Chapter 5

Question 1

The primary difference between IAS 37, and U.S. GAAP concerning the treatment of contingent liabilities pertains to:

A. definition of terms.

B. measurement.

C. classification on the balance sheet.

D. disclosure of relevant information.

Answer 1

A. definition of terms.

Question 2

The term “provision” as it is used in IAS 37, is most closely related to what term in U.S. GAAP?

A. Contingent liability, where the outflow of resources is “remote.”

B. Contingent liability, where the outflow of resources is “probable.”

C. Current liability, where the outflow is difficult to measure.

D. Reserve for bad debt, where the amount recoverable is “uncertain.”

Answer 2

B. Contingent liability, where the outflow of resources is “probable.”

Question 3

Under IAS 37, how are contingent liabilities treated in the financial statements?

A. IAS 37 does not address contingent liabilities.

B. They are recorded as current liabilities if the amount is reasonably measured.

C. They are disclosed in the notes to the financial statements when there is more than a remote possibility of an outflow of resources.

D. They are not disclosed.

Answer 3

C. They are disclosed in the notes to the financial statements when there is more than a remote possibility of an outflow of resources.

Question 4

What is a “contingent asset?”

A. There is no such thing, in IASB standards, as a “contingent asset.”

B. This is an asset that has been put up as collateral against a loan.

C. This is a possible inflow of resources arising from a future activity.

D. It is a probable asset, arising from past events, whose existence is yet to be confirmed definitively by a future event.

Answer 4

D. It is a probable asset, arising from past events, whose existence is yet to be confirmed definitively by a future event.

Question 5

According to IAS 37, how should contingent assets be recognized?

A. They should be disclosed in the notes to the financial statements if the inflow of resources is probable.

B. They should be recognized like any other asset, with a debit to “contingent assets.”

C. They should not be disclosed anywhere in the financial statements due to their uncertainty.

D. They should only be disclosed in the notes to the financial statements if the inflows of resources are virtually certain.

Answer 5

A. They should be disclosed in the notes to the financial statements if the inflow of resources is probable.

Question 6

Under IAS 37, inflows of resources that are “virtually certain” to be received should be:

A. disclosed as contingent assets in the notes to the financial statements.

B. recognized as assets.

C. undisclosed until management is absolutely certain that resources will be received.

D. reported only in the cash flow statement.

Answer 6

B. recognized as assets.

Question 7

Why is it difficult to compare IAS 18, Revenue, to U.S. GAAP?

A. The IASB definition of revenue is very complicated, whereas the definition of revenue under U.S. GAAP is straightforward.

B. Revenue is not defined under U.S. GAAP.

C. There is no single standard in U.S. GAAP that deals solely with revenue.

D. Under U.S. GAAP, revenue is defined in terms of cash, whereas IAS 18 defines revenue in terms of a variety of resources.

Answer 7

C. There is no single standard in U.S. GAAP that deals solely with revenue.

Question 8

How does U.S. GAAP require the prior service cost related to retirees to be recognized?

A. Amortize over the average remaining working lives of active employees

B. Recognize immediately

C. Don’t recognize at all

D. Amortize over remaining expected life of the retirees

Answer 8

D. Amortize over remaining expected life of the retirees

Question 9

How should stock options be accounted for under IASB standard on stock options (IFRS 2)?

A. Since their value is not determinable until a future date, they are not recorded, but only disclosed in the notes to the financial statements.

B. A compensation expense is recorded based on the value of the options expected to vest as of the date the options are granted.

C. An expense is recorded only if a market value for the options exists on the date the options are granted.

D. The options are recorded as a liability for the value of the stock at the exercise date.

Answer 9

B. A compensation expense is recorded based on the value of the options expected to vest as of the date the options are granted.

Question 10

Under IAS 1, Presentation of Financial Statements, which of the following is NOT a criterion in the definition of a current liability?

A. It is a liability that is expected to be settled in an entity’s normal operating cycle.

B. It is a liability primarily held for the purpose of trading.

C. It is a liability that does not have the right to defer until 18 months after the balance sheet date.

D. It is a liability that is expected to be settled within 12 months of the balance sheet date.

Answer 10

C. It is a liability that does not have the right to defer until 18 months after the balance sheet date.

Question 11

Which of the following represents a difference in the classification of current liabilities between IFRS and U.S. GAAP?

A. Refinanced short-term debt

B. Amounts payable on demand due to violation of debt covenants

C. Bank overdrafts

D. All of the above

Answer 11

D. All of the above

Question 12

According to IAS 37, with respect to onerous contracts, a provision should be recognized for “unavoidable costs of the contract”, which is:

A. the intrinsic value of the contract.

B. the lower of cost or market value of the contract.

C. the lower of cost of fulfillment or the penalty from non-fulfillment of the contract.

D. None of the above

Answer 12

C. the lower of cost of fulfillment or the penalty from non-fulfillment of the contract.

Question 13

Under IAS 19, Employee Benefits, which of the following benefits are covered?

A. Compensated absences and bonuses

B. Post-employment benefits

C. Deferred compensation and disability benefits

D. All of the above

Answer 13

D. All of the above

Question 14

Which of the following statements is true of IAS 19?

A. It establishes guidance for measuring onerous contract.

B. It requires all past service costs to be recognized in net income in a subsequent period in which the benefit plan is changed.

C. Its revised version became effective in the year 2013.

D. It covers all employee benefits including share-based compensation.

Answer 14

C. Its revised version became effective in the year 2013.

Question 15

Zenith Company, a calendar-year entity, amends its defined benefit pension plan on January 1, 2013 and must recognize the increase in past service costs of its vested and non-vested employees as of that date in the calculation of its net 2013 pension expense (or revenue). The pertinent facts as of January 1, 2013 are:

(DON’T HAVE NUMBERS)

Calculate the past service costs included in 2013 net pension expense (or revenue) under IAS 19.

A. $5,100

B. $5,400

C. $600

D. $7,000

Answer 15

D. $7,000

Question 16

Zenith Company, a calendar-year entity, amends its defined benefit pension plan on January 1, 2013 and must recognize the increase in past service costs of its vested and non-vested employees as of that date in the calculation of its net 2013 pension expense (or revenue). The pertinent facts as of January 1, 2013 are:

(DON’T HAVE NUMBERS)

Calculate the past service costs included in 2013 net pension expense (or revenue) under U.S GAAP.

A. $5,100

B. $5,400

C. $600

D. $7,000

Answer 16

C. $600

Question 17

Which of the following is a difference between IAS 37 and U.S. GAAP with respect to restructuring provisions?

A. U.S. GAAP does not allow recognition of a restructuring provision until a liability has been incurred.

B. There is no difference between IAS 37 and U.S. GAAP with respect to restructuring provisions.

C. IAS 37 does not allow recognition of a restructuring provision until a liability has been incurred.

D. A restructuring provision and related loss is more likely to occur later under IAS 37 than under U.S. GAAP.

Answer 17

A. U.S. GAAP does not allow recognition of a restructuring provision until a liability has been incurred.

Question 18

Which of the following statements is true of the treatment of actuarial gains and losses under IFRS and U.S. GAAP?

A. IFRS requires the disclosure of actuarial gains and losses in the notes to financial statements.

B. IFRS requires immediate recognition of actuarial gains and losses in net income.

C. U.S. GAAP allows a choice between immediate recognition in other comprehensive income or in net income.

D. U.S. GAAP requires the actuarial gains and losses to be recognized immediately through other comprehensive income.

Answer 18

C. U.S. GAAP allows a choice between immediate recognition in other comprehensive income or in net income.

Question 19

With respect to post-employment medical benefits, U.S. GAAP:

A. does not recognize the concept of post-employment medical benefits.

B. has considerably less guidance than IAS 19.

C. follows the guidance of IAS 19.

D. has considerably more guidance than IAS 19.

Answer 19

D. has considerably more guidance than IAS 19.

Question 20

Which of the following is NOT a share-based payment transaction under IFRS 2?

A. Equity-settled share-based payment

B. Cash-settled share-based payment

C. Choice-of-settlement share-based payment

D. All of the above are share-based payment transactions under IFRS 2.

Answer 20

D. All of the above are share-based payment transactions under IFRS 2.

Question 21

Under IFRS 2, Share-based Payment, what approach is used to account for the transaction?

A. Comparable transaction approach

B. Fair value approach

C. Market approach

D. Notional value approach

Answer 21

B. Fair value approach

Question 22

Under both IFRS and U.S. GAAP, in an equity-settled share-based payment transaction, how are such payments to non-employees measured?

A. At the cost of the goods or services received.

B. Both standards are silent as to the treatment of payments to non-employees.

C. Always the fair value of the equity instrument.

D. At the fair value of goods or services received, if a reliable determination is available—otherwise, the fair value of the equity instrument.

Answer 22

D. At the fair value of goods or services received, if a reliable determination is available—otherwise, the fair value of the equity instrument.

Question 23

Under U.S. GAAP, with respect to equity-settled share-based payments, if the fair value of the equity instrument is used, the value is determined:

A. at the earlier of the date a commitment for performance is reached or the date the services are actually completed.

B. at the date the services are actually completed.

C. at the date a commitment for performance is reached.

D. None of the above

Answer 23

A. at the earlier of the date a commitment for performance is reached or the date the services are actually completed.

Question 24

How does U.S. GAAP differ from IFRS with respect to cash-settled share-based payments?

A. U.S. GAAP always treats such payments as a liability.

B. U.S. GAAP offers the option to treat such payments as either a liability or equity.

C. IFRS and U.S. GAAP follow the same approach with respect to such payments.

D. U.S. GAAP, under certain circumstances, may treat such payments as equity.

Answer 24

D. U.S. GAAP, under certain circumstances, may treat such payments as equity.

Question 25

Under IFRS 2, with respect to cash-settled share-based payments, when an employee has received stock appreciation rights, how is the fair value of those rights measured?

A. Using the consolidation method

B. Using an option pricing model

C. Using the dividend discount approach

D. All of the above

Answer 25

B. Using an option pricing model

Question 26

Under IFRS 2, with respect to choice-of-settlement share-based payments, if it is the entity that has the right to choose between equity settlement and cash settlement, when must the entity choose the cash settlement?

A. If the supplier provides services

B. If the supplier provides goods

C. If the entity has a present obligation to settle in cash

D. The entity always has the option to choose either method.

Answer 26

C. If the entity has a present obligation to settle in cash

Question 27

Under IFRS 2, with respect to choice-of-settlement share-based payments, if the supplier chooses the cash settlement, the entity is deemed to have issued a compound financial instrument consisting of debt and equity. When cash is received, how does the supplier applies it?

A. Only against the equity portion

B. Apportioned between debt and equity based on relative fair market value of each component

C. Only against current year liabilities

D. Only against the debt portion

Answer 27

D. Only against the debt portion

Question 28

Under IAS 12, Income Taxes, which of the following issues are covered?

A. Temporary differences

B. Operating loss carry forwards

C. Tax credit carry forwards

D. All of the above

Answer 28

D. All of the above

Question 29

Under IAS 12, current and deferred taxes are measured on the basis of:

A. rates that have been enacted or substantively enacted by the balance sheet date.

B. current rates and rates anticipated when temporary differences reverse.

C. rates anticipated when temporary differences reverse.

D. rates prevailing when the entity provided goods or services.

Answer 29

A. rates that have been enacted or substantively enacted by the balance sheet date.

Question 30

Under the IASB’s exposure draft, Income Tax, how would the term “substantively enacted”, as it applies to tax laws, be determined?

A. When the affected jurisdiction has issued final regulations with respect to a tax law

B. When any future steps in the enactment process can’t change the outcome

C. When one part of a bicameral legislature has passed a tax bill

D. All of the above

Answer 30

B. When any future steps in the enactment process can’t change the outcome

Question 31

Under U.S. GAAP, a deferred tax asset must be realized when:

A. realization is probable.

B. realization is possible.

C. realization is more likely than not.

D. realization is greater than 75% likely.

Answer 31

C. realization is more likely than not.

Question 32

What is the journal entry required to recognize a deferred tax asset of $50,000?

A. Dr. Deferred Tax Asset $50,000, Cr. Income Tax Benefit $50,000

B. Dr. Deferred Tax Asset $50,000, Cr. Equity $50,000

C. Dr. Income Tax Expense $50,000, Cr. Deferred Tax Asset $50,000

D. Dr. Deferred Tax Asset $50,000, Cr. Deferred Tax Liability $50,000

Answer 32

A. Dr. Deferred Tax Asset $50,000, Cr. Income Tax Benefit $50,000

Question 33

Under IAS 12, Income Taxes, how is the relationship between a hypothetical tax expense based on statutory rates and reported tax expense based on the effective tax rate explained?

A. A numerical reconciliation between tax expense based on the statutory rate in the home country and tax expense based on the effective tax rate must be presented.

B. A numerical reconciliation between tax expense based on the weighted-average statutory rate across jurisdictions in which the company pays income taxes and tax expense based on the effective tax rate must be presented.

C. Both (A) and (B) can be acceptable explanations.

D. Neither (A) nor (B) are acceptable explanations.

Answer 33

C. Both (A) and (B) can be acceptable explanations.

Question 34

What kinds of temporary differences related to income taxes can arise under IFRS that don’t occur under U.S. GAAP?

A. Book and tax differences related to the amortization of property, plant, and equipment for book purposes and cost method for tax purposes.

B. Book and tax differences related to the calculation of impairments for book purposes with adjustment for tax purposes.

C. Book and tax differences related to the revaluation of property, plant, and equipment for book purposes and cost method for tax purposes.

D. Book and tax differences related to the calculation of contingent liability for book purposes with no like adjustment for tax purposes.

Answer 34

C. Book and tax differences related to the revaluation of property, plant, and equipment for book purposes and cost method for tax purposes.

Question 35

Under IAS 1, Presentation of Financial Statements, how must deferred taxes be classified on the balance sheet?

A. As either a current asset or a current liability

B. As always a noncurrent asset or a noncurrent liability

C. As either a current or noncurrent asset or liability based on the expected timing of realization

D. As a separately stated positive or negative component of equity

Answer 35

B. As always a noncurrent asset or a noncurrent liability

Question 36

IAS 18, Revenue, covers which types of revenues?

A. Sale of goods

B. Rendering of services

C. Interest, royalties, and dividends

D. All of the above

Answer 36

D. All of the above

Question 37

Under IAS 18, which of the following is NOT a condition that must be met in order for revenue from the sale of goods to be recognized?

A. The significant risks and rewards of ownership of the goods have been transferred to the buyer.

B. There must be a binding, written contract between the seller and the buyer.

C. The amount of revenue can be measured reliably.

D. Neither continued managerial involvement normally associated with ownership nor effective control of the goods is retained.

Answer 37

B. There must be a binding, written contract between the seller and the buyer.

Question 38

Under IAS 18, which of the following is an example of retention of significant risks and rewards by the seller?

A. The buyer has no right to rescind the purchase.

B. The seller is under no obligation for satisfactory performance not covered by normal warranties.

C. Goods are sold subject to installation, but installation is not a significant part of the contract and has not yet been completed.

D. Receipt of revenue by the seller is contingent on the buyer generating revenue through its sale of the goods.

Answer 38

D. Receipt of revenue by the seller is contingent on the buyer generating revenue through its sale of the goods.

Question 39

SilverStone Inc. supplies emission systems worth $100,000 to Horizon Enterprises. As per the terms of sale contract, SilverStone takes back all unused emission systems. Horizon estimates that 5% of the emission systems will be returned. Under IAS 18, only four out of the five conditions for recognizing revenue from the sale of goods are met as economic benefits of 95% of sale will flow to SilverStone. How much revenue should be recognized by SilverStone Inc.?

A. The recognition of the entire sale must be deferred until the fifth condition has been met.

B. $75,000 of the sales price can be currently recognized as revenue and $25,000 will be treated as a deferred revenue (liability).

C. The entire $100,000 sales price can be currently recognized since most of the conditions have been met.

D. None of the above represents a proper treatment of this sale.

Answer 39

B. $75,000 of the sales price can be currently recognized as revenue and $25,000 will be treated as a deferred revenue (liability).

Question 40

What is true about both IFRS and U.S. GAAP with respect to service contracts?

A. IFRS and U.S. GAAP both allow the use of the percentage-of-completion method.

B. Neither IFRS, nor U.S. GAAP allows the use of the percentage-of-completion method.

C. IFRS allows the use of the percentage-of-completion method while U.S. GAAP does not.

D. U.S. GAAP allows the use of the percentage-of-completion method while IFRS does not.

Answer 40

C. IFRS allows the use of the percentage-of-completion method while U.S. GAAP does not.

Question 41

Under IAS 18, when it is probable that the economic benefits of interest, royalties, and dividends will flow to the enterprise and can be measured reliably, how should revenue be recognized?

A. Interest income shall be recognized based on an effective yield basis.

B. Royalties are recognized on an accrual basis with reference to the terms of the agreement.

C. Dividends are recognized when the shareholders’ right to receive payment is established.

D. All of the above govern revenue recognition under these circumstances.

Answer 41

D. All of the above govern revenue recognition under these circumstances.

Question 42

Under a joint Exposure Draft issued by the IASB and FASB in June 2010, Revenue from Contracts with Customers, which of the following is NOT one of the steps to be applied in the recognition of revenue across a wide range of transactions and industries?

A. Identify the contract with a customer.

B. Do not separate the transaction price for separate performance obligations if the contract is a bundled contract where goods and services are not sold separately.

C. Identify the separate performance obligations in the contract.

D. Determine the transaction price.

Answer 42

B. Do not separate the transaction price for separate performance obligations if the contract is a bundled contract where goods and services are not sold separately.

Question 43

IAS 32 defines a financial instrument as:

A. the currency of a foreign country in which the enterprise does business.

B. a certified check.

C. any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

D. a recognized stock exchange.

Answer 43

C. any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Question 44

Under IAS 32, which of the following is a financial asset?

A. Investment in equity instruments accounted for under the equity method

B. Investment in special-purpose entities

C. A 30% investment in a subsidiary

D. Loans to other entities

Answer 44

D. Loans to other entities

Question 45

Under IAS 32, which of the following is a financial liability?

A. A payable

B. A bank loan

C. An intercompany loan payable

D. All of the above

Answer 45

D. All of the above

Question 46

Under IAS 32, how should an equity instrument be classified?

A. It must always be classified as equity by its very nature.

B. The entity has the option of classifying it as a liability or equity.

C. If it contains a contractual obligation that meets the definition of a financial liability, it should be classified as a liability.

D. The entity should apportion the classification between liability and equity if there is a contractual obligation that meets the definition of a financial liability.

Answer 46

C. If it contains a contractual obligation that meets the definition of a financial liability, it should be classified as a liability.

Question 47

Under U.S. GAAP, if an entity issues 4% preferred stock that gives shareholders the right to redeem the shares if the prevailing interest rates on 5-year certificates of deposit exceed 4%, how should this stock be accounted for on the books of the entity?

A. Initially as equity and then reclassified as a liability when the triggering event occurs

B. As a liability since the chances are more likely than not that the triggering event will occur

C. As equity or a liability at the option of the entity

D. As a permanent part of equity, to be debited as shares are redeemed

Answer 47

A. Initially as equity and then reclassified as a liability when the triggering event occurs

Question 48

Under IAS 39, Financial Instruments: Recognition and Measurement, which of the following is NOT a category into which a financial asset must be classified?

A. Property, plant, and equipment

B. Held-to-maturity investments

C. Loans and receivables

D. Available-for-sale financial assets

Answer 48

A. Property, plant, and equipment

Question 49

Under IAS 39, Financial Instruments: Recognition and Measurement, which of the following terms describes the removal of a financial asset or liability from the balance sheet when certain appropriate criteria have been met?

A. Decoupling

B. Extinguishment

C. Derecognition

D. Reversal

Answer 49

C. Derecognition

Question 50

Under IAS 39, under what circumstances will derecognition of a financial liability occur?

A. When the obligation has been paid

B. When the obligation has been canceled

C. When the obligation has expired

D. All of the above

Answer 50

D. All of the above

Question 51

Under U.S. GAAP, when new debt is issued for old debt:

A. extinguishment costs are deferred and amortized over the term of the new debt.

B. debt extinguishment costs are expensed as incurred.

C. modification costs are amortized over the term of the old debt.

D. old debt is not extinguished and new debt is recognized.

Answer 51

A. extinguishment costs are deferred and amortized over the term of the new debt.

Question 52

If a derivative is not designated as a hedge:

A. the change in market value must be recognized in net income when it changes.

B. the change in market value is not recognized in net income.

C. the change in fair value is not recognized in net income.

D. the change in fair value must be recognized in net income when it changes.

Answer 52

D. the change in fair value must be recognized in net income when it changes.

Question 53

Alpha Inc. has receivables from unrelated parties with a face value of $5,000.
It transfers these receivables to bank for $4,500, without recourse. It will continue to collect the receivables, depositing them in a non-interest-bearing bank account with the cash flows remitted to the bank at the end of each month. It is not allowed to sell or pledge the receivables to anyone else and is under no obligation to repurchase the receivables from bank. Which of the following is the appropriate treatment for these Accounts receivables?

A. It should show these receivables in its Balance Sheet.

B. It should amortize these receivables.

C. It should derecognize these receivables.

D. It should derecognize these receivables if it retains the interest earned on these.

Answer 53

C. It should derecognize these receivables.

Question 54

Sigma Company issued $12 million in 10 percent bonds 6 years ago currently having a carrying amount of $10.7 million. The bond agreement allows for early extinguishment by Sigma Company beginning in the current year. Sigma’s investment bank has arranged for the company to issue $10 million of new 8 percent bonds at face value to a group of investors. The proceeds will be used to extinguish the 10 percent bonds. The banking, legal, and accounting costs to execute the transaction total $200,000. The journal entry to record the debt extinguishment will include:

A. a debit to Bonds Payable—8% for $10,000,000.

B. a credit to Gain on Extinguishment of 10% Bonds for $500,000.

C. a credit to Bonds Payable—10% for $12,000,000.

D. a debit to Loss on Extinguishment of 10% Bonds for of $200,000.

Answer 54

B. a credit to Gain on Extinguishment of 10% Bonds for $500,000.