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Homework answers / question archive / Western Leyte College of Ormoc city, Inc

Western Leyte College of Ormoc city, Inc

Accounting

Western Leyte College of Ormoc city,

Inc.FAR 101

PROVISION AND CONTINGENT LIABILITY

1)Which of the following are not factors that are considered when evaluating whether or not to record a liability for pending litigation?

 

The ability to make a reasonable estimate of the amount of the loss.

Time period in which the underlying cause of action occurred.

The probability of an unfavorable outcome.

The type of litigation involved.

 

  1. In March 2014, an explosion occurred at Jogel Co.'s plant, causing damage to area properties. By May 2014, no claims had yet been asserted against Jogel. However, Jogel's management and legal counsel concluded that it was reasonably possible that Jogel would be held responsible for negligence, and that P4,000,000 would be a reasonable estimate of the damages. Jogel's P5,000,000 comprehensive public liability policy contains a P400,000 deductible clause. In Jogel's December 31, 2013 financial statements, for which the auditor's fieldwork was completed in April 2014, how should this casualty be reported?

 

    1. No note disclosure of accrual is required for 2013 because the event occurred in 2014
    2. As a note disclosing a possible liability of P4,000,
    3. As a note disclosing a possible liability of P400,000
    4. As an accrued liability of P400,00

 

  1. On January 1, 2013, Nicholas Corp. signed a three-year noncancelable purchase contract, which allows Nicholas to purchase up to 500,000 units of computer part annually from Dark Supply Co. at P10 per unit and guarantees minimum annual purchase of 100,000 units. During 2013, the part unexpectedly became obsolete. Nicholas had 250,000 units of this inventory at December 31, 2013, and believes these parts can be sold as scrap for P2 per unit. What amount of probable loss from the purchase commitment should Nicholas report in its 2013 profit or loss?

 

a. 1,600,000

b.  2,400,000

c.  2,000,000

d. 800,000

 

  1. Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2013. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months. The

 

management of Ortiz estimates that this recall would cost P800,000. What accounting recognition, if any, should be accorded this situation?

 

    1. Operating expense of P800,000 and liability of P800,000
    2. No recognition
    3. Appropriation of retained earnings of P800,000
    4. Note disclosure only

 

  1. Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be

 

    1. the mean of the range.
    2. the minimum of the range.
    3. the maximum of the range.
    4. zero.

 

  1. 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?

 

    1. Remote
    2. Reasonably possible
    3. Probable
    4. Certain

 

  1. Dean Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and

 

    1. the Dean Company admits guilt.
    2. the cause for action occurred during the accounting period covered by the financial statements.
    3. the court will decide the case within one year.
    4. the damages appear to be material.

 

  1. Estimated liabilities are disclosed in financial statements by

 

    1. An appropriation of retained earnings
    2. Appropriately classifying them as regular liabilities in the statement of financial position
    3. Note to the financial statements
    4. Showing the amount among the liabilities but not extending to the liability total

 

 

 

  1. Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be

 

    1. classified as an appropriation of retained earnings.
    2. accrued.
    3. disclosed but not accrued.
    4. neither accrued nor disclosed.

 

 

 

  1. During 2015, Libya Company is the defendant in a breach of patent lawsuit. The lawyers believe there is an 80% chance that the court will not dismiss the case and the entity will incur outflow of benefits.

 

If the court rules in favor of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of P2,000,000 and a 40% chance that the entity will be required to pay damages of P1,000,000.

Other amounts of damages are unlikely.

 

The court is expected to rule in late December 2016. There is no indication that the claimant will settle out of court.

 

A 7% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates.

 

An appropriate discount rate is 10% per year. The present value of 1 at 10% for one period is 0.91.

What is the measurement of the provision on December 31, 2015? a. 1,280,000

b.  1,369,600

c.  1,500,000

d.  1,246,336

 

  1. Iriga Company issued the 2015 financial statements on March 1, 2016. The entity provided the following data for the year ended December 31, 2015:

 

Amount owing to another entity for services rendered during

December 2015                                                                                                                                    300,000

Estimated long service leave owing to employees in respect of past

services                                                                                                                                                 1,200,000

 

Estimated cost of relocating an employee from head office to a branch

in another city (employee will physically relocate in January

 

100,000

 

2016)

Estimated cost of overhauling machine every 5 years                                                     150,000 What amount should be recognized as provision on December 31, 2015?

a. 1,200,000

b. 1,300,000

c.  1,600,000

d.  1,750,000

 

  1. During 2015, Beal Company became involved in a tax dispute with the BIR. On December 31, 2015, the tax advisor believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was P500,000. Before the 2015 financial statements were issued, the entity received and accepted a BIR settlement offer of P550,000.

 

What amount of accrued liability should have been reported on December 31, 2015?

 

a.  650,000

b. 550,000

c.  500,000

d.                     0

 

  1. Nia Company is involved in litigation regarding a faulty product sold in a prior year. The entity has consulted with an attorney and determined that it is possible that the entity may lose the case. The attorney estimated that there is a 50% chance of losing. If this is the case, the attorney estimated that the amount of any payment would be P5,000,000.

 

What is the required journal entry as a result of this litigation?

 

    1. Debit litigation expense P5,000,000 and credit litigation liability P5,000,000.
    2. No journal entry is required.
    3. Debit litigation expense P2,000,000 and credit litigation liability P2,000,000.
    4. Debit litigation expense P2,500,000 and credit litigation liability P2,500,000.

 

  1. Concord Company sells motorcycle helmets. In 2015, the entity sold 4,000,000 helmets before discovering a significant defect in their construction. By December 31, 2015, two lawsuits had been filed against the entity. The first lawsuit, which the entity has little chance of winning, is expected to be settled out of court for P1,500,000 in January 2016. The legal counsel believed that the entity has a 50-50 chance of winning the second lawsuit, which is for P1,000,000.

What is the accrued liability on December 31, 2015 as a result of the lawsuits? a. 1,500,000

b.  1,000,000

c. 2,500,000

 

d.                          0

 

  1. In November 5, 2015, a Dunn Company truck was in an accident with an auto driven by Bell. Dunn received notice on January 15, 2016 of a lawsuit for P700,000 damages for personal injuries suffered by Bell. The entity’s counsel believed it is probable that Bell will be awarded an estimated amount in the range between P200,000 and P450,000 and no amount is a better estimate of potential liability that any other amount because each point in the range is as likely as any other. The 2015 financial statements were issued on March 1, 2016.

What amount of loss should be accrued on December 31, 2015? a. 450,000

b.  200,000

c.  325,000

d.                     0

 

  1. During 2015, Smith Company filed suit against West Company seeking damages for patent infringement. On December 31, 2015, Smith’s legal counsel believed that it was probable that Smith would be successful against West for an estimated amount of P1,500,000. In March 2016, Smith was awarded P1,000,000 and received full payment thereof.

 

In Smith’s 2015 financial statements issued on February 2016, how should this award be reported?

 

    1. As a receivable and revenue of P1,000,000.
    2. As a receivable and deferred revenue of P1,000,000.
    3. As a disclosure of a contingent asset of P1,000,000.
    4. As a disclosure of a contingent asset of P1,500,000.

 

  1. Tone Company is the defendant in a lawsuit filed by Witt in 2015 disputing the validity of copyright held by Tone. On December 31, 2015, Tone determined that Witt would probably be successful against Tone for an estimated amount of P400,000. Appropriately, a P400,000 loss was accrued by a charge to income for the year ended December 31, 2015. On December 31, 2016, Tone and Witt agreed to a settlement providing cash payment of P250,000 by Tone to Witt, and transfer of Tone’s copyright to Witt. The carrying amount of the copyright on Tone’s accounting records was P60,000 on December 31, 2016.

 

What would be the effect of the settlement on Tone’s income before tax in 2016?

 

    1. 150,000 increase
    2.    60,000 decrease
    3.    90,000 increase
    4.    90,000 decrease

 

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

 

    1. The probability that the event will occur is greater than the probability that the event will not occur.
    2. The probability that the event will not occur is greater than the probability that the event will occur.
    3. The probability that the event will occur is the same as the probability that the event will not occur.
    4. The probability that the event will occur is 90% likely.

 

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

 

    1. Reflects the weighting of all possible outcomes by their associated probabilities
    2. Is determined as the individual most likely outcome
    3. May be the individual most likely outcome adjusted for the effect of other possible outcomes
    4. Midpoint of the possible outcomes

 

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

 

    1. Reflects the weighting of all possible outcomes by their associated probabilities
    2. Is determined as the individual most likely outcome
    3. May be the individual most likely outcome adjusted for the effect of other possible outcomes
    4. Midpoint of the possible outcomes

 

  1. Which of the following statements is incorrect where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party?

 

    1. The reimbursement shall be recognized only when it is virtually certain that the reimbursement will be received if the entity settles the obligation.
    2. The amount of the reimbursement shall not exceed the amount of the provision.
    3. The reimbursement shall be netted against the estimated liability.
    4. In the income statement, the expense relating to the provision may be presented net of the reimbursement.

 

  1. Which of the following statements is true in relation to recognition of a provision?

 

  1. No provision for costs that need to be incurred to operate in the future.

 

  1. A provision for the decommissioning of an oil installation or a nuclear plant station shall be recognized to the extent that an entity is obliged to rectify damage already caused.

 

    1. I only
    2. II only
    3. Both I and II
    4. Neither I nor II

 

  1. Provisions shall be discounted if the effect is material. Which of the following is incorrect regarding the discount rate?

 

    1. Reflects current market assessment of the time value of money.
    2. Reflects risk specific to the liability
    3. Does not reflect risk for which future cash flow estimates have already been adjusted
    4. Is a post-tax discount rate

 

  1. For an event to be an obligating event, it is necessary that the entity has no realistic alternative but to settle the obligation created by the event and this is the case only:

 

  1. Where the settlement of the obligation can be enforced be law.
  2. Where the event creates valid expectation in other parties that the entity will discharge the obligation as in the case of a constructive obligation.

 

    1. I only
    2. II only
    3. Either I or II
    4. Neither I nor II

 

  1. Which of the following statements is true concerning the measurement of a provision?

 

  1. The amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of reporting period.

 

  1. The best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation at the end of reporting period or to transfer it to a third party at that time.

 

    1. I only
    2. II only
    3. Both I and II
    4. Neither I nor II

 

  1. Which of the following statements is true in relation to the measurement of a provision?

 

  1. The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision.

 

  1. Where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditure expected to settle the obligation.

 

    1. I only
    2. II only
    3. Both I and II
    4. Neither I nor II

 

  1. Which of the following statements is false in relation to measurement of a provision?

 

  1. Future events that may affect the amount required to settle the obligation shall be reflected in the amount of the provision where there is sufficient objective evidence that the future events will occur.

 

  1. Gains from expected disposal of assets shall be taken in to account in measuring a provision.

 

    1. I only
    2. II only
    3. Both I and II
    4. Neither I nor II

 

  1. Which of the following statements is incorrect concerning recognition of a provision?

 

    1. Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate.
    2. A provision shall be used only for expenditures for which the provision was originally recognized.
    3. Provisions shall be recognized for future operating losses.
    4. If an entity has an onerous contract, the present obligation under the contract shall be recognized and measured as a provision.

 

  1. It is a contract in which the unavoidable costs of meeting the obligation under the contract exceed the economic benefits to be received under the contract.

 

    1. Onerous contract
    2. Executory contract
    3. Executed contract
    4. Sale contract

 

  1. This is defined as “a structured program that is planned and controlled by the management that materially changes either the scope of a business of an entity or the manner in which that business is conducted”.

 

    1. Restructuring
    2. Liquidation
    3. Recapitalization
    4. Corporate revamp

 

  1. Which is a cost of restructuring?

 

    1. Cost of retraining or relocating continuing staff
    2. Marketing or advertising cost
    3. Investment in new system and distribution network
    4. Cost of relocating business activities to another location 32.A provision for restructuring is required when
      1. The entity has a detailed plan for the restructuring.
      2. The entity has raised 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.

 

        1. I only
        2. II only
        3. Both I and II
        4. Neither I nor II

 

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

 

      1. Legislation
      2. A contract
      3. Other operation of law
      4. An established pattern of past practice

 

  1. 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 us calculating the restructuring provision.

 

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

 

    1. Retraining staff continuing to be employed
    2. Relocation costs relating to staff moving to other divisions
    3. Contractually required costs of retiring staff being made redundant from the division being closed
    4. Future operating losses of the division being closed up to date of closure

 

    1. factory owned by an entity was destroyed by fire. The entity lodged an insurance claim for the value of the factory building and plant, and an amount

 

equal to one year’s profit. During the year, there were a number of meetings with the representatives of the insurance company. Finally, before year-end, it was decided that the entity would receive compensation for 90% of its claim. The entity received a letter that the settlement check for that amount had been mailed but it was not received before year-end. How should the entity treat this in the financial statements?

 

      1. Disclose the contingent asset in the footnotes.
      2. Wait until next year when the settlement check is actually received and not recognized this receivable at all since at year-end it is a contingent asset.
      3. Record 90% of the claim as a receivable as it is virtually certain that the contingent asset will be received.
      4. Record 100% of the claim as a receivable at year-end as it is virtually certain that the contingent asset will be received, and adjust the 10% next year when the settlement check is actually receive

 

  1. 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 its financial statements at year-end?

 

    1. Recognize a provision for the current year equal to the estimated amount
    2. Recognize a provision for the current year equal to one-half only of the estimated amount
    3. 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
    4. Ignore the event

 

  1. The board of directors of an entity decided in the latter part of the current year to wind up international operations in the Far East and move them to Australia.

 

The decision was based on a detailed formal plan of restructuring as required by IFRS.

 

This decision was conveyed to all workers and management personnel at the headquarters in Europe. The cost of this restructuring plan can be measured reliably.

 

How should the entity treat this restructuring in the financial statements for the current year-end?

 

    1. Disclose only the restructuring decision and the cost of restructuring because the entity has not announced the restructuring to those affected by the decision and thus has not raised an expectation that the entity would actually carry out the restructuring.

 

    1. Recognize a provision for restructuring since the board of directors has approved it and it has been announced in the headquarters of the entity in Europe.
    2. Mention the decision to restructure and the cost involved in the chairman’s statement in the annual report since it is a decision of the board of directors.
    3. Because the restructuring has not commenced before year-end, based on prudence, wait until next year and do nothing in this year’s financial statements.

 

    1. contingent liability is a

 

      1. Possible obligation that arises from past event and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more future uncertain events now wholly within the control of the entity.

 

      1. 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.

 

        1. I only
        2. II only
        3. Both I and II
        4. Neither I nor II

 

  1. Which of the following statements in relation to a contingent liability is true?

 

    1. An obligation as a result of the entity creating a valid expectation that it will discharge its responsibilities is a contingent liability.

 

    1. A present obligation that arises from past event but cannot be reliably measured is a contingent liability.

 

  1. I only
  2. II only
  3. Both I and II
  4. Neither I nor II

 

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

 

  1. Remote
  2. Reasonably possible
  3. Probable
  4. Certain

 

  1. An entity has a self-insurance plan. Each year, the entity appropriated retained earnings for contingencies in an amount equal to insurance premiums saved less recognized losses from lawsuits and other claims. As a result of an accident in the current year, the entity is a defendant in a lawsuit in which it will

 

probably have to pay measurable amount of damages. What are the effects of this lawsuit’s probable outcome on the entity’s financial statements for the current year?

 

  1. An increase in expenses and no effect on liabilities
  2. An increase in both expenses and liabilities
  3. No effect on expenses and an increase in liabilities
  4. No effect on either expenses or liabilities 42.Contingent assets are usually recognized when
  1. Realized
  2. Occurrence is reasonably possible and the amount can be reasonably estimated
  3. Occurrence is probable and the amount can be reasonably estimated
  4. The amount can be reasonably estimated

 

  1. When the occurrence of a contingent asset is probable and the amount can be reasonably estimated, the contingent asset should be

 

    1. Recognized in the statement of financial position and disclosed
    2. Classified as an appropriation of retained earnings
    3. Disclosed but not recognized in the statement of financial position
    4. Neither recognized in the statement of financial position nor disclosed

 

  1. An entity operates a plant in a foreign country. It is probable that the plant will be expropriated. However, the foreign government has indicated that the entity will receive a definite amount of compensation for the plant. The amount of compensation is less than the fair value but exceeds the carrying amount of the plant. The contingent asset should be reported

 

    1. As a valuation allowance as part of shareholders’ equity
    2. As a fixed asset valuation allowance account
    3. In the notes to the financial statements
    4. In the statement of financial position

 

  1. Contingent liabilities will or will not become actual liabilities depending on

 

    1. Whether they are probable and estimable
    2. The degree of uncertainty
    3. The present condition suggesting a liability
    4. The outcome of a future event 46.Reporting is required for
  1. Loss contingencies that are probable and can be reliably measured
  2. Gain contingencies that are probable and can be reliably measured
  3. Loss contingencies that are possible and can be reliably measured
  4. All loss contingencies

 

  1. Pending litigation would generally be considered

 

    1. Nonmonetary liability
    2. Contingent liability
    3. Estimated liability
    4. Current liability

 

  1. Gain contingencies that are remote and can be reliably measured

 

    1. Must be disclosed
    2. May be disclosed
    3. Must be reported
    4. Should not be reported or disclosed

 

  1. Which of the following should be disclosed in the financial statements as a contingent liability?

 

    1. The entity has accepted liability prior to year-end for unfair dismissal of an employee.
    2. The entity has received a letter from a supplier complaining about an old unpaid invoice.
    3. The entity is involved in a legal case which it may possibly lose.
    4. The entity has not yet paid certain warranty claims.

 

  1. What condition is necessary to recognize an environmental liability?

 

    1. The entity has an existing legal obligation and the amount of the liability can be reliably estimated.
    2. The entity can reliably estimate the liability.
    3. The entity has an existing legal obligation.
    4. Obligating event has occurre

 

  1. Which of the following is required to be disclosed regarding risk and uncertainties that exist?

 

    1. Factor causing an estimate to be sensitive.
    2. The potential impact of estimate when it is reasonably possible that the estimate will change in the future.
    3. The potential impact of estimate when it is remotely possible that the estimate will change in the future.
    4. A description of operations of the entity.

 

  1. How should incurred costs associated with relocating employees in a restructuring be accounted for?

 

    1. Measured at fair value and recognized over two years.
    2. Measured at fair value and recognized when the liability is incurred.
    3. Recognized when costs are paid.
    4. Measured at fair value and treated as error.

 

  1. Under IFRS, a provision is

 

    1. An event which is not recognized because it is not probable or cannot be measured reliably.
    2. An event which is probable and measurable.
    3. An event which is possible or remote and measurable.
    4. An event which is probable but not measurable.

 

  1. In calculating present value in a situation with a range of possible outcomes all discounted using the same interest rate, the expected present value would be

 

    1. The most-likely outcome
    2. The maximum outcome
    3. The minimum outcome
    4. The sum of probability-weighted present values

 

  1. Reserves for contingencies for general or unspecified risks should

 

    1. Be accrued in the financial statements and disclosed
    2. Not be accrued in the financial statements and need not be disclosed
    3. Be disclosed
    4. Be accrued in the financial statements

 

  1. An expropriation of asset which is imminent and for which the loss can be reasonably estimated should be

 

    1. Accrued
    2. Disclosed
    3. Accrued and disclosed
    4. Not accrued and not disclosed

 

  1. An entity received notification of legal action against the entity. The attorneys determined that it is probable the entity will lose the suit and the loss can be estimated reliably. How should the estimated loss be reported?

 

    1. As a provision for loss reported in the statement of financial position and a loss recorded in other comprehensive income
    2. As a contingent liability reported in the statement of financial position and a loss in the income statement
    3. As a provision for loss reported in the statement of financial position and a loss in the income statement
    4. In the notes to financial statements as a contingency

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