Instruction: Select the best answer from the choices provided.
Source: Various test banks
1. The most common type of liability is
a. One that comes into existence due to a loss contingency.
b. One that must be estimated.
c. One that comes into existence due to a gain contingency.
d. One to be paid in cash and for which the amount and timing are known.
2. Which is not a characteristic of a liability?
a. It represents a transfer of an economic resource.
b. It must be payable in cash.
c. It arises from present obligation to other entity.
d. It results from past event.
3. Classifying liabilities as either current or noncurrent helps creditors assess
a. Profitability
b. The relative risk of an entity's liabilities
c. The degree of an entity's liabilities
d. The amount of an entity's liabilities
4. Short-term obligations are reported as noncurrent if
a. The entity has a long-term line of credit.
b. The entity has tentative plan to issue long-term bonds payable.
c. The entity has the the right at the end of reporting period to defer settlement of liability for at least twelve months after
the end of reporting period.
d. The entity has the ability to refinance on a long-term basis.
5. Which situation would not require a noncurrent liability to be reported as current?
a. The long-term debt is callable by the creditor.
b. The creditor has the right to demand payment due to a contractual violation.
c. The long-term debt matures within the upcoming year.
d. All of these require the current classification.
6. Which of the following represents a liability?
a. The obligation to pay for goods that an entity expects
b. The obligation to provide goods that customers have to order from suppliers next year ordered and paid for during the
current year five-year note
c. The obligation to pay interest on a payable that was issued the last day of the year
d. The obligation to distribute an entity's own shares
7. Which does not meet the definition of a liability?
a. The signing of a an employment contract at fixed 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
8. Which of the following is a characteristic of a current liability but not a noncurrent liability?
a. Unavoidable obligation
b. Present obligation to transfer an economic resource
c. Settlement is expected within the normal operating cycle or within 12 months, whichever is longer
d. The obligating event has already occurred
9. Which is not a characteristic of a liability?
a. Present obligation
b. Arises from past event
c. Results in a transfer of economic resource
d. Liquidation is reasonably expected to require use of current asset
10. 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 current assets
d. Showing current liabilities in the order of liquidation
11. Among the short-term obligations at year-end are 90-day notes, renewable for another 90-day period. What is the
classification of the notes payable?
a. Current liabilities
b. Deferred credits
c. Noncurrent liabilities
d. Intermediate debt
12. At year-end, an entity has 120-day note payable outstanding. The entity has followed the policy of replacing the note rather
than repaying it over the last three years. The entity's treasurer says that this policy is expected to continue indefinitely, and
the arrangement is acceptable to the bank to which the note was issued. What is the proper classification of the note in the
year-end statement of financial position?
a. Dependent on the intention of management
b. Dependent on the actual ability to refinance
c. Current liability, unless specific refinancing criteria are met
d. Noncurrent liability
13. An entity had a note payable due next year. After the end of reporting period and before the issuance of the current year
financial statements, the entity issued long-term bonds payable. Proceeds from the bonds were used to repay the note
when due. How should the entity classify the note payable at current year-end?
a. Current liability with separate disclosure of the note refinancing
b. Current liability with no disclosure required
c. Noncurrent liability with separate disclosure of the note refinancing
d. Noncurrent liability with no separate disclosure required
14. An entity had a loan due for repayment in six months time but the entity had the right to defer settlement for two years later.
In which section of the statement of financial position should this loan be presented?
a. Current liability
b. Current asset
c. Noncurrent liability
d. Noncurrent asset
15. At year-end, an entity classified a note payable as current liability. Under what condition could the entity reclassify the note
payable from current to noncurrent?
a. If the entity had the intent and ability to reclassify the note before the end of reporting period.
b. If the entity had executed an agreement to refinance the note before issuance of the financial statements.
c. If the entity had the intent and ability to reclassify the note before the issuance of the financial statements.
d. If the entity had executed an agreement to refinance the note before the end of reporting period.
16. The most relevant measurement of liabilities at initial recognition should always reflect
a. The expectation of the management
b. Historical cost
c. The credit standing of the entity
d. The single most likely minimum possible amount
17. Which statement best describes the term liability?
a. An excess of equity over current assets
b. Resources to meet financial commitments when due
c. The residual interest in the assets of the entity
d. A present obligation arising from past event
18. What is the relationship between present value and 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 current liabilities .
19. If a long-term debt becomes callable due to the violation of a loan covenant
a. The debt may continue to be classified as noncurrent.
b. The debt should be reclassified as current.
c. Cash must be reserved to pay the debt.
d. Retained earnings must be restricted.
20. What is the classification of debt callable by the creditor?
a. Noncurrent liability
b. Current liability
c. Current liability if the creditor intends to call the debt within one year
d. Current liability if it is probable that the creditor will call the debt within one year
