually paid to employees but paid on their behalf.

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

44. Claire had previously purchased inventory from Jamie for $20 000. On 1 August Claire gave Jamie a 60-day bill of exchange to cover the amount of the account payable plus interest at 10% p.a. The correct accounting entry in Claire's books to record the settlement of the bill at maturity is:

a. DR Bills payable $20 000; CR Bank $20 000

b. DR Bills payable $20 329; DR Interest expense $329; CR Bank $20 329; CR Unexpired interest $329

c. DR Bills payable $19 671; DR Interest expense $329; CR Bank $20 000

d. DR Bills payable $20 329; CR Interest expense $329; CR Bank $20 000.

General Feedback:

Learning objective 16.5: explain the nature of the major categories of current liabilities, and how to account for them.

45. is an arrangement whereby the terms and conditions of a debt are avoided or defeated.

a. Collateralising.

b. Obligating.

c. Discounting.

d. Defeasance.

General Feedback:

Learning objective 16.6: explain the nature of the major categories of non-current liabilities and how to account for them.

46. Which of the following is a disadvantage to shareholders of using long-term debt rather than equity?

a. Interest payments must be made on time regardless of a reduction in profitability.

b. Interest is tax deductible.

c. Lenders do not share in excess profits.

d. Lenders do not have voting rights.

General Feedback:

Learning objective 16.6: explain the nature of the major categories of non-current liabilities and how to account for them.

47. A $100 debenture quoted at 96 is said to:

a. sell at $4 below its market value.

b. sell at par.

c. sell at a premium.

d. sell at a discount

General Feedback:

Learning objective 16.6: explain the nature of the major categories of non-current liabilities and how to account for them.

48. Debentures may be:
I. unsecured.
II. secured by a floating charge over assets.
III. secured by a specific charge over particular assets.

a. None of the other options

b. I only

c. I, II and III

d. II and III only

General Feedback:

Learning objective 16.6: explain the nature of the major categories of non-current liabilities and how to account for them.

49. Which of the following statements concerning debentures is incorrect?

a. The division of debenture borrowings into $100 or $50 units allows many small investors to participate in the issue.

b. An issue of debentures to the public must be accompanied by a prospectus.

c. A trustee, such as a bank or an insurance company, must be appointed to protect the rights of the debenture holders.

d. The market value of debentures is always the same as their face value.

General Feedback:

Learning objective 16.6: explain the nature of the major categories of non-current liabilities and how to account for them.

50. A liability where the borrowings are from many investors, representing a written promise to pay a principal amount at a specific time, as well as interest on the principal at a specific rate per period, is known as:

a. defeasance.

b. collateral.

c. a sinking fund.

d. a debenture.

General Feedback:

Learning objective 16.6: explain the nature of the major categories of non-current liabilities and how to account for them.

51. From the point of view of the business, which of the following is an advantage of using long-term debt rather than equity in financing?
I. Interest is tax deductible.
II. It does not dilute the control of existing owners.
III. Creditors do not share in any excess profits of the entity.
IV. Interest payments are a fixed commitment regardless of profits.

a. I, II, III

b. I, IV

c. I, III

d. I, II, III, IV

General Feedback:

Learning objective 16.6: explain the nature of the major categories of non-current liabilities and how to account for them.

52. Tassel Pty Ltd has a current ratio of 2.5:1 and current liabilities of $10 000. If Tassel has $10 000 of inventory, the quick ratio is:

a. 2.33 to 1

b. 2.00 to 1

c. 1.50 to 1

d. 2.25 to 1

General Feedback:

Learning objective 16.7: analyse liabilities for decision-making purposes.
Feedback: Current assets are $10 000 × 2.5 = $25 000. Quick assets are $25 000 - $10 000 = $15 000, therefore the quick ratio is $15 000/$10 000 = 1.5:1

53. Which of the following ratios are used to evaluate long-term financial stability?
I. Debt ratio
II. Current ratio
III. Equity ratio
IV. Profit margin
V. Quick ratio

a. I, II, III, IV and IV

b. II, III and IV

c. I and III

d. II and V

General Feedback:

Learning objective 16.7: analyse liabilities for decision-making purposes.

54. A capitalisation ratio of 4:1 means:

a. debt is 25% equity is 75%.

b. debt is one fifth of equity.

c. equity is one fifth of debt.

d. debt is 75% equity is 25%.

General Feedback:

Learning objective 16.7: analyse liabilities for decision-making purposes.

55. Total liabilities divided by total assets is the formula to calculate an entity's:

a. Equity ratio

b. Debt ratio

c. Capitalisation ratio

d. Current ratio

General Feedback:

Learning objective 16.7: analyse liabilities for decision-making purposes.

56. A capitalisation ratio of 2:1 compared to 2.5:1 means:

a. a higher level of equity.

b. a greater dependency on debt..

c. a lower level of gearing.

d. a lesser dependency on debt

General Feedback:

Learning objective 16.7: analyse liabilities for decision-making purposes.

57. If the debt ratio is 20%, the equity ratio is:

a. 80%.

b. unable to be calculated.

c. 5:1.

d. 20%.

General Feedback:

Learning objective 16.7: analyse liabilities for decision-making purposes.

59. Brass Ltd's statement of financial position at year-end consists of:
Current assets $420 000
Non-current assets 330 000
Current liabilities 70 000
Non-current liabilities 350 000
Share capital 150 000
Retained earnings 210 000
The debt ratio is:

a. 56%.

b. 48%.

c. 100%.

d. 86%.

General Feedback:

Learning objective 16.7: analyse liabilities for decision-making purposes.
Feedback: ($70 000 + $350 000)/ [$420 000 + $330 000]