a.

An entity has a present obligation as a result of a past

event.
LA SALLE UNIVERSITY b. It is probable that an outflow of resources embodying
COLLEGE OF ACCOUNTANCY economic benefits will be required to settle the
ACADEMIC COUNCIL’S THE LOBBY obligation.
c. The amount of obligation can be measured reliably
1. Estimated liabilities are disclosed in financial statements by d. All of the above.
a. Note to the financial statements
b. Showing the amount among the liabilities but not 10. Where there is a continuous range of possible outcomes, and
extending to the liability total each point in that range is as likely as any other, the range to
c. An appropriation of retained earnings be used is the
d. Appropriately classifying them as regular liabilities in a. Minimum
the statement of financial position b. Maximum
c. Midpoint
2. It is a marketing scheme whereby an entity grants award d. Summation of the minimum and maximum
credits to customers and the entity can redeem the award
11. When the provision involves a large population of items, the
credits in exchange for free or discounted goods or services.
a. Customer loyalty program estimate of the amount
b. Premium plan a. Reflects the weighing of all possible outcomes by their
c. Marketing program associated probabilities.
d. Loyalty award b. Is determined as the individual most likely outcome.
c. May be the individual most likely outcome adjusted for
3. The award credits granted to customers under a customer the effect of other possible outcome.
loyalty program it offers is often described as d. Midpoint of the possible outcomes.
a. Points
b. Awards 12. When the provision arises from a single obligation, the
c. Credits estimate of the amount
d. Royalty a. Reflects the weighing all possible outcomes by their
associated probabilities

m
er as
4. The consideration allocated to the award credits is measured b. Is determined as the individual most likely outcome
at c. Is the individual most likely outcome adjusted for the

co
a. Fair value of the award credits eH w effect of other possible outcomes
b. Carrying amount of goods to be received in exchange d. Midpoint of the possible outcomes
c. Fair value of the goods to be received in exchange

o.
d. The proportion of the fair value of the award credits 13. Which statement is incorrect where some or all of the
rs e
relative to the total consideration received from the expenditure required to settle a provision is expected to be
ou urc

initial sale of the goods reimbursed by another party?

a. The reimbursement shall be recognized only when it is
5. Under a loyalty program, if the entity supplies the awards virtually certain that the reimbursement would be
itself, the consideration allocated to the award credits received if the entity settles the obligation
o

a. Shall be recognized as revenue immediately b. The amount of the reimbursement shall not exceed the
b. Shall not be accounted for as revenue separately
aC s

amount of the provision

c. Shall be recognized initially as deferred revenue and c. In the income statement, the expense relating to the
vi re

amortized as revenue over a reasonable period not provision may be presented net of the reimbursement
exceeding five years d. The reimbursement shall not be treated as separate
d. Shall be recognized initially as deferred revenue and asset and therefore “netted” against the estimated
y

subsequently recognized as revenue upon the liability for the provision

ed d

redemption of the award credits

14. Which of the following statements is false in relation to
ar stu

6. An entity sells appliances that include a three-year warranty. recognition of a provision?

Service calls under the warranty are performed by an a. No provision is recognized for costs that need to be
independent mechanic under a contract with the entity. incurred to operate in the future
Based on experience, warranty costs are expected to be b. A provision for the decommissioning of an oil
is

incurred for each machine sold. When should the entity installation or a nuclear plant station shall be
recognize these warranty costs? recognized to the extent that an entity is obliged to
Th

a. Evenly over the life of the warranty rectify damage already caused
b. When the service calls are performed c. Both a and b
c. When payments are made to the mechanic d. Neither a nor b
d. When the machines are sold
15. Which of the following statements is incorrect concerning
sh

7. A retail store received cash and issued gift certificates that recognition of a provision?
are redeemable in merchandise. The gift certificates lapse a. Provisions shall be reviewed at the end of each
one year after they are issued. How would the deferred reporting period and adjusted to reflect the current best
revenue account be affected by redemption and lapse of estimate
certificates, respectively? b. A provision shall be used only for expenditures for
a. Decrease and No effect which the provision was originally recognized
b. Decrease and Decrease c. Provisions shall be recognized for future operating
c. No effect and No effect losses
d. No effect and Decrease d. If an entity has an onerous contract, the present
obligation under the contract shall be recognized and
8. Which of the following is the correct definition of a measured as a provision
provision?
a. A possible obligation arising from past event 16. Provisions shall be recognized for all of the following, except
b. A liability of uncertain timing or amount a. Cleaning-up costs of contaminated land when an oil
c. A liability which cannot be easily measured entity has a published policy that it will undertake to
d. An obligation to transfer funds to an entity clean up all contamination that it causes
9. study
This A provision
source wasshall be recognized
downloaded as liability when
by 100000829656916 from CourseHero.com on 07-26-2021 13:48:43 GMT -05:00
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS Page 1 of 4
https://www.coursehero.com/file/26876291/FAR-19MC-Provisions-Contingent-Liabilities-and-Contingent-Assetse1docx/
 b. Restructuring costs after a binding sale agreement has
been signed
c. Rectification costs relating to defective products already
sold
d. Future refurbishment costs due to introduction of a new
computer system
17. Which of the following statements is true concerning the
measurement of a provision?
a. 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.
b. 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.
c. Both a and b
d. Neither I nor II
18. Which of the following is false in relation to the
measurement of provision?
a. The risks and uncertainties that inevitably surround
many events and circumstances shall be taken into
account in reaching the best estimate of a provision.
b. 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
c. Contractually required costs of retraining staff being
made redundant from the division being closed
d. Future operating losses of the division being closed up
to the date of closure
24. A contingent liability is a
a. Possible obligation that arises from past event and
whose existence will be confirmed only by the
occurrence or nonoccurrence of one or more uncertain
future events not wholly within the control of the entity.
b. Present obligation that arises from past event and it is
probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation and the amount of the obligation can be
measured reliably.
c. Both a and b
d. Neither a nor b
25. Which of the following statements is incorrect concerning a
contingent liability?
a. A contingent liability is not recognized in the financial
statements.
b. A contingent liability is disclosed only.
c. If the contingent liability is remote, no disclosure is
required.
d. A contingent liability is both probable and measurable.
26. It is a possible asset that arises from past event and whose

m
c. Both a and b existence will be confirmed only by the occurrence or

er as
d. Neither a nor b nonoccurrence of one or more uncertain future events not
wholly within the control of the entity.

co
19. Provisions shall be discounted if the effect is material. The
eH w a. Contingent asset
discount rate should (choose the incorrect one) b. Other asset
c. Suspense account

o.
a. Reflect current market assessment of the time value of
d. Current asset
rs e
money
b. Reflect risks specific to the liability
ou urc

c. Not reflect risks from which future cash flow estimates 27. Which of the following is incorrect concerning contingent
have been adjusted asset?
d. Be post-tax discount rate a. A contingent asset is not recognized in the financial
statements because this may result to recognition of
o

20. This is defined as “a structured program that is planned and income that may never be realized.
aC s

controlled by the management that materially changes either b. When the realization of income is virtually certain, the
vi re

the scope of a business of an entity or the manner in which related asset is no longer contingent asset and its
that business is conducted”. recognition is appropriate.
a. Restructuring c. A contingent asset is only disclosed when the
y

b. Liquidation occurrence of the future event is possible or remote.

c. Recapitalization d. The related gain arising from the contingent asset is
ed d

d. Corporate revamp recognized usually when it is realized.

ar stu

21. Examples of events that qualify as restructuring include all of 28. The likelihood that the future event will or will not occur can
the following, except be expressed by a range of outcome. Which range means that
a. Sale or termination of business the future event occurring is very slight?
b. Closure of business location in a region or relocation of a. Probable
is

business from one location to another b. Reasonably possible

c. Change in management structure such as elimination of c. Certain
Th

a layer of management d. Remote

d. Fundamental reorganization of an entity that has an
immaterial and insignificant impact on its operations 29. The present obligation that is probable and for which the
amount can be reliably measured shall
sh

22. It is the abusive practice of manipulation and creative
accounting by dumping all kinds of provisions under the
banner of provision for restructuring.
a. Big bath provision
b. Creative accounting
c. Cookie jar
d. General reserve
23. 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?
a. Retraining staff continuing to be employed
b. Relocation costs relating to staff moving to other
divisions
This study source was downloaded by 100000829656916 from CourseHero.com on 07-26-2021 13:48:43 GMT -05:00
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
https://www.coursehero.com/file/26876291/FAR-19MC-Provisions-Contingent-Liabilities-and-Contingent-Assetse1docx/
a. Not be accrued but shall be disclosed in the notes to the
financial statements.
b. Be accrued by debiting an appropriate retained
earnings account and crediting liability account.
c. Be accrued by debiting an expense account and
crediting an appropriated retained earnings account.
d. Be accrued by debiting an expense account and
crediting a liability account.
30. Contingent assets are usually recognized when
a. Realized
b. Occurrence is reasonably possible and the amount can
be measured reliably
c. Occurrence is probable and the amount can be reliably
measured
d. The amount can be reliably measured
Page 2 of 4
 31. Which of the following is the proper accounting treatment
for a contingent asset?
a. An accrued account
b. Deferred earnings
c. An account receivable with an additional disclosure
explaining the nature of the transaction
d. A disclosure only
32. 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 shall be
reported
a. As a valuation allowance as a part of shareholders’
equity
b. As a fixed valuation allowance account
c. In the notes to the financial statements
d. In the statement of financial position
33. A provision is a liability that is
a. Uncertain as to existence, timing or amount
b. Uncertain as to timing or amount
c. Uncertain as to existence or amount
d. Uncertain as to existence but certain as to timing or
amount
34. An obligation that is contingent on the occurrence of a future
entity’s experience, warranty costs are estimated at ₱300
per machine. During the current year, Jekyll Company sold
2,400 washing machines and paid warranty costs of
₱170,000. In its balance sheet for the current year, what
amount should Jekyll Company report as estimated warranty
liability?
a. ₱170,000
b. ₱240,000
c. ₱550,000
d. ₱720,000
38. Ethel Company’s president gets an annual bonus of 10% of
net income after bonus and income tax. Assume the tax rate
of 30% and the correct income before bonus and tax is
₱9,600,000. How much should be reported as current
liability in Ethel’s December 31, 2017 statement of financial
position?
a. ₱ 395,000
b. ₱ 628,000
c. ₱ 722,000
d. ₱2,240,000
39. Beginning 2017, Pains Company began marketing a new
beer called “Red Eagle”. To help promote the product, the
management is offering a special beer mug to each customer
for every 20 specially marked bottle caps of Red Eagle. Pains
estimates that out of the 300,000 bottles of Red Eagle sold
during 2017, only 50% of the marked bottle caps will be

m
redeemed. For the year 2017, 8,000 mugs were ordered by

er as
event should be reported in the balance sheet as a liability if
a. The future event is likely to occur the company at a total cost of ₱360,000. A total of 4,500

co
b. The amount of the obligation can be reasonably mugs were already distributed to customers. What is the
estimated
eH w
c. The occurrence of the future event is at least reasonably
total amount of the liability that Pains Company should
report on its December 31, 2017 statement of financial

o.
possible and the amount is known position?
rs e
d. The occurrence of the future event is probable and the a. ₱135,000
ou urc

amount can be reasonably estimated b. ₱202,500

c. ₱337,500
35. A new product introduced by Eaut Promotions carries a two- d. ₱360,000
year warranty against defects. The estimated warranty costs
o

40. On January 2, 2017, Greco Company introduced a new line of

related to sales are as follows:
products that carry a three-year warranty against factory
aC s

Year of sale 3%
Year after sale 5% defects. Estimated warranty cost related to peso sales are as
vi re

follows: 1% of the sales in the year of sale, 2% in the year

Sales and actual warranty expenditures for the years ended after sales and 3% in the second year after sale. Sales and
December 31, 2016 and 2017 are as follows: actual warranty expenditures for the period 2017 to 2019
y

Sales Actual Warranty were as follows:

ed d

Expenditures Sales Actual Warranty Expenditures

2016 ₱ 800,000 ₱20,000 2019 ₱100,000 ₱750
ar stu

2017 1,000,000 70,000 2018 250,000 3,750

2017 350,000 11,250
What amount should Eaut report as its estimated liability as
of December 31, 2017? What amount should Greco Company report as warranty
is

a. ₱4,000 expense in 2017?

b. ₱24,000 a. ₱ 3,500
Th

c. ₱54,000 b. ₱11,250
d. ₱74,000 c. ₱11,500
d. ₱21,000
36. On December 2, 2017, an employee filed a ₱3,000,000
41. A court case decided on 21 December 2017 awarded
lawsuit against Scruicer Company for damages suffered
sh

damages against Jenin. The judge has announced that the

when one of the Scruicer’s plants exploded on July 20, 2017.
amount of damages will be set at a future date, expected to
Scruicer’s legal counsel expects the company will lose the
be in March 2018. Jenin has received advice from its lawyers
lawsuit and estimates the loss to be between ₱500,000 and
that the amount of the damages could be anything between
₱1,000,000. The employee has offered to settle the lawsuit
₱20,000 and ₱7,000,000. As of December 31, 2017, how
out of court for ₱900,000, but Scruicer will not agree to the
much should be recognized in the statement of financial
settlement.
position regarding this court case?
In its December 31, 2017 statement of financial position, a. ₱ 0
b. ₱ 20,000
what amount should Scruicer Company report as provision
c. ₱3,510,000
from lawsuit? d. ₱7,000,000
a. ₱500,000
b. ₱750,000 42. On February 5, 2018, an employee filed a ₱2,000,000 lawsuit
c. ₱1,000,000
against Monica Company for damages suffered when one of
d. ₱3,000,000
Monica’s plant exploded on December 29, 2017. Monica’s
37. Jekyll Company sells washing machines that carry a three- legal counsel expects the entity will probably lose the lawsuit
year warranty against manufacturer’s defects. Based on the and estimates the loss to be ₱500,000. The employee has
This study source was downloaded by 100000829656916 from CourseHero.com on 07-26-2021 13:48:43 GMT -05:00
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS Page 3 of 4
https://www.coursehero.com/file/26876291/FAR-19MC-Provisions-Contingent-Liabilities-and-Contingent-Assetse1docx/
 offered to settle the lawsuit out of court for ₱900,000 but attorney, it is probable that Home will have to pay ₱500,000
Monica Company will not agree to the settlement. In its and it is reasonably possible that Home will have to pay
December 31, 2017 statement of financial position, what ₱600,000 as a result of this lawsuit. In its 2017 financial
amount should Monica Company report as liability from statements, Home should report
lawsuit? a. An accrued liability of ₱500,000 only.
a. ₱ 500,000 b. An accrued liability of ₱500,000 and would disclose a
b. ₱ 900,000 contingent liability.
c. ₱1,000,000 c. An accrued liability of ₱600,000 only.
d. ₱2,000,000 d. No information about this lawsuit.

43. On November 25, 2017, an explosion occurred at a Mary
Company plant causing extensive property damage to area
buildings. By March 10, 2018, claims had been asserted
against Mary. Mary’s management and counsel concluded
that it is probable Mary will be responsible for damages, and
that ₱3,500,000 would be reasonable estimate of its liability.
Mary’s ₱10,000,000 comprehensive public liability policy
has a ₱500,000 deductible clause. What should be reported
in the December 31, 2017 financial statements, issued on
March 25, 2017, in relation to this item?
a. An accrued liability of ₱500,000.
b. An accrued liability of ₱3,500,000.
c. A footnote disclosure indicating the probable loss of
₱500,000.
d. A footnote disclosure indicating the probable loss of
₱3,500,000.
44. Gallery Department Store sells gift certificates, redeemable
48. Hope guarantee a loan of ₱200,000 to Faith. At the time
when the financial statements of Hope are being finished, it
is clear that Faith is in financial difficulties and it is probable
that Hope will meet the guarantee. In the financial
statements, Hope should
a. Only disclose in the notes the amount of the guarantee
b. Recognize a provision for liability of ₱200,000
c. Not recognize and need not disclose the guarantee
d. Recognize a provision for liability of ₱200,000 and also
disclose in the notes to financial statements
49. Milder Company has guaranteed a loan of ₱300,000 to Miller
Company. After the balance sheet date of Milder Company
but before directors approved the financial statements,
Milder Company receives notice that Miller Company is in
liquidation and the creditor of Miller will involve the
guarantee. What proper accounting should Milder Company
account for the guarantee?

m
for store merchandise that expires one year after their a. The amount of the guarantee is not accounted for in

er as
issuance. Gallery has the following information pertaining to Milder’s books

co
its gift certificates sales and redemptions: b. The amount of ₱330,000 should be recognized as a
Unearned at December 31, 2016
2017 sales
eH w 600,000
2,000,000
provision
c. The ₱300,000 be recognized as a liability when

o.
2017 redemptions of prior-years sales 200,000 necessary disclosure in the notes to financial
rs e
2017 redemptions of current-year 1,400,000 statements.
d. The contingent liability should be disclosed by way of
ou urc

sales
note to the financial statements
Gallery’s experience indicates 10% of gift certificates sold
will not be redeemed. In its December 31, 2017 statement of
o

financial position, what amount should Gallery report as

unearned revenue?
aC s

a. ₱400,000
vi re

b. ₱600,000
c. ₱800,000
d. ₱1,000,000
y

45. Goverance Inc. has a bonus plan covering all employees, the
ed d

total bonus is equal to 10% of Governance’s preliminary

ar stu

(pre-bonus, pretax) income reduced by income tax

(computed of the preliminary income less the bonus itself).
Governance’s preliminary income for 2017 is ₱1,000,000
and the income tax rate is 32%. How much is the bonus for
is

2017?
a. ₱61,200
Th

b. ₱65,891
c. ₱68,000
d. ₱70,248

46. In May 2016, West Company filed suit against Brown, Inc.
sh

seeking ₱850,000 damages for patent infringement. A court

verdict in November 2016 awarded West ₱600,000in
damages, but Brown’s appeal is not expected to be decided
before 2016. West’s counsel believes it is probable but not
virtually certain that West will be successful against Brown
for an estimated amount in the range between ₱300,000 and
₱450,000, with ₱400,000 considered the most likely
amount. What amount should West record as a contingent
asset from lawsuit in the year ended December 31, 2016?
a. None
b. ₱300,000
c. ₱400,000
d. ₱600,000

47. On December 31, 2017, Home Company was a defendant in a

pending lawsuit. The suit arose from the alledge defect of a
product that Home sold in 2016. The opinion of home’s
This study source was downloaded by 100000829656916 from CourseHero.com on 07-26-2021 13:48:43 GMT -05:00
PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS Page 4 of 4
https://www.coursehero.com/file/26876291/FAR-19MC-Provisions-Contingent-Liabilities-and-Contingent-Assetse1docx/

Powered by TCPDF (www.tcpdf.org)