1. 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 be measured reliably.

2. 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. lgnore the event.

3. 5. 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.

4. 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