Mapa Institute of Technology

FIL 11

Problem 4-6 Multiple choice (IFRS)

1)A provision shall be recognized when

 

1. 1. There is a legal obligation arising from a past obligating event, the probability of the outflow of resources is more than remote but less than probable, and a reliable estimate can be made of the amount of the obligation.

1. 2. There is a constructive obligation as a result of a past obligating event, the outflow of resources is probable, and a reliable estimate can be made of the amount of the obligation

 

1. 3. There is a possible obligation arising from a past event, the outflow of resources is probable, and an approximate amount can be set aside toward the obligation

 

1. 4. Management decides that it is essential that a provision be made for unforeseen circumstances and keeping in mind this year the profits were enough but next year there may be losses

 

 

2. A competitor has sued an entity for 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 shall at year-end

 

1. 1. Recognize a provision for this possible obligation
   2. Make a disclosure of the possible obligation in footnotes to the financial statements
   3. Make no provision or disclosure and wait until the lawsuit is finally decided and then expense the amount paid on settlement, if any
   4. Set aside, as an appropriation, a contingency reserve, an amount based on the best estimate of the possible liability

 

 

3. A 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 net profit. During the year, there were a number of meetings with th 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 yer-end. How should the entity treat this in the financial statements?

 

1. 1. Disclose the contingent asset in the footnotes
   2. Wait until next year when the settlement check is actually received and not recognize 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 received

 

 

4. 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. 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

 

 

5. The board of directors of an entity decided in the latter part of the current year o 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 PAS 37.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. 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.
   2. 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.
   3. Mention the decision to restructure and the cost involved in the chirma’s statement in the annual report since it is a decision of the board of directors.
   4. 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

 

 

 

 

Problem 4-7 Multiple choice (PAS 37)

 

1. Which of the following statements is incorrect concerning a contingent liability?

 

1. 1. A contingent liability is both probable and measurable
   2. An entity shall not recognize a contingent liability in the financial statements
   3. A contingent liability is disclosed only
   4. If a contingent liability is remote, no disclosure is required

 

 

2. A contingent liability is a

 

1. Possible obligation that arises from past event 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

 

2. Present obligation that arises from past event and it is not probavle 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. 1. I only
   2. II only
   3. Both I and II
   4. Neither I nor II

 

 

3. 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

 

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

 

 

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

 

 

4. It is possible asset that arises from past event and whose existence will be confirmed occurrence or non-occurrence of one more uncertain future events not

wholly within the control of the entity

 

1. 1. Contingent asset
   2. Contingent gain
   3. Possible asset
   4. Asset in suspense

 

 

5. Which of the following statement is incorrect concerning a contingent asset?

 

1. 1. A contingent asset is recognized because this may result to recognition of income that may never be realized.
   2. When the realization of income is virtually certain, the related asset is no longer a contingent asset and its recognition is appropriate.
   3. A contingent asset is disclosed where an inflow of economic benefit is probable.
   4. A contingent asset is disclosed where an inflow of economic benefit is possible or remote

 

 

 

Problem 4-8 Multiple Choice (AICPA Adapted)

 

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

 

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

 

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

 

 

3. A present obligation that is probable and for which the amount can be reliably estimated shall

 

1. 1. Not be accrued but shall be disclose in the notes of financial statement
   2. Be accrued by debiting an appropriated retained earnings account and crediting a liability account
   3. Be accrued by debiting an expense account and crediting an appropriated retained earnings account
   4. Be accrued by debiting an expense accounting and crediting a liability account

 

 

4. An entity has self-insurance plan. Each year, the entity appropriated retained earnings for contingencies in 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 amount measurable damages. What are the effects of this lawsuit’s probable outcome on the entity’s financial statement for the current year?

 

1. 1. An increase in expenses and no effect on liabilities
   2. An increase in both expense and liabilities
   3. No effect on expenses and increase in liabilities
   4. No effect on either expenses or liabilities

 

 

5. Contingent assets are usually recognized when

 

1. 1. Realized
   2. Occurrence is reasonable and the amount can be reasonably estimated
   3. The amount can be reasonably estimated
   4. The amount can be reasonably estimated

 

 

 

 

 

6. Which of the following is the proper way to report a contingent asset, receipt of which is certain?

 

1. 1. As an asset
   2. As a unearned revenue
   3. As a disclosure only
   4. No disclosure and no accrual

7. Which of the following is the proper accounting treatment of a probable contingent asset?

 

1. 1. An accrued account
   2. Deferred earnings
   3. An account receivable with an additional disclosure explaining the nature of transaction
   4. A disclosure only

 

 

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

 

1. 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

 

 

9. 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 received 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 should reported

 

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

 

 

10. At year end, an entity was suing a competitor for a patent infringement. The award from the probable favourable outcome could be reasonably estimated. The entity’s financial statements should report the expected award as

 

 

1. 1. Receivable and revenue
   2. Receivable and reduction of patent
   3. Receivable and deferred revenue
   4. Disclosure only

 

 

 

 

Problem 4-9 Multiple choice (IAA)

 

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

 

1. 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.

 

 

2. A contingent liability shall be recognized when

 

1. 1. Any lawsuit is actually filed against an entity.
   2. It is certain that funds are available to pay the amount of the claim.
   3. It is probable that a liability has been incurred even though the amount of the loss cannot be reasonably estimated.
   4. The amount of the loss can be reasonably estimated and it is probable prior to issuance of financial statements that a liability has been incurred.

 

 

3. How should a contingent liability be reported in the financial statements when it is reasonably possible that the entity will have to pay the liability at a future date?

 

1. 1. As a deferred liability
   2. As an accrued liability
   3. As a disclosure only
   4. As an account payable with an additional disclosure explaining the nature of the transaction

 

 

 

4. Disclosure usually is not required for

 

1. 1. Contingent gains that are probable and can be reasonably estimated.
   2. Contingent losses that are reasonably possible and cannot be reasonably estimated.
   3. Contingent losses that are probable and cannot be reasonably estimated.
   4. Contingent losses that are remote and can be reasonably estimated.

5. Provisions are accrued because the likelihood of an unfavorable outcome is

 

1. 1. Virtually certain
   2. Greater than 50%
   3. At least 75%
   4. Possible

 

 

6. Reporting is required for

 

1. 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.

 

 

7. Pending litigation would generally be considered

 

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

 

 

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

 

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

 

 

9. A contingent liability

 

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

 

 

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

 

1. 1. The entity has accepted liability prior to the year-end for unfair dismissal of an