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TOA Quizzer 10 - Provisions, Contingencies PDF
TOA Quizzer 10 - Provisions, Contingencies PDF
Theory of Accounts
TOA Quizzer 10 Prof. Francis H.Villamin
5. A provision is recognized in the statement of financial position under which of the following
requirements?
I. An enterprise has a present obligation, legal or constructive, as a result of a past event.
II. It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation.
III. A reliable estimate can be made of the amount of the obligation.
a. I, II and III
b. II and III
c. I only
d. II only
6. A provision shall be recognized as liability if it satisfies all of the following criteria, except
a. The amount of the obligation can be measured reliably.
b. It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation.
c. It is possible that an outflow of resources embodying economic benefits will be required to settle the
obligation.
d. The entity has a present obligation as a result of a past event.
9. It is an event that creates a legal or constructive obligation because the enterprise has no other reali stic
alternative but to settle the obligation.
a. Recognition event
b. Adjusting event
c. Non-adjusting event
d. Obligating event
11. 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
12. It is the statistical method of estimating a provision which means that where the provision being
measured involves a large population of items, the obligation is estimated by “weighting” all possible
outcomes by their associated possibilities.
a. Extrapolation
b. Weighted average
c. Simple average
d. Expected value
13. Which statement is incorrect when a provision is expected to be reimbursed by another party?
a. The expense relating to the provision may be presented net of the reimbursement.
b. The amount of reimbursement may exceed the provision.
c. The reimbursement shall not exceed the provision.
d. The reimbursement shall be recognized when it is virtually certain that the reimbursement will be
received if the entity settles the provision.
17. According to IAS 37, for which of the following should a provision be recognized?
a. Future operating losses
b. Obligations under insurance contracts
c. Reduction in fair value of financial instruments
d. Obligation for plant decommissioning costs
19. Lush Corporation, a manufacturer of household paints, is preparing annual financial statements at
December 31, 2017. Because of a recently proven health hazard in one of its paints, the government
has clearly indicated its intention of having Lush recall all cans of this paint sold in the last si x months.
The management of Lush estimates that this recall would cost P800,000. What accounting recognition,
if any, should be accorded this situation?
a. No recognition.
b. Note disclosure only.
c. Operating expense of P800,000 and liability of P800,000.
d. Appropriation of retained earnings of P800,000.
20. It is a contract in which the unavoidable cost of meeting the obligations under the contract exceed the
economic benefits to be received under the contract.
a. Onerous contract
b. Loss contract
c. Take and pay contract
d. Unfavorable contract
21. The unavoidable costs under an onerous contract is described as the least net cost of exiting from the
contract, that is represented by
a. cost of fulfilling the contract.
b. penalty arising from failure to fulfill the contract.
c. lower of the cost of fulfilling the contract or the penalty of arising from failure to fulfill the contract.
d. higher of the cost of fulfilling the contract or the penalty arising from failure to fulfill the contract.
22. Restructuring is
a. a possible asset that arises from past events and whose 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.
b. 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.
c. a program that is planned and controlled by management, and materially changes the scope of a
business undertaken by an entity or the manner in which that business is conducted.
d. purchase or sale of under a contract whose terms require delivery of the asset within the time frame
established generally by regulation or convention in the marketplace concerned.
a. Both I and II
b. Neither I nor II
c. I only
d. II only
25. Which of the following should be disclosed in the financial statements as a contingent liability?
a. The entity has accepted a liability prior to the year-end for unfair dismissal of an employee and is to
pay damages.
b. The entity has received a letter from a supplier complaining about a past unpaid invoice.
c. The entity is involved in a legal case, which it may possibly lose, although this is not probable.
d. The entity has not yet paid certain claims under sales warranties.
27. It is a possible asset that arises from past events and whose 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.
a. Contingent asset
b. Goodwill
c. Intangible asset
d. Other asset
29. Jose Solis is a farmer who own land, which borders on the right-of-way of the Eastern Railroad. On
August 10, 2017, due to the admitted negligence of the Railroad, hay on the farm was set on fire and
burned. Solis had a dispute with the Railroad for several years concerning the ownership of a small
parcel of land. The representative of the Railroad has offered to assign any rights, which the Railroad
may have in the land to Solis in exchange for a release of his right to reimbursement for the loss he has
sustained from the fire. Solis appears inclined to accept the Railroad’s offer. Railroad’s 2017 financial
statements should include the following related to the incident
a. Recognition of a loss and creation of a liability for the value of the land.
b. Recognition of a loss only.
c. Creation of a liability only.
d. Disclosure in note form only.
30. A competitor has sued our entity for the 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 should, at year-end,
a. recognize a provision for this possible obligation.
b. make a disclosure of the possible obligation in the footnotes to the financial statements.
c. make no provision or disclosure and wait until the lawsuit is finally decided and then expense the
amount on settlement, if any.
d. set aside, as an appropriation, a contingency reserve, an amount based on the best estimate of the
possible liability.