PROVISION

Question 1

1. Which is the correct definition of a provision?
   a. A possible obligation arising from past event
   b.A liability of uncertain timing or amount
   c. A liability which cannot be easily measured
   d. An obligation to transfer funds to an entity

Answer 1

b.A liability of uncertain timing or amount

Question 2

2. A provision shall be recognized as liability when
   a. An entity has a present obligation as a result of a past event
   b. It is probable that an outflow of resources embodying economic benefits will be required to the obligation
   c. The amount of the obligation can be measured reliably
   d.All of these are required for the recognition of provision as liability.

Answer 2

d.All of these are required for the recognition of provision as liability.

Question 3

3. A legal obligation is an obligation that is derived from all of the following, except
   a. Legislation
   b. A contract
   c. Other operation of law
   d. An established pattern of past practice

Answer 3

d. An established pattern of past practice

Question 4

4. An entity has an established pattern of practice or stated policy that has created valid expectation that it will accept certain responsibilities.
   a. Constructive obligation
   b. Legal obligation
   c. Unerous obligation
   d. Present obligation

Answer 4

a. Constructive obligation

Question 5

5. It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but to settle the obligation.
   a. Obligating event
   b. Past event
   c. Subsequent event
   d. Current event

Answer 5

a. Obligating event

Question 6

1. An outflows of resources embodying economic benefits is regarded as “probable” when
   a. The probability that the event will occur is greater than the probability that the event will not occur.
   b.The probability that the event will not occur is greater than the probability that the event will occur.
   c. The probability that the event will occur is the same as the probability that the event will not occur.
   d. The probability that the event will occur is 90% likely.

Answer 6

a. The probability that the event will occur is greater than the probability that the event will not occur.

Question 7

2. Where range of possible outcomes, and each point in that range is as likely as any other, the range to be used is
   a. Minimum
   b. Maximum
   c. Midpoint
   d. Sum of the minimum and maximum

Answer 7

c. Midpoint

Question 8

3. When the provision involves a large population of items, the estimate of the amount
   a. Reflects the weighting of all possible outcomes by their associated probabilities.
   b. Is determined as the individual most likely outcome.
   c. May be the individual most likely outcome adjusted for the effect of other possible outcomes.
   d. Midpoint of the possible outcomes.

Answer 8

a. Reflects the weighting of all possible outcomes by their associated probabilities.

Question 9

4. When the provision arises from a single obligation, the estimate of the amount
   a. Reflects the weighting of all possible outcomes.
   b. Is determined as the individual most likely outcome.
   c. Is the individual most likely outcome adjusted for the effect of other possible outcomes.
   d. Midpoint of the possible outcomes.

Answer 9

c. Is the individual most likely outcome adjusted for the effect of other possible outcomes.

Question 10

5. The present value in a range of possible outcomes all discounted using the same rate would be
   a. The most likely outcome
   b. The maximum outcome
   C. The minimum outcome
   d. The sum of probability-weighted present value

Answer 10

d. The sum of probability-weighted present value

Question 11

1. For which of the following should a provision be recognized?
   a. Future operating losses
   b. Obligations under insurance contracts
   c. Reductions in fair value of financial instruments
   d. Obligations for plant decommissioning costs

Answer 11

d. Obligations for plant decommissioning costs

Question 12

2. Provisions shall be recognized for all of the following, except
   a. 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.
   b. Restructuring costs after a binding sale agreement has been signed.
   c. Rectification costs relating to defective products sold.
   d. Future refurbishment costs due to introduction of a new computer system.

Answer 12

d. Future refurbishment costs due to introduction of a new computer system.

Question 13

3. An entity isclosing 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
   c. Contractually required costs of retiring staff being made redundant from the division being closed
   d. Future operating losses of the division being closed up to the date of closure

Answer 13

c.Contractually required costs of retiring staff being made redundant from the division being closed

Question 14

4. An entity operates chemical plants. The published policies include a commitment to making good any damage caused to the environment by the operations. The entity has always honored this commitment. Which of the following scenarios would give rise to an environmental 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.

Answer 14

d. A chemical spill from one of the entity’s plants has caused harm to the surrounding area and wildlife.

Question 15

5. 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 next year. The cost of fitting smoke detector can be measured reliably. 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. Ignore the event.

Answer 15

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.

Question 16

1. Contingent liabilities will or will not become actual liabilities depending on
   a. Whether probable and measurable.
   b. The degree of uncertainty.
   c.The present condition suggesting a liability.
   d. The outcome of a future event.

Answer 16

d. The outcome of a future event.

Question 17

2. A contingent liability shall be recognized when
   a. Any lawsuit is actually filed against an entity.
   B. It is certain that funds are available to pay the amount of the claim.
   c. It is probable that a liability has been incurred but the amount cannot be reliably measured.
   d. The amount of the loss can be reliably measured and it is probable prior to issuance of financial statements that a liability has been incurred.

Answer 17

d. The amount of the loss can be reliably measured and it is probable prior to issuance of financial statements that a liability has been incurred.

Question 18

3. How should a contingent liability be reported in the financial statements when it is reasonably possible?
   a. As a deferred liability
   b. As an accrued liability
   c. As a disclosure only
   d. As an account payable

Answer 18

c. As a disclosure only

Question 19

4. Disclosure usually is not required for
   a. Contingent gain that is probable and measurable.
   b. Contingent loss that is possible and measurable.
   c. Contingent loss that is probable and cannot be reliably measured
   d. Contingent loss that is remote and measurable

Answer 19

d. Contingent loss that is remote and measurable

Question 20

5. Reporting in the financial statements is required for
   a. Loss contingency that is probable and measurable
   b. Gain contingency that is probable and measurable
   c. Loss contingency that is possible and measurable
   d. All loss contingency

Answer 20

a. Loss contingency that is probable and measurable

Question 21

6. A contingent liability
   a. Definitely exists as a liability but the amount and due date are indeterminable.
   b. Is accrued even though not reasonably estimated.
   C. Is the result of a loss contingency.
   d. Is not recognized in the financial statements.

Answer 21

d. Is not recognized in the financial statements.

Question 22

7. A contingent liability is
   a. An estimated liability.
   b. An event which is not recognized because it is not probable that an outflow will be required or the amount cannot be reliably estimated.
   c. A potential large liability.
   d. A potential small liability.

Answer 22

b. An event which is not recognized because it is not probable that an outflow will be required or the amount cannot be reliably estimated.

Question 23

8. An entity received notification of legal action. How should the probable and measurable loss be reported?
   a. As a loss recorded in other comprehensive income
   b. As a loss in the income statement and a contingent liability
   c. As a loss in the income statement and a provision
   d. In the notes to financial statements

Answer 23

c. As a loss in the income statement and a provision

Question 24

9. A contingent liability
   a. Has a most probable value of zero but may require a payment if a given future event occurs.
   b. Definitely exists as a liability.
   c. Is reported as current liability.
   d. Is not disclosed in the financial statements.

Answer 24

a. Has a most probable value of zero but may require a payment if a given future event occurs.

Question 25

10. Which of the following is **not considered** when **evaluating whether or not to record a liability for pending litigation**? a. Time period of the underlying cause of action b. The type of litigation involved c. The probability of an unfavorable outcome d. The ability to make a reliable estimate of the loss

Answer 25

b. The **type of litigation** involved

Question 26

1. **Contingent asset is usually recognized** when a. Realized b. Occurrence is reasonably possible and the amount can be reliably measured c. Occurrence is probable and measurable d. The amount can be reliably measured

Answer 26

a. Realized

Question 27

2. Which is the **proper treatment of contingent asset?** a. An accrued account b. Deferred income c. An account receivable d. A disclosure only

Answer 27

d. A **disclosure only**

Question 28

3. Gain contingency that is **remote** and measurable a. Must be disclosed in a note to financial statements. b. May be disclosed in a note to financial statements. c. Must be reported in the body of the financial statements d. Should not be reported or disclosed.

Answer 28

d. Should not be reported or disclosed.

Question 29

4. Which is the ******proper way to report a contingent asset receipt** of which is **virtually certain**? a. As an asset b. As unearned revenue c. As a disclosure only d. No disclosure and no accrual

Answer 29

a. As an **asset**

Question 30

5. What is the proper treatment of a **patent infringement** case of the plaintiff with **probable favorable outcome and a measurable settlement?** a. No reporting is required at this time b. Disclosure c . A gain for the minimum settlement d. A gain for the probable settlement

Answer 30

b. **Disclosure**

Question 31

QUESTION 44-20 Multiple choice (AICPA Adapted) 1. An entity **did not record** an accrual for a present obligation **but disclose** the nature of the obligation and the range of the loss. How likely is the loss? a. Remote b. Reasonably possible c. Probable d. Certain

Answer 31

b. Reasonably possible

Question 32

2. 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?** a. Probable b. Reasonably possible c. Certain d. Remote

Answer 32

d. Remote

Question 33

3. An **expropriation of asset which** is **imminent** and for which the loss can be **reasonably estimated** should be a. Accrued b. Disclosed c. Accrued and disclosed d. Ignored

Answer 33

c. Accrued and disclosed

Question 34

4. A present obligation that is **probable** and for which the **amount can be reliably estimated** should a. Not be accrued but disclosed. b. Be accrued by debiting retained earnings and crediting a liability. c. Be accrued by debiting an expense and crediting retained earnings. d. Be accrued by debiting an expense and crediting a liability.

Answer 34

d. Be accrued by **debiting an expense** and **crediting a liability**.

Question 35

5. **General or unspecified contingencies** should a. Be accrued in the financial statements and disclosed. b. Not be accrued and need not be disclosed. c. Not be accrued but should be disclosed. d. Be accrued but need not be disclosed.

Answer 35

b. **Not be accrued** and need **not be disclosed.**