Chapter 12 - Liabilities

Question 1

What is a liability?

Answer 1

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

Question 2

What is a constructive obligation?

Answer 2

May be established by an entity having established or published policies and practices which creates a valid expectation that those policies or practices will be upheld

Question 3

What is a legal obligation?

Answer 3

One enforced by operation of law

Question 4

What is a current liability?

Answer 4

Liabilities which are payable within 12 months of reporting date e.g payables, bank overdraft

Question 5

What is a non current liability?

Answer 5

Long term liability payable more than 12 months after the reporting period e.g long term bank loan

Question 6

What is the double entry for a purchase of goods for cash?

Answer 6

Dr purchases/ expenses
Cr cash

Question 7

What is the double entry for a purchase made on credit?

Answer 7

Dr Purchases/ expenses
Cr payables

Question 8

What is the double entry when a credit customer makes a payment?

Answer 8

Dr payables
Cr cash

Question 9

What is a provision?

Answer 9

A liability of uncertain timing or amount

Question 10

What is the 3 criteria to be met before a provision can be recognised?

Answer 10

1) there must be a present obligation that exists as the result of past event
2) there will be a probable transfer of economic benefits
3) there must be a reliable estimate of the potential cost

Question 11

What is the double entry for a provision?

Answer 11

Dr expenses
Cr provision

Question 12

What happens if a provision is not recognised in the financial statements?

Answer 12

Need to be disclosed as a contingent liability in the financial statements

Question 13

How does IAS 37 s10 define a contingent liability?

Answer 13

A possible obligation that arises from past events or
A probable obligation that arises from past events but the amount of the obligation cannot be measure with sufficient reliability

Question 14

How does IAS 37 s10 define a contingent asset?

Answer 14

A possible asset that rises from past events and whole 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

Question 15

If probability of occurrences is virtually certain >95% what is the treatment for contingent liabilities and assets?

Answer 15

C.I - provide
C.A - recognise

Question 16

If probability of occurrences is probable 51%- 95% what is the treatment for contingent liabilities and assets?

Answer 16

C.I - provide
C.A - disclosure note

Question 17

If probability of occurrences is possible 5%- 50% what is the treatment for contingent liabilities and assets?

Answer 17

C.I - disclosure note
C.A - ignore

Question 18

If probability of occurrences is remote <5% what is the treatment for contingent liabilities and assets?

Answer 18

C.I - ignore
C.A - ignore

Question 19

When a disclosure note is made what should it state?

Answer 19

The nature of the contingency, the uncertain factors that may affect the future outcome, and an estimate of the financial effect

Question 20

The movement in the provision for disclosure is recorded where?

Answer 20

Financial statements each year