Chapter 12: Liabilities

Question 1

A present obligation arising from a past event, the settlement of which is expected to result in an outflow of resources embodying economic benefits or service potential.

Answer 1

Liability

Question 3

An obligation resulting from a contract, legislation, or other operation of law.

Answer 3

Legal Obligation

Question 4

An obligation that results from an entity’s actions that create a VALID EXPECTATION from others that the entity will accept and discharge certain responsibilities.

Answer 4

Constructive Obligation

Question 5

Liability Recognition Criteria:

Answer 5

• It meets the definition of a liability.
• It is probable that there’d be an outflow of resources.
• Cost or value can be measured reliably.

Question 6

A contractual obligation to deliver cash/financial asset to another entity. It is also the obligation to exchange financial assets/liabilities with another entity under POTENTIALLY UNFAVORABLE conditions.

Answer 6

Financial Liabilities

Question 7

When is a financial liability RECOGNIZED?

Answer 7

When an entity becomes a party to the contractual provisions of the instrument.

Question 8

Initial Measurement of Financial Liabilities

Answer 8

Fair Value - Transaction Costs, except for financial liabilities for financial liabilities at FV through surplus/deficit.

Question 9

Subsequent Measurement of Financial Liabilities

Answer 9

Amortized Cost

Question 10

How to compute for the initial carrying amount of bonds?

Answer 10

Net issuance proceeds - Bond issue costs

Question 11

How to compute for the initial carrying amount of bonds?

Answer 11

Net issuance proceeds - Bond issue costs

Question 12

These are not expensed outright, but rather a deduction when determining the carrying amount of the bonds. Also, these are amortized to interest expense over the term of the bonds.

Answer 12

Bond Issue Costs

Question 13

Does the amortization of bond issue costs increases interest expense?

Answer 13

Yessir.

Question 14

Amortization is allocated to:

Answer 14

• Bond discount
• Bond issue costs

Question 15

When is a financial liability DERECOGNIZED?

Answer 15

When it is extinguished, discharged, waived, cancelled, or it expires.

Question 16

A liability of uncertain timing or amount.

Answer 16

Provision

Question 17

A provision is RECOGNIZED when:

Answer 17

When ALL the recognition criteria for a liability are met.

Question 18

If one or more of the recognition criteria are not met, the item is considered as a:

Answer 18

Contingent Liability

Question 19

A POSSIBLE obligation that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Answer 19

Contingent Liability

Question 20

A POSSIBLE asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Answer 20

Contingent Asset

Question 21

If CONTINGENT liability is PROBABLE:

Answer 21

Recognize and disclose.

Question 22

If CONTINGENT liability is POSSIBLE:

Answer 22

Disclose

Question 23

If CONTINGENT liability is REMOTE:

Answer 23

Ignore

Question 24

If a CONTINGENT asset is PROBABLE:

Answer 24

Disclose

Question 25

If a CONTINGENT asset is POSSIBLE:

Answer 25

Ignore

Question 26

If a CONTINGENT asset is REMOTE:

Answer 26

Ignore

Question 27

Measurement of Provision

Answer 27

Entity’s best estimate of the amount needed to settle the liability at the reporting date.

Question 28

If the effect of the time value of money is MATERIAL, the provision shall be measured at:

Answer 28

Present value of the settlement amount discounted at a pre-tax rate.

Question 29

Can a provision be used for things other than what was originally recognized as a provision?

Answer 29

Naur.

Question 30

No provision shall be recognized for this because such expectation indicates that certain assets used in these activities may be impaired. Thus, these assets shall be tested for impairment instead.

Answer 30

Future Operating Net Deficits

Question 31

A contract in which the unavoidable costs of settling the obligations under the contract exceed the economic benefits expected to be received from it.

Answer 31

Onerous Contract

Question 32

The obligation under an onerous contract is recognized as:

Answer 32

Provision

Question 33

A program that is planned and controlled by management, and materially changed either the scope of activities or the manner in which these activities are carried out.

Answer 33

Restructuring

Question 34

A legal obligation to restructure EXISTS if:

Answer 34

If at the reporting date, the entity has entered into a binding agreement to sell or transfer an operation.

Question 35

A constructive obligation to restructure exists if, at the reporting date, both the following are present:

Answer 35

• Detailed formal plan
• Plan is announced to those affected by it.

Question 36

Does a restructuring provision includes ONLY the direct costs?

Answer 36

Yessir.

Question 37

Does a restructuring provision includes costs associated with the ongoing activities of the entity?

Answer 37

Naur.