-ToA Quizzer 10 - Provisions, Contingencies

DE LA SALLE UNIVERSITY MANILA RVR – COB DEPARTMENT OF ACCOUNTANCY REVDEVT 2nd Term AY 15-16 Theory of Accounts TOA Quizzer 10

Prof. Francis H.Villamin

IAS 37 – PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS 1.

Which is not an essential characteristic of an accounting liability? a. The liability is the present obligation of a particular entity. b. The payee to whom the obligation is owed must be identified. c. The liability arises from past event or transaction. d. The settlement of the liability requires an outflow of resources embodying economic benefits.

2.

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 amount.

3.

Estimated liabilities are disclosed in financial statements by a. a footnote to the statements. b. showing the amount among the liabilities but not extending it to the liability total. c. an appropriation of retained earnings. d. appropriately classifying them as regular liabilities in the statement of financial position.

4.

It is an existing liability of uncertain amount or uncertain timing. a. Contingent liability b. Unearned income c. Discount on note payable d. Provision

5.

A provision is recognized in the statement of financial position under which of the following requirements? I. An enterprise has a present obligation, legal or constructive, as a result of a past event. II. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. III. A reliable estimate can be made of the amount of the obligation. a. I, II and III b. II and III c. I only d. II only

6.

A provision shall be recognized as liability if it satisfies all of the following criteria, except a. The amount of the obligation can be measured reliably. b. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. c. It is possible that an outflow of resources embodying economic benefits will be required to settle the obligation. d. The entity has a present obligation as a result of a past event.

7.

A constructive obligation is an obligation I. Arising from contract, legislation or operation of law. II. That is derived from an enterprise’s action that the enterprise will accept certain responsibilities because of past practice, published policy or current statement and as a result, the enterprise has created a valid expectation in other parties that it will discharge those responsibilities. a. Both I and II b. Neither I nor II c. I only d. II only

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8.

Liabilities are present obligations, which represent a. both legal and constructive obligations b. neither legal nor constructive obligations c. legal obligations only d. constructive obligations only

9.

It is an event that creates a legal or constructive obligation because the enterprise has no other reali stic alternative but to settle the obligation. a. Recognition event b. Adjusting event c. Non-adjusting event d. Obligating event

10.

What amount is accrued as a provision? a. Minimum b. Maximum c. Median d. Best estimate

11.

Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the range to be used is the a. minimum b. maximum c. midpoint d. summation of the minimum and maximum

12.

It is the statistical method of estimating a provision which means that where the provision being measured involves a large population of items, the obligation is estimated by “weighting” all possible outcomes by their associated possibilities. a. Extrapolation b. Weighted average c. Simple average d. Expected value

13.

Which statement is incorrect when a provision is expected to be reimbursed by another party? a. The expense relating to the provision may be presented net of the reimbursement. b. The amount of reimbursement may exceed the provision. c. The reimbursement shall not exceed the provision. d. The reimbursement shall be recognized when it is virtually certain that the reimbursement will be received if the entity settles the provision.

14.

Which statement is not valid in the measurement of a provision? a. Gains from the expected disposal of an asset shall be taken into account. b. The risks and uncertainties that inevitably surround many events and circumstances shall be considered in making the best estimate. c. The amount of the provision should be the present value of the expenditure expected to settle the obligation. d. Future events that may affect the settlement of a provision shall be reflected in the provision where there is objective evidence that the future events will occur.

15.

Which is not correct about a provision? a. If an entity has an onerous contract, the present obligation under the contract shall be measured as a provision. b. A provision shall be used only for expenditures for which the provision was originally recognized. c. Provisions shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate. d. Provisions shall be recognized for future operating losses.

16.

Which of the following is within the scope of IAS 37? a. Financial instruments carried at fair value. b. Future payments under employment contracts. c. Future payments on vacant leasehold premises. d. No insurance company’s policy liability.

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17.

According to IAS 37, for which of the following should a provision be recognized? a. Future operating losses b. Obligations under insurance contracts c. Reduction in fair value of financial instruments d. Obligation for plant decommissioning costs

18.

Provisions shall be recognized for all of the following, except a. cleaning-up costs of contaminated land when an oil company has a published policy that it will undertake to clean up all contamination that it causes. b. restructuring costs after a binding sale agreement has been signed. c. rectification costs relating to effective products already sold. d. future refurbishment costs due to introduction of a new computer system.

19.

Lush Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2017. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lush recall all cans of this paint sold in the last si x months. The management of Lush estimates that this recall would cost P800,000. What accounting recognition, if any, should be accorded this situation? a. No recognition. b. Note disclosure only. c. Operating expense of P800,000 and liability of P800,000. d. Appropriation of retained earnings of P800,000.

20.

It is a contract in which the unavoidable cost of meeting the obligations under the contract exceed the economic benefits to be received under the contract. a. Onerous contract b. Loss contract c. Take and pay contract d. Unfavorable contract

21.

The unavoidable costs under an onerous contract is described as the least net cost of exiting from the contract, that is represented by a. cost of fulfilling the contract. b. penalty arising from failure to fulfill the contract. c. lower of the cost of fulfilling the contract or the penalty of arising from failure to fulfill the contract. d. higher of the cost of fulfilling the contract or the penalty arising from failure to fulfill the contract.

22.

Restructuring is a. a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. b. a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. c. a program that is planned and controlled by management, and materially changes the scope of a business undertaken by an entity or the manner in which that business is conducted. d. purchase or sale of under a contract whose terms require delivery of the asset within the time frame established generally by regulation or convention in the marketplace concerned.

23.

A provision for restructuring is required when I. The entity has a detailed plan for restructuring. II. The entity has raised a valid expectation in the minds of those affected that the entity will carry out the restructuring by announcing its main features to those affected by it. a. Both I and II b. Neither I nor II c. I only d. II only

24.

A contingent liability is a I. Possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more future uncertain events not wholly within the control of the entity. II. Present obligation that arises from past event and it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured reliably.

TOA Quizzer 10 a. b. c. d.

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Both I and II Neither I nor II I only II only

25.

Which of the following should be disclosed in the financial statements as a contingent liability? a. The entity has accepted a liability prior to the year-end for unfair dismissal of an employee and is to pay damages. b. The entity has received a letter from a supplier complaining about a past unpaid invoice. c. The entity is involved in a legal case, which it may possibly lose, although this is not probable. d. The entity has not yet paid certain claims under sales warranties.

26.

Which of the following statements in relation to a contingent liability is true? I. An obligation as a result of the entity creating a valid expectation that it will discharge its responsibilities is a contingent liability. II. A present obligation that arises from past events but cannot be reliably measured is a contingent liability. a. Both I and II b. Neither I nor II c. I only d. II only

27.

It is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. a. Contingent asset b. Goodwill c. Intangible asset d. Other asset

28.

A contingent asset is a. disclosed where an inflow of economic benefits is probable. b. disclosed where an inflow of economic benefits is possible. c. recognized in the financial statements because this represents the recognition of income that has been realized. d. contingent if the realization of income is virtually certain.

29.

Jose Solis is a farmer who own land, which borders on the right-of-way of the Eastern Railroad. On August 10, 2017, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Solis had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights, which the Railroad may have in the land to Solis in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Solis appears inclined to accept the Railroad’s offer. Railroad’s 2017 financial statements should include the following related to the incident a. Recognition of a loss and creation of a liability for the value of the land. b. Recognition of a loss only. c. Creation of a liability only. d. Disclosure in note form only.

30.

A competitor has sued our entity for the unauthorized use of its patented technology. The amount that the entity may be required to pay to the competitor if the competitor succeeds in the lawsuit is determinable with reliability, and according to the legal counsel it is less than probable but more than remote that an outflow of the resources would be needed to meet the obligation. The entity that was sued should, at year-end, a. recognize a provision for this possible obligation. b. make a disclosure of the possible obligation in the footnotes to the financial statements. c. make no provision or disclosure and wait until the lawsuit is finally decided and then expense the amount on settlement, if any. d. set aside, as an appropriation, a contingency reserve, an amount based on the best estimate of the possible liability.