Mapa Institute of Technology

FIL 11

Problem 4-1 Multiple Choice (PAS 37)

1)Which is the correct definition of provision?

1. 1. A possible obligation arising from past events.
   2. A liability of uncertain timing or amount
   3. A liability which cannot be easily measured

1. 4. An obligation to transfer funds to an entity.

2. A provision shall be recognized when:

1. An entity has a present obligation as a result of past event.

2. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.

1. 1. I and II only.
   2. I and III only
   3. II and III only
   4. I, II and III

3. A constructive obligation is an obligation.

1. That is derived from an entity’s action that the entity will accept certain responsibilities because of past practice, published policy or current statement.

2. The entity has created a valid expectation in other parties that it will discharge those responsibilities.

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

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

1. 1. Obligating event
   2. Past event
   3. Subsequent event
   4. Current event

5. An outflow of resources embodying economic benefits

1. 1. The probability that the event will occur is greater than the probability at the event will not occur.
   2. The probability that the event will not occur is greater than the probability that the event will occur.

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

6. What amount is recognized as provision?

1. 1. Best estimate of the expenditure
   2. Minimum of the range
   3. Maximum of the range
   4. Midpoint of the range

7. Where there is continuous range of possible outcomes , and each point in that range as likely as any other, the range to be used is the:

1. 1. Minimum
   2. Maximum
   3. Midpoint
   4. Summation of Maximum and Minimum.

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

1. 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.
   4. May be the individual most likely outcome.

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

1. 1. Reflects him weighting of all possible outcomes by their associated probabilities.
   2. Is determined as the individual most likely outcome.

1. 3. Is the individual most likely outcome adjusted for the effect of other possible outcomes?
   4. Midpoint of the possible outcomes.

10. 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. 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 provision.
   3. The reimbursement shall be “netted” against the estimated liability for the provision.
   4. In the income statement, the expense relating to the provision may be presented net of the reimbursement.

Problem 4-2 Multiple Choice (PAS 37)

1. Which of the following statements is true regarding recognition of a provision?

1. 1. No provision is recognized for cost that need to be incurred to operate in the future.
   2. 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 damaged already caused.

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

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

1. Reflects current market rate 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.

3. 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. 1. Where the settlement of the obligation can be enforced by law.

1. 2. Where the event creates valid expectation in other parties that the entity will discharge the obligation as in the case of constructive obligation.

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

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

1. 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.
   2. 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 the same time.

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

5. Which of the following terms is associated with recognizing provision?

1. Possible
2. Likely
3. Remote
4. Probable

Problem 4-3 Multiple Choice (PAS 37)

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

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

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

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

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

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

3. 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. A 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.

4. 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

5. The unavoidable costs under an onerous contract represent the “least net cost of exiting from the contract”, which is equal to

1. Cost of fulfilling the contract
2. Penalty arising from failure to fulfil the contract
3. Lower of the cost of fulfilling the contract or the penalty arising from failure to fulfil the contract
4. Higher of the cost of fulfilling the contract or the penalty arising from failure to fulfil the contract.

Problem 4-4 Multiple choice (PAS 37)

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

2. Examples of events that qualify as restructuring include all of the following, except

1. 1. Sale or termination of business
   2. Closure of business location in a region or relocation of business from one location to another.
   3. Change in management structure such as elimination of a layer of management d.Fundamental reorganization of an entity that has an immaterial and insignificant impact on its operations

3. Which is a cost of restructuring?

1. 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 from one location to another

4. It is the abusive practice of manipulation and creative accounting by dumping all kinds of provisions under the banner of provision for restructuring.

1. 1. Big bath provision
   2. Creative accounting
   3. Cookie jar
   4. General reserve

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

Problem 4-5 Multiple choice (IFRS)

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

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

2. A provision should be recognized for which of the following?

1. 1. Future operating losses
   2. Obligations under insurance contracts
   3. Reductions in fair value of financial instruments
   4. Obligations for plant decommissioning costs

3. Provisions shall be recognized for all of the following except

1. 1. 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.
   2. Restructuring costs after a binding sale agreement has been signed
   3. Rectification costs relating to defective products already sold
   4. Future refurbishment costs due to introduction of a new computer system

4. 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?

1. 1. Retraining staff continuing to be employed