Provision

Question 1

Which is the correct definition of a provision?

a. A possible obligation arising from past events
b. A liability of uncertain timing or uncertain amount
c. liability which cannot be easily measured
d. An obligation to transfer funds to an entity

Answer 1

b. A liability of uncertain timing or uncertain amount

Question 2

A provision shall be recognized when

a. An entity has a present obligation as a result of a past event.
b. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
c. The amount of the obligation can be measured reliably.
d. All of these are required for the recognition of a provision liability.

Answer 2

d. All of these are required for the recognition of a provision liability.

Question 3

A legal obligation is an obligation that is derived from all of the following, except

a. Legislation
b. A contract
c. Other operation of law
d. An established pattern of practice

Answer 3

d. An established pattern of practice

Question 4

An entity has an established pattern of practice or stated policy that has created valid expectation that it will accept certain financial responsibility.

a. Constructive obligation
b. Legal obligation
c. Onerous obligation
d. Possible obligation

Answer 4

a. Constructive obligation

Question 5

It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle the obligation.

a. Obligating event
b. Past event
c. Subsequent event
d. Current event

Answer 5

a. Obligating event

Question 6

An outflow of resources embodying economic benefits is regarded as probable when

a. The probability that the event will occur is greater than the probability that the event will not occur.
b. The probability that the event will not occur is greater than the probability that the event will occur.
c. The probability that the event will occur is the same as the probability that the event will not occur
d. The probability that the event will occur is 90% likely.

Answer 6

a. The probability that the event will occur is greater than the probability that the event will not occur.

Question 7

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

Answer 7

c. Midpoint

Question 8

When the provision involves a large population of items, the estimate of the amount

a. Reflects the weighting of all possible outcomes by their associated probabilities.
b. Is determined as the individual most likely outcome.
c. May be the individual most likely outcome adjusted for the effect of other possible outcomes.
d. Midpoint of the possible outcomes.

Answer 8

a. Reflects the weighting of all possible outcomes by their associated probabilities.

Question 9

When the provision arises from a single obligation, the estimate of the amount

a. Reflects the weighting of all possible outcomes by their associated probabilities.
b. Is determined as the individual most likely outcome.
c. Is the individual most likely outcome adjusted for the effect of other possible outcomes.
d. Midpoint of the possible outcomes.

Answer 9

c. Is the individual most likely outcome adjusted for the effect of other possible outcomes.

Question 10

The present value in a range of possible outcomes all discounted using the same rate would be

a. The most-likely outcome b.
b. The maximum outcome
c. The minimum outcome
d. The sum of probability-weighted present value

Answer 10

d. The sum of probability-weighted present value

Question 11

A provision shall be recognized for

a. Future operating losses
b. Obligations under insurance contracts
c. Reductions in fair value of financial instruments
d. Obligations for plant decommissioning costs

Answer 11

d. Obligations for plant decommissioning costs

Question 12

Provisions shall be recognized for all of the following, except

a. Cleaning-up costs of contaminated land when an oil entity has a published policy that it will undertake to clean up all contamination that it causes.
b. Restructuring costs after a binding sale agreement.
c. Rectification costs relating to products sold.
d. Future refurbishment costs due to introduction of a new computer system.

Answer 12

d. Future refurbishment costs due to introduction of a new computer system.

Question 13

An entity is closing one of its operating divisions, and the conditions for making restructuring provision have been met. The closure will happen in the first quarter of the next financial year.

At the current year-end, the entity has announced the formal plan publicly and is calculating the restructuring provision.

Which of the following costs should be included in the restructuring provision?

a. Retraining staff continuing to be employed
b. Relocation costs relating to staff moving to other divisions
c. Contractually required costs of retiring staff being made redundant from the division being closed
d. Future operating losses of the division being closed up to the date of closure

Answer 13

c. Contractually required costs of retiring staff being made redundant from the division being closed

Question 14

An entity has been served a legal notice at year-end by the Department of Environment and Natural Resources to fit smoke detectors in its factory on or before middle of the next year. The cost of fitting smoke detector can be measured reliably.

How should the entity treat this in the financial statements at year-end?

a. Recognize a provision for the current year equal to the estimated amount.
b. Recognize a provision for the current year equal to one-half only of the estimated amount.
c. No provision is recognized at year-end because there is no present obligation for the future expenditure since the entity can avoid the future expenditure by changing the method of operations, but disclosure is required.
d. Ignore the event.

Answer 14

c. No provision is recognized at year-end because there is no present obligation for the future expenditure since the entity can avoid the future expenditure by changing the method of operations, but disclosure is required.

Question 15

An entity operates chemical plants. The published policies include a commitment to making good any damage caused to the environment by its operations. The entity has always honored this commitment.

Which of the following scenarios relating to the entity would give rise to a provision?

a. On past experience it is likely that a chemical spill which would result in having to pay fines and penalties will occur in the next year.
b. Recent research suggests there is a possibility that the entity’s actions may damage surrounding wildlife.
c. The government has outlined plans for a new law requiring all environmental damage to be rectified.
d. A chemical spill from one of the entity’s plants has caused harm to the surrounding area and wildlife.

Answer 15

d. A chemical spill from one of the entity’s plants has caused harm to the surrounding area and wildlife.

Question 16

An entity did not record an accrual for a present obligation but disclose the nature of the obligation and the range of the loss. How likely is the loss?

a. Remote
b. Reasonably possible
c. Probable
d. Certain

Answer 16

b. Reasonably possible

Question 17

The likelihood that the future event will or will not occur can be expressed by a range of outcome. Which range means that the future event occurring is very slight?

a. Probable
b. Reasonably possible
c. Certain
d. Remote

Answer 17

d. Remote

Question 18

An expropriation of asset which is imminent and for which the amount of loss can be reasonably estimated shouid

a.Accrued
b. Disclosed
c. Accrued and disclosed
d. Ignored

Answer 18

c. Accrued and disclosed

Question 19

A present obligation that is probable and for which the amount can be reliably estimated should

a. Not be accrued but disclosed in the notes to the financial statements.
b. Be accrued by debiting an appropriated retained earnings account and crediting a liability account.
c. Be accrued by debiting an expense account and crediting an appropriated retained earnings account.
d. Be accrued by debiting an expense account and crediting a liability account.

Answer 19

c. Be accrued by debiting an expense account and crediting an appropriated retained earnings account.

Question 20

General or unspecified contingencies should

a. Be accrued in the financial statements and disclosed.
b. Not be accrued and need not be disclosed.
C. Not be accrued but should be disclosed.
d. Be accrued but need not be disclosed.

Answer 20

b. Not be accrued and need not be disclosed.

Question 21

Contingent liability will or will not become actual liability depending on

a. Whether probable and measurable.
b. The degree of uncertainty.
c. The present condition.
d. The outcome of a future event.

Answer 21

d. The outcome of a future event.

Question 22

A contingent liability shall be recognized when

a. Any lawsuit is actually filed against an entity.
b. It is certain that funds are available to pay the amount of the claim.
c. It is probable that a liability has been incurred but the amount cannot be reliably measured.
d. The amount of the loss can be reliably measured and it is probable prior to issuance of financial statements that a liability has been incurred.

Answer 22

d. The amount of the loss can be reliably measured and it is probable prior to issuance of financial statements that a liability has been incurred.

Question 23

How should a contingent liability be reported in the financial statements when it is reasonably possible?

a. As a deferred liability
b. As an accrued liability
c. As a disclosure only
d. As an account payable

Answer 23

c. As a disclosure only

Question 24

Reporting in the financial statements is required for

a. Loss contingency that is probable and measurable
b. Loss contingency that is remote and measurable
c. Loss contingency that is possible and measurable
d. All loss contingencies

Answer 24

a. Loss contingency that is probable and measurable

Question 25

A contingent liability

a. Definitely exists as a liability but the amount and due date are indeterminable.
b. Is accrued even though not reasonably estimated.
c. Is the result of a loss contingency.
d. Is not recognized in the financial statements.

Answer 25

c. Is the result of a loss contingency.

Question 26

A contngent liability is

a. An estimated liability.
b. An event which is not recognized hecause it is not probable that an outflow will be required or the amount cannot be reliably estimated
C. A potential large liability.
d. A potential small liability.

Answer 26

b. An event which is not recognized hecause it is not probable that an outflow will be required or the amount cannot be reliably estimated

Question 27

A contingent liability

a. Has a most probable value of zero but may require a payment if a given future event occurs.
b. Definitely exists as a liability.
c. Is reported as current liability.
d. Is not disclosed in the financial statements.

Answer 27

a. Has a most probable value of zero but may require a payment if a given future event occurs.

Question 28

Disclosure is usually not required for

a. Probable and measurable contingent gain
b. Possible and measurable contingent loss
c. Probable and immeasurable contingent loss
d. Remote and measurable contingent loss

Answer 28

d. Remote and measurable contingent loss

Question 29

An entity received notification of legal action. How should the probable and measurable loss be reported?

a. As a loss recorded in other comprehensive income
b. As a loss in the income statement and a contingent liability
c. As a loss in the income statement and a provision
d. In the notes to financial statements

Answer 29

c. As a loss in the income statement and a provision

Question 30

Which of the following is not considered when evaluating whether or not to record a liability for pending litigation?

a. Time period of the underlying cause of action
b. The type of litigation involved
c. The probability of an unfavorable outcome
d. The ability to make a reliable estimate of the loss

Answer 30

b. The type of litigation involved

Question 31

Contingent asset is usually recognized when

a. Realized
b. Occurrence is reasonably possible and the amount can be reliably measured
c. Occurrence is probable and measurable
d. The amount can be reliably measured

Answer 31

a. Realized

Question 32

Which is the proper treatment of contingent asset?

a. An accrued account
b. Deferred income
c. An account receivable
d. A disclosure only

Answer 32

d. A disclosure only

Question 33

Gain contingency that is remote and measurable

a. Must be disclosed in a note to financial statements.
b. May be disclosed in a note to financial statements.
c. Must be reported in the body of the financial statements.
d. Should not be reported or disclosed.

Answer 33

d. Should not be reported or disclosed.

Question 34

Which is-the proper way to report a contingent asset, receipt of which is virtually certain?

a. As an asset
b. As unearned evenue
C. As a disclosure only
d. No disclosure and no accrual

Answer 34

a. As an asset

Question 35

What is the proper treatment of a patent infringement case of the plaintiff with probable favorable outcome and measurable settlement?

a. No reporting is required at this time
b. Disclosure
c. A gain for the minimum settlement
d. A gain for the probable settlement

Answer 35

d. A gain for the probable settlement