CHAPTER 1:Summary

Borja,Gad Daniel V.
● An obligation is either (a) legal obligation (arising from contacts or law) or (b) constructive
obligation (arising from actions that create a valid expectation on
others that the entity will a accept and discharge certain responsibilities).
● Financial liabilities include contractual obligations to deliver cash or to exchange financial
instruments under conditions that are potentially unfavorable.
● Financial liabilities are classified as FVPL or amortized cost.
● Reclassification of financial liabilities is prohibited.
● Financial liabilities are initially measured at fair value minus transaction costs, except FVPL
liabilities in which the transaction costs are expensed immediately.
● A liability is classified as current if: (a) it is expected to be settled within the normal operatiA
liability is classified as current if: (a) it is expected to be settled within the normal operating cycle;
(b) it is held primarily for the purpose of trading; © it is to be settled within 1 year; or (d) the entity
does not have an unconditional right to defer settlement of the liability for at least twelve months
after the reporting period.
● A currently maturing obligation is presented as current. Only on the following instances would
a currently maturing obligation is presented as noncurrent: (1) refinancing is completed as of
the end of reporting period, (2) refinancing after the end of reporting period but before authorization of financial statements
for issue is at the discretion of the entity, and (3) grace period is received as of end of reporting period to rectify breach of
loan covenant ending at least twelve months after the end of reporting period.
● Deferred tax liabilities are always presented as noncurrent when an entity presents a classified statement of financial
position.
● Share (stock) dividends payable are not liabilities but rather equity, i.e., an
addition to share capital.
PROBLEM 1: TRUE OR FALSE
FALSE 1. A liability exists only if the party to whom the obligation is owed is specifically identified.
FALSE 2. Legal obligations arise only from law.
FALSE 3. A long-term debt that is maturing within 12 months from the end of the reporting period is a
current liability.
FALSE 4. Financial liabilities other than FVPL liabilities are initially measured at fair value plus
transaction costs.
TRUE 5. Amortized cost financial liabilities are subsequently measured at the present value of the
cash outflows from the instrument.
TRUE 6. Financial liabilities may be subsequently reclassified between the amortized cost and
fair value measurement categories.
FALSE 7. Trade payables and other liabilities that are part of an entity's working capital may
be
presented as current liabilities even if they are expected to be settled beyond one year.
FALSE 8. According to PAS 1, a currently maturing debt that the entity's management intends
to
refinance is presented as noncurrent.
TRUE 9. According to PFRS 15, if an entity expects that a portion of gift certificates sold will
not
be redeemed, the entity recognizes the expected breakage amount as revenue in proportion
to
the pattern of rights exercised by customers.
TRUE 10. Unearned revenue is revenue that is earned but not yet collected.
PROBLEM 2 : MULTIPLE CHOICE-THEORY
1. Which of the following is not one of the aspects of the definition of a liability under the Conceptual Framework?
a. Obligation
b. Transfer of an economic resource
c. Present obligation as a result of past events
d. Probable outflow of economic benefits.
2. Which of the following would most likely not give rise to a liability?
a. An irrevocable commitment becomes purchase burdensome.
b. Earning of taxable income.
c. Signing an employment contract.
d. Sale of product with implied warranty.
3. Entity A enters into an executory contract. Entity A appropriately did not recognize any asset or liability from the contract.
Which of the following statements is correct?
a. If Entity A performs its obligation first, Entity A shall
recognize an asset.
b. If Entity A performs its obligation first, Entity A shall
recognize a liability.
c. If the counterparty performs its obligation first, Entity
A shall recognize an asset.
d. Entity A should recognize a combined asset and
liability upon signing the contract.
4. According to PFRS 9, when should an entity recognize a financial liability?
a. When the instrument imposes probable outflows of economic benefits that can be measured reliably.
b. When the entity becomes a party to the contractual provisions of the instrument.
c. Upon entering into the contract even if the contract is still executory.
d. Any of these as a matter of an accounting policy choice.
5. Which of the following liabilities is a financial liability?
a. Advances from customers
b. A constructive obligation
c. Callable preference shares issued
d. An obligation to deliver a variable number of own shares worth
a fixed amount of cash.
6. According to PFRS 9, financial liabilities are classified as
a. FVPL or amortized cost.
b. FVPL, FVOCI or amortized cost.
c. FVPL or FVOCI.
d. none of these
7. Financial liabilities that are classified as amortized cost are subsequently measured at
a. fair value with changes in fair value recognized in profit or loss.
b. fair value with changes in fair value recognized in other comprehensive income.
c. partly (a) and partly (b) depending on the change in the instrument's credit risk.
d. the present value of the remaining cash flows of the instrument, discounted at the original effective
interest rate.
8. According to PAS 1, which of the following statements is correct regarding the refinancing of long-term
obligations?
a. A currently maturing obligation is classified as current even if a refinancing agreement to reschedule
payments on a long-term basis is completed after the reporting period and before the financial statements
are authorized for issue.
b. A currently maturing obligation is classified as current if a refinancing agreement to reschedule
payments on a long term basis is completed after the reporting period and before the financial statements
are authorized for issue.
c. A currently maturing obligation is always classified as a current liability, without exception.
9. Which of the following is a trade payable?
a. Income tax payable
b. Note payable issued in exchange for inventories
c. Dividend payable
d. Short-term bank loan
10. Which of the following is incorrect regarding the accounting for gift certificates under PFRS 15?
a. The entity recognizes a contract liability when it sells
gift certificates.
b. The entity derecognizes the contract liability and
recognizes revenue when customers use gift
certificates
c. The entity recognizes revenue for the full amount of
expected breakage.
d. If the entity expects that a portion of the gift
certificates sold will not be redeemed, the entity
recognizes the expected breakage amount as
revenue in proportion to the pattern of rights
exercised by the customer.
PROBLEM 2 ANSWERS:
1. D
2. D
3. A
4. B
5. D
6. A
7. A
8. A
9. C
10. A