Deck 8: Liabilities and Owners Equity

Question 1

Contingent liabilities do not meet the criteria for recognition as liabilities.

Answer 1

True

Question 2

The practice that is not based on the proprietary theory is:

A)Considering dividends as distributions of profit
B)Not considering the salaries of partners in a partnership as expenses
C)The capital maintenance principle of maintaining the physical level of operations before recognising a profit
D)The equity method of accounting for long-term investments

Answer 2

C

Question 3

It is correct that:

A)In practice the entity theory rather than the proprietary theory is the dominant theory
B)In practice both the entity and the proprietary theories are influential
C)In practice the proprietary theory rather than the entity theory is the dominant theory
D)The proprietary theory is now obsolete

Answer 3

B

Question 4

Under the entity theory the assets belong to the owners and the liabilities are the obligations of the owners.

Question 5

Liabilities are present obligations of an entity,whereas owners' equity is a residual interest or claim but not an obligation to transfer assets.

Question 6

Interpretation of the IASB (AASB)Framework suggests that a liability should cease to be recognised when assets or services have been transferred to other entities in satisfaction of the debt.

Question 7

Which of these possible methods for settling liabilities involves the outflow of assets by the entity?

A)The provision of services
B)Replacement of one obligation with another obligation
C)A creditor waiving the obligation
D)Cash payment

Question 8

The version of the accounting equation that represents the entity theory of accounting is:

A)P = A - L
B)Assets = Equities
C)A = L + P
D)None of the above

Question 9

Generally speaking accountants are more likely to record liabilities later than assets.

Question 10

An example of where fair value measurement is required subsequent to acquisition is post-employment obligations such as pensions (superannuation)under IAS 19/AASB 119.

Question 11

The Framework recognises that settlement of liabilities can occur in several ways.What is not one of those ways?

A)Cash receipt
B)Transfer of other assets
C)Replacement of the obligation with another obligation
D)Conversion of the obligation to equity

Question 12

A physical capital rather than a financial capital view is appropriate under proprietary theory.

Question 13

The Framework recommends that capital is conceptualised as the invested money or the invested purchasing power of the entity.

Question 14

Even if a liability meets the Framework definition it still should not be recognised if the amount at which the settlement will take place cannot be measured reliably.

Question 15

Under the proprietorship theory of accounting the incorrect statement(s)is/are:
I)Assets belong to the proprietor
Ii)Liabilities are the obligations of the entity
Iii)Income and expense accounts are subsidiary accounts of proprietorship
Iv)An objective of accounting is to determine the net worth of the owner

A)i,ii,iv
B)ii
C)i
D)i,ii

Question 16

The entity view of accounting was formulated in response to the shortcomings of the proprietary view concerning the separate legal status of a company.

Question 17

The IASB has decided not to treat share-based remuneration as an expense.

Question 18

A present obligation that will transfer assets from an entity in the future,exists in which of the following cases?
I)A sole proprietor takes out a loan to purchase inventory for her business
Ii)Employees' wages are owed for the previous fortnight
Iii)A company issues ordinary shares to increase its capital base

A)i,iii
B)i,ii,iii
C)ii,iii
D)i,ii

Question 19

Retained profits and share dividends represent elements of earned capital.

Question 20

Future warrantee claims should not be recorded as a liability in the balance sheet as there is no objective evidence as to the amount that will be claimed.

Question 21

'Legal rights should be the only basis of distinction between creditor and owner.' Discuss.

Question 22

The usual measurement basis allowed by the IFRS and adopted in practice for subsequent measurement of long-term borrowings in IFRS consolidated financial statements is:

A)Cost
B)Fair value
C)Amortised cost
D)Expected payments

Question 23

The statement that is true in respect of appropriations is:

A)Some appropriations are a ploy by a company to make it appear to shareholders that the amount available for dividends has been reduced.
B)Appropriations affect profit determination
C)Appropriations of retained earnings to specific reserve accounts represent particular assets
D)None of the statements are true.

Question 24

With respect to the IASB Framework's definition of a liability,and in particular the requirement for a present obligation,which of the following items would be recognised as liabilities?
I)An employee has accrued 2 months worth of long service leave with the company
Ii)An employee has fallen ill and has accrued 12 days of sick leave which she will now use
Iii)An employee has worked for the company for six years and has accrued 25 days sick leave

A)i,iii
B)i,ii,iii
C)ii,iii
D)i,ii

Question 25

Which of the following should definitely be recognised as a liability under the IASB Framework?
I)Share dividend declarations
Ii)Cash dividend declarations
Iii)Convertible notes

A)i,iii
B)ii
C)ii,iii
D)i,ii

Question 26

Which of these is a right of creditors?

A)Settlement of their claims by a given date through a transfer of assets
B)Priority over owners in settlement of their claims in the event of liquidation
C)The right to use the assets of the firm only as specified in contracts
D)All of the above

Question 27

Preference shares can have characteristics that are consistent with liabilities.These characteristics include:

A)Participation in dividends
B)Priority over ordinary shares in the return of capital
C)Voting rights
D)The claim associated with the preference share is variable

Question 28

Are preference shares debt or equity and does it matter? Discuss.

Question 29

Which of these items would not meet the definition of a liability under the IASB Framework and the current accounting standards?
I)A provision for uninsured losses
Ii)An unconditional purchase obligation
Iii)Accrued long service leave.

A)i,iii
B)i,ii,
C)i.ii,iii
D)i,

Question 30

The most commonly used measurement method for liabilities is:

A)Fair value
B)Historical cost
C)Market value
D)Replacement value

Question 31

'Since pension funds are separate legal entities,it might be presumed that unfunded commitments of the plans are not liabilities of an employer firm that pays into a fund.' J.Godfrey,et el,'Accounting Theory',7^th Ed.p.273.Explain and discuss.

Question 32

Do frequent flyer points give rise to a liability for an airline? Discuss.