Master Liabilities Accounting: Quizzes and Practice Questions

Question 1

Accounts payable represents which type of liability?

Accepted Answer

Trade payable

Answer

Loan payable

Answer

Deferred revenue

Answer

Unearned expense

Question 2

What is the accounting treatment for a liability that is extinguished before its maturity date?

Accepted Answer

Recognize a gain or loss on extinguishment

Answer

Amortize the liability over its remaining term

Answer

Derecognize the liability immediately

Answer

Suspend recognition of the liability

Question 3

What is the primary objective of IAS 37?

Accepted Answer

To establish uniform standards for recognizing, measuring, and disclosing liabilities

Answer

To minimize tax liabilities

Answer

To enhance financial performance

Answer

To provide guidance on legal compliance

Question 4

Accounts payable are classified as which type of liability?

Accepted Answer

Current liabilities

Answer

Long-term liabilities

Answer

Non-current liabilities

Answer

Contingent liabilities

Question 5

The recognition of a liability typically results in:

Accepted Answer

An increase in liabilities and a decrease in equity

Answer

A decrease in assets and an increase in equity

Answer

An increase in both assets and liabilities

Answer

A decrease in both assets and liabilities

Question 6

Journal entry to record the issuance of a note payable at face value:

Accepted Answer

Debit: Notes Payable, Credit: Cash

Answer

Debit: Cash, Credit: Notes Payable

Answer

Debit: Interest Expense, Credit: Notes Payable

Answer

Debit: Notes Payable, Credit: Accounts Payable

Question 7

When should liabilities be disclosed in financial statements, according to the concept of materiality?

Accepted Answer

When they could significantly affect the financial statements

Answer

When they are larger than a certain absolute amount

Answer

When financial reporting standards specifically require their disclosure

Answer

Never, as liabilities are always considered immaterial

Question 8

What is the primary distinction between a current liability and a non-current liability?

Accepted Answer

Current liabilities are due within one year, while non-current liabilities are due after one year.

Answer

Current liabilities are less likely to be paid than non-current liabilities.

Answer

Current liabilities require collateral, while non-current liabilities do not.

Answer

Current liabilities are reported on the balance sheet, while non-current liabilities are reported on the income statement.

Question 9

How is a deferred tax liability calculated?

Accepted Answer

As the difference between the carrying value of an asset and its tax base multiplied by the applicable tax rate.

Answer

As the difference between the tax expense for financial reporting purposes and the tax payable for tax purposes.

Answer

As the present value of future tax payments.

Answer

As the amount of income taxes that will be payable in the next fiscal year.

Question 10

What is the primary purpose of a provision for doubtful debts?

Accepted Answer

To create a reserve for potential future losses on accounts receivable.

Answer

To reduce the carrying value of accounts receivable to their estimated realizable value.

Answer

To offset the revenue recognized from sales on account.

Answer

To report the amount of bad debts expense for the period.

Question 11

What is the impact of a contingent liability on the financial statements?

Accepted Answer

It is disclosed in the notes to the financial statements.

Answer

It is recognized as a liability on the balance sheet.

Answer

It is recognized as an expense on the income statement.

Answer

It has no impact on the financial statements.

Question 12

Which of the following is a key distinction between accounting for liabilities and accounting for equity?

Accepted Answer

Liabilities represent obligations to external parties, while equity represents claims by owners.

Answer

Liabilities are recorded at their historical cost, while equity is recorded at its fair value.

Answer

Liabilities are reported on the balance sheet, while equity is reported on the income statement.

Answer

Liabilities do not affect the distribution of profits, while equity does.

Question 13

Which of the following is a type of liability that is recognized on the balance sheet if the obligation is probable and can be reliably measured?

Accepted Answer

Provision

Answer

Contingent liability

Question 14

How should a contingent liability be disclosed in the financial statements according to IFRS?

Accepted Answer

In the notes to the financial statements if the obligation is possible

Answer

On the face of the balance sheet if the obligation is probable

Question 15

What is the distinction between a current liability and a non-current liability as per IFRS?

Accepted Answer

Current liabilities are due within twelve months, while non-current liabilities are due after twelve months

Answer

Current liabilities are unsecured, while non-current liabilities are secured

Question 16

Which of the following transactions would result in an increase in liabilities?

Accepted Answer

Purchasing inventory on account

Answer

Issuing shares for cash

Question 17

Which of the following factors should be considered when estimating the amount of a provision?

Accepted Answer

The probability of occurrence and the amount of the obligation

Answer

The historical cost of the obligation

Question 18

Which of the following is a key principle in accounting for liabilities as per IFRS?

Accepted Answer

Liabilities should be recognized when they become probable and can be reliably measured

Answer

Liabilities should be recorded at their historical cost

Question 19

Which of the following is an example of a current liability?

Accepted Answer

Accounts payable

Answer

Deferred revenue

Answer

Long-term debt

Answer

Contingent liability

Question 20

what is the main advantage of using present value to measure liabilities?

Accepted Answer

It reflects the time value of money.

Answer

It simplifies the accounting process.

Answer

It provides a more conservative estimate of the liability.

Answer

It is the only method accepted by most accounting standards.

Question 21

what is the purpose of a provision?

Accepted Answer

To record a probable obligation for which the amount or timing is uncertain

Answer

To record a contingent liability that is not probable

Answer

To reduce the reported amount of an asset

Answer

To increase the reported amount of a liability

Question 22

When should a contingent liability be recognized and measured?

Accepted Answer

When it is probable and can be reasonably estimated

Answer

When it is remote and cannot be reasonably estimated

Answer

When it is possible and can be reasonably estimated

Answer

When it is certain to occur but the amount cannot be reasonably estimated

Question 23

Which account is used to initially record a liability?

Accepted Answer

Liabilities

Answer

Expenses

Answer

Equity

Answer

Revenue

Question 24

Which transaction would increase a company's liabilities?

Accepted Answer

Taking out a loan

Answer

Issuing dividends

Answer

Repaying a loan

Answer

Purchasing inventory with cash

Question 25

Which of the following is NOT a fundamental characteristic of a liability?

Accepted Answer

Its settlement is expected to result in an inflow of economic resources.

Answer

It represents an obligation to transfer economic resources in the future.

Answer

It arises from a past event that gives rise to a present obligation.

Answer

It can be reliably measured.

Question 26

Which of the following is a method for measuring the present value of a liability?

Accepted Answer

Discounted cash flow method

Answer

Amortization method

Answer

Weighted average method

Answer

Straight-line method

Question 27

Which of the following is a characteristic of a contingent liability?

Accepted Answer

It is a potential obligation that depends on a future event

Answer

It is an obligation that is certain to occur but the timing or amount is uncertain

Answer

It is an obligation that is not recognized on the balance sheet

Answer

It is a liability that is due within one year

Question 28

What is the primary purpose of a sinking fund?

Accepted Answer

To provide funds to repay a debt at maturity.

Answer

To reduce the taxable income of a company.

Answer

To invest funds for the benefit of employees.

Answer

To provide a source of liquidity in the event of an emergency.

Question 29

Identify the essential principle guiding accounting for liabilities.

Accepted Answer

Prudence

Answer

Materiality

Answer

Going concern

Answer

Consistency

Question 30

Distinguish between a current liability and a non-current liability.

Accepted Answer

Current liabilities are due within one year, whereas non-current liabilities are due after one year.

Answer

Current liabilities are uncertain, while non-current liabilities are definite.

Answer

Current liabilities appear on the balance sheet, while non-current liabilities are disclosed in the notes.

Answer

There's no distinction between current and non-current liabilities.

Question 31

State the purpose of a warranty provision.

Accepted Answer

To cover the potential costs of repairs or replacements under warranty.

Answer

To reduce taxable income.

Answer

To fund the purchase of new equipment.

Answer

To offset the cost of inventory sold.

Question 32

Explain the purpose of a notes payable.

Accepted Answer

To document a loan from a lender

Answer

To secure a loan from a lender

Answer

To provide additional information about a liability

Answer

To delay the payment of a liability

Question 33

Define a liability according to its essential characteristic.

Accepted Answer

A probable outflow of economic resources arising from a past event that creates a present obligation

Answer

A transaction or other event that has occurred

Answer

A transfer of ownership

Answer

A contingent obligation that may become a legal obligation in the future

Question 34

When should a contingent liability be recognized on the balance sheet?

Accepted Answer

When both the occurrence of the contingent event is probable and the amount of the liability can be reasonably estimated

Answer

When either the occurrence of the contingent event is probable or the amount of the liability can be reasonably estimated

Answer

When the occurrence of the contingent event is reasonably possible

Answer

Never, contingent liabilities are not recognized on the balance sheet

Question 35

How are liabilities classified based on their timing of settlement?

Accepted Answer

Current liabilities: due within one year; Non-current liabilities: due after one year

Answer

Short-term liabilities: due within 90 days; Long-term liabilities: due after 90 days

Answer

Fixed liabilities: secured by assets; Floating liabilities: not secured by assets

Answer

Operating liabilities: related to normal business operations; Financing liabilities: related to financing activities

Question 36

Identify an example of a short-term liability.

Accepted Answer

Trade accounts payable

Answer

Bonds payable

Answer

Deferred income tax liability

Answer

Long-term debt

Question 37

What is the primary purpose of an allowance for doubtful accounts?

Accepted Answer

To estimate the amount of uncollectible accounts receivable

Answer

To reduce the carrying value of accounts receivable

Answer

To create a reserve for future bad debts

Answer

To increase the net income of the company

Question 38

Which factor is irrelevant when determining the appropriate discount rate for a liability?

Accepted Answer

Expected inflation rate

Answer

Risk of the liability

Answer

Current market interest rates

Answer

Company's credit rating

Question 39

Identify a common example of a deferred income liability.

Accepted Answer

Unearned revenue

Answer

Prepaid rent

Answer

Accrued expenses payable

Answer

Short-term debt

Question 40

Which of the following is NOT a fundamental characteristic of a liability?

Accepted Answer

It is always recorded on the income statement.

Answer

It represents an obligation of an entity.

Answer

It arises from past transactions or events.

Answer

It is likely to result in an outflow of economic resources.

Question 41

What is the primary objective of accounting for liabilities?

Accepted Answer

To provide relevant information about the nature and amount of an entity's obligations.

Answer

To estimate future cash flows associated with liabilities.

Answer

To assess the risk exposure of the entity.

Answer

To allocate costs and expenses to appropriate accounting periods.

Question 42

Which of the following is an example of a current liability?

Accepted Answer

Accrued expenses

Answer

Deferred revenue

Answer

Long-term bonds payable

Answer

Capital leases

Question 43

Which of the following methods is used to determine the present value of a liability?

Accepted Answer

Discounting future cash flows using an appropriate interest rate.

Answer

Compounding future cash flows using an appropriate interest rate.

Answer

Capitalizing future cash flows over the life of the liability.

Answer

Accumulating future cash flows over the life of the liability.

Question 44

Which of the following is a key assumption underlying the going concern principle?

Accepted Answer

The entity will continue to operate in the foreseeable future.

Answer

The entity is not experiencing significant financial difficulties.

Answer

The entity's liabilities are always less than its assets.

Answer

The entity's solvency is not a concern for creditors or other stakeholders.

Question 45

Which of the following is not a fundamental characteristic of a liability?

Accepted Answer

Recognized only when incurred

Answer

Economic obligation

Answer

Uncertainty of timing or amount

Answer

Conditional upon a future event that is probable

Question 46

The primary purpose of accounting for liabilities is to:

Accepted Answer

Provide information about the financial obligations of an entity

Answer

Predict future cash flows

Answer

Maximize the entity's profit

Answer

Comply with legal requirements

Question 47

Current liabilities are defined as those financial obligations expected to be settled within:

Accepted Answer

One year or less

Answer

Two years or less

Answer

Five years or less

Answer

Ten years or less

Question 48

Which accounting method is used to allocate interest expense and present a long-term liability on the balance sheet?

Accepted Answer

Effective interest method

Answer

Straight-line method

Answer

Amortization method

Answer

Depletion method

Question 49

Contingent liabilities are disclosed in which financial statement?

Accepted Answer

Notes to the financial statements

Answer

Balance sheet

Answer

Income statement

Answer

Statement of changes in equity

Question 50

Which financial statement does NOT provide information about liabilities?

Accepted Answer

Income statement

Answer

Balance sheet

Answer

Statement of changes in equity

Answer

Cash flow statement

Question 51

Which accounting principle plays a crucial role in guiding the treatment of liabilities?

Accepted Answer

Matching principle

Answer

Historical cost principle

Answer

Going concern concept

Answer

Materiality concept

Question 52

Which of the following statements does NOT correctly describe a key characteristic of a liability?

Accepted Answer

Its existence is highly uncertain.

Answer

It represents an obligation of the entity.

Answer

It is expected to be settled by sacrificing economic resources.

Answer

It arises as a result of a past transaction or event.

Question 53

In a standard balance sheet presentation, liabilities are typically presented in which section?

Accepted Answer

Liabilities

Answer

Assets

Answer

Equity

Answer

Income Statement

Question 54

Which of the following statements accurately describes the characteristic of a liability?

Accepted Answer

An uncertain obligation that requires an outflow of resources.

Answer

A certain obligation that will not require an outflow of resources.

Answer

An obligation that is not expected to be settled within a year.

Answer

An obligation that is not recognized in the financial statements.

Question 55

According to IAS 37, what is the initial recognition criterion for a provision?

Accepted Answer

It is probable that an obligation exists.

Answer

It is possible that an obligation exists.

Answer

It is reasonably possible that an obligation exists.

Answer

It is certain that an obligation exists.

Question 56

Which of the following methods is used to measure a provision?

Accepted Answer

Expected value

Answer

Most likely amount

Answer

Historical cost

Answer

Weighted average

Question 57

What is the distinction between a current liability and a non-current liability?

Accepted Answer

Current liabilities are expected to be settled within one year, while non-current liabilities are expected to be settled after one year.

Answer

Current liabilities are expected to be settled after one year, while non-current liabilities are expected to be settled within one year.

Answer

Both current and non-current liabilities are expected to be settled within one year.

Answer

Both current and non-current liabilities are expected to be settled after one year.

Question 58

What is the primary goal of accounting for liabilities?

Accepted Answer

To disclose information about obligations that may impact an entity's financial position.

Answer

To ensure compliance with financial reporting regulations.

Answer

To minimize the likelihood of future losses.

Answer

To maximize the entity's profitability.

Question 59

How does a capital lease differ from an operating lease?

Accepted Answer

In a capital lease, ownership of the asset transfers to the lessee, whereas in an operating lease it does not.

Answer

In an operating lease, ownership of the asset transfers to the lessee, whereas in a capital lease it does not.

Answer

Both capital leases and operating leases transfer ownership of the asset to the lessee.

Answer

Neither capital leases nor operating leases transfer ownership of the asset to the lessee.

Question 60

Which of the following is NOT a characteristic of a liability, according to the International Financial Reporting Standards (IFRS)?

Accepted Answer

An uncertain outflow of resources embodying economic benefits

Answer

A present obligation of the entity

Answer

Likely to arise from past events

Answer

Control over the resource embodying the obligation is transferred from the entity

Question 61

Which of the following is a key consideration when determining the classification of a liability as current or non-current, according to IFRS?

Accepted Answer

Maturity date of obligation

Answer

Probability of settlement

Answer

Amount of the liability

Answer

Type of liability