ALDERSGATE COLLEGE COURSE AUDIT II

SCHOOL OF BUSINESS AND ACCOUNTANCY

MODULE 1 LIABILITIES

1. Define liabilities.

Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular
entity to transfer assets or provide services to other entities in the future as a result of past transactions or
services.

2. What are the essential characteristics of an accounting liability?

1. Are probable, future sacrifices of economic benefits

2. Arise from present obligations (to transfer goods or provide services) to other entities
3. Result from past transactions or events.

3. Give examples of liabilities.

Notes Payable, Accounts Payable, Salaries Payable, Wages Payable, Interest Payable, Other Accrued
Expenses Payable, Income Taxes Payable, Customer Deposits, Warranty Liability, Unearned Revenues,
Bonds Payable

4. Explain the “initial measurement” of liabilities.

Under IFRS 9 all financial instruments are initially measured at fair value plus or minus, in the case of a
financial asset or financial liability not at fair value through profit or loss, transaction costs.

5. What is the meaning of “transaction costs’?

Incremental costs that are directly attributable to the acquisition or disposal of a financial asset or financial
liability. An incremental cost is one that would not have been incurred if the entity had not acquired, issued
or disposed of the financial instrument. Transaction costs include fees and commissions paid to agents,
advisers, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes
and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal
administrative or holding costs.

6. What is the meaning of “fair value” of financial liability?

The fair value is the amount that a liability is settled for a value that is fair to both the buyer and the seller.

7. Explain the “subsequent measurement” of liabilities.

There are only two categories of financial liabilities: those at fair value through profit or loss (including
trading liabilities), and other. Trading liabilities (including derivatives when they have negative fair values)
are measured at fair value. The changes in fair value are included in the net profit or loss for the period. All
other (non-trading) financial liabilities are carried at amortized cost.

8. What is the meaning of “amortized cost” of a financial liability?

The carrying amount of a financial liability carried at amortized cost is calculated as the amount to be
paid/repaid at maturity (usually the principal amount or par/face value), plus or minus any unamortized

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SCHOOL OF BUSINESS AND ACCOUNTANCY

original premium or discount, net of any origination fees and transaction costs and less principal
repayments.

9. Explain the measurement of noncurrent liabilities.

Noncurrent liabilities are carried at amortized cost

10. Explain the measurement of current liabilities.

Current liabilities are measured at fair value.

11. Explain the “fair value option” of measuring a financial liability.

IFRS 9 contains an option to designate, at initial recognition, a financial asset as measured at FVTPL if
doing so eliminates or significantly reduces an ‘accounting mismatch’ that would otherwise arise from
measuring liabilities or recognizing the gains and losses on them on different bases.

12. What are “estimated liabilities”?

An estimated liability is a debt or obligation of an unknown amount that can be reasonably estimated. In
other words, it’s a known liability that management knows exists, but there is no way of knowing the exact
amount of the liability.

13. Multiple Choice (PFRS 9)

1. An entity shall measure initially a financial liability not designated at fair value through profit loss at
C a. Fair value
b. Fair value plus directly attributable transaction costs
c. Fair value minus directly attributable transaction costs
d. Face amount
D 2. Transaction costs directly attributable to the issue of a financial liability include all of the following
except
a. Fees and commissions paid to agents
b. Levies by regulatory agencies
c. Transfer taxes and duties
d. Financing costs
D 3. The initial fair value of a financial liability is defined as the
a. Amount for which liability is paid
b. Amount for which a liability is paid in an orderly transaction
c. Amount for which a liability is paid between market participants
d. Amount for which a liability is paid in an orderly transaction between market participants at the
measurement date
C 4. After initial recognition, an entity shall measure a financial liability at
I. Amortized cost using the effective interest method
II. Fair value through profit or loss
a. I only
b. II only
c. Either I or II

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ALDERSGATE COLLEGE COURSE AUDIT II
SCHOOL OF BUSINESS AND ACCOUNTANCY

d. Neither I nor II
D 5. Which of the following statements is true in relation to the fair value option of measuring a financial
liability?
I. At initial recognition, an entity may irrevocably designate a financial liability at fair value through
profit or loss
II. The financial liability is measured at every year-end and any changes in fair value are recognized
in profit or loss
III. The interest expense on the financial liability is recognized using the effective interest rate.
a. I and II only
b. I and III only
c. II and III only
d. I, II and III

14. Multiple Choice (IAA)

1. The conceptually appropriate method of measuring a liability is to
C
a. Discount the amount of expected cash outflows that are necessary to liquidate the liability using the
market rate of interest at the date the liability was initially incurred
b. Discount the amount of expected cash outflows that are necessary to liquidate the liability using the
market rate of interest at the date of the financial statements
c. Record as liability the amount of cash that would be required to pay the liability in the ordinary
course of business-on the date of the financial statements
d. Record as liability the amount of cash actually received when a liability was incurred.
2. For a liability to exist
A a. A past transaction or event must have occurred
b. The exact. amount must be known
c. The identity of the party owed must be known
d. An obligation to pay cash in the future must exist
3. Which of the following represents a liability?
C a. The obligation to pay for goods that an entity expects to order from suppliers next year
b. The obligation to provide goods that customers have ordered and paid for during the current year
c. The obligation to pay interest on a five-year note payable that was issued the last day of the
current year
d. The obligation to distribute an entity's own shares next year as a result of a stock dividend declared
near the end of the current year
A 4. Which of the following does not meet the definition of a liability?
a. The signing of a three-year employment contract at a fixed annual salary
b. An obligation to provide goods or services in the future
c. A note payable with no specified maturity date
d. An obligation that is estimated in amount
C 5. Which of the following statements in relation to liabilities is not valid?
a. Current liabilities shall not be offset against assets that are to be applied to their liquidation.
b. Unasserted claims are never accrued because to do so would require an entity to implicitly admit
liability.
c. Commitments to make future purchases shall be accrued if losses become probable and if the
amount is reasonably measurable.
d. Estimated liabilities shall be accrued because these are known to exist and are only uncertain as to
amount.
15. Multiple Choice (IAA)
C 1. Which of the following is a characteristic of a current liability but not a noncurrent liability?
a. Unavoidable obligation
b. Present obligation that entails settlement by probable future transfer of cash, goods or services

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ALDERSGATE COLLEGE COURSE AUDIT II
SCHOOL OF BUSINESS AND ACCOUNTANCY

c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer.
d. The obligating event creating the liability has already occurred.
D 2. Which of the following is not considered a characteristic of a liability?
a. Present obligation
b. Arises from past event
c. Results in an outflow of resources
d. Liquidation is reasonably expected to require use of existing resources classified as current assets
A 3. What in the relationship between current liabilities and an operating cycle?
a. Liquidation of current liabilities is reasonably expected within the operating cycle or one year,
whichever is longer.
b. Current liabilities are the result of operating transactions.
c. Current liabilities cannot exceed the amount incurred in one operating cycle.
d. There is no relationship between the two. 
A 4. What is the relationship between present value and the concept of a liability?
a. Present value is used to measure certain liabilities
b. Present value is not used to measure liabilities
c. Present value is used to measure all liabilities
d. Present value is used to measure noncurrent liabilities
C 5. Which of the following is not an acceptable presentation of current liabilities?
a. Listing current liabilities in the order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities in the order of liquidation preference

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