FA-Ch. 12 Provisions

Which of the following statements about the requirements relating to IAS 37 Provisions,

Contingent Liabilities and Contingent Assets are correct?

1. 1. A contingent asset should be disclosed by note if an inflow Of economic benefits is

probable.

2. 2. NO disclosure Of a contingent liability is required if the possibility Of a transfer Of

economic benefits arising is remote.

3. 3. Contingent assets must not be recognised in financial statements unless an inflow of

economic benefits is virtually certain to arise.

• 1, 2 and 3

• 1 and 2 only

• 1 and 3 only

• 2 and 3 only

The following items need to be considered in finalising the financial statements of Q Co:

1. 1. QCO gives warranties on its products. Q CO's statistics show that about 5% Of sales give

rise to a warranty claim.

2. 2. Q Co has guaranteed the overdraft of another entity. The likelihood of a liability arising

under the guarantee is assessed as possible.

What is the correct action to be taken in the financial statements of Q Co for these items?

• Create a provision - 1

  Disclose by note

  only - 2

• Disclose by note

  only - 1

  No action - 2

• Create a provision - 1 and 2

• Disclose by note

  only - 1 and 2

Which the following statements relating to the requirements of IAS 37 Provisions,

Contingent Liabilities and Contingent Assets is correct?

• A contingent asset must always be recognised and accounted for in the financial

  statements.

• A contingent asset must always be disclosed in the notes to the financial statements.

• A contingent liability must always be disclosed in the notes to the financial statements

  if it is regarded as possible.

• A contingent liability must always be disclosed in the notes to the financial statements

  if it is regarded as probable.

Which the following statements relating to the requirements of IAS 37 Provisions,

Contingent Liabilities and Contingent Assets is correct?

• A contingent asset must be recognised and accounted for in the financial statements

  if it is regarded as probable,

• A contingent asset must never be recognised in the financial statements.

• A contingent liability must either be recognised and accounted for in the financial

  statements, or disclosed in the notes to the financial statements.

• A contingent liability may not be required to be accounted for or disclosed in the notes

  to the financial statements under certain circumstances.

Which of the following statements are correct in relation to provisions and liabilities?

1. 1. A provision will always be classified as falling due for payment within twelve months

Of the reporting date, whereas a liability may be classified as either current or non-

current.

2. 2. A provision requires judgement and estimation to quantify the amount and/or the

date Of payment, whereas a liability is normally capable Of precise calculation and the

date of payment can be determined.

3. 3. A provision meets the definition of a liability, but is subject to uncertainty regarding

the exact amount or date of the future outflow of economic benefits.

• 1 and 2

• 2 and 3

• 1 and 3

• 1, 2 and 3

Driller Co undertakes oil and gas exploration activities. One of the conditions of the operating

licence is that Driller must make good any damage caused to the local environment as a result

of its exploration activities. As at the year-end date of 31 August 20X4, Driller Co estimated

that the cost of rectifying damage already caused at current exploration sites at $5 million.

At that date Driller Co estimated that that the cost of rectifying expected future damage at

current exploration sites at an additional $20 million. Driller Co also estimated that all

current exploration sites will operate until 20X7 or beyond that date.

How should this information be reported in the financial statements of Driller Co for the

year ended 31 August 20X4?

• As a provision classified as a current liability for $5 million

• As a provision classified as a current liability for $25 million

• As a provision classified as a non-current liability for $5 million

• As a provision classified as a non-current liability for $25 million

Recently, users of a new perfume have suffered blistering of the skin along with considerable

pain and discomfort. Following investigation by the manufacturer, Fleur Co, it appears that

product contamination occurred during the bottling process which was performed by Bottler.

Fleur CO's legal representatives have advised it that it is probable that customers will make

valid compensation claims totalling $3 million and that it is probable Fleur Co will be able to

successfully counter-claim against Bottler for the same amount.

How should this information be reported in the financial statements of Fleur Co for the

year ended 31 August 20X4?

• There should be a provision for $3 million only recognised in the statement of financial

  position.

• There should be a provision and an asset, each for $3 million, recognised in the

  statement of financial position.

• No provision or asset should be recognised in the statement of financial position as the

  two amounts cancel each other.

• There should a provision for $3 million in the statement Of financial position and a

  disclosure note only to deal with the contingent asset Of the amount which may be

  recovered from Bottler.

Electrode Co manufactures vacuum cleaners and allows customers three months from the

date of purchase to return cleaners if they are dissatisfied with the product for any reason.

At 31 May 20X8, Electrode Co included a provision of in the financial statements

relating to the expected return of cleaners which had been sold before the year-end date. At

31 May 20X9, Electrode Co estimated that the amount of the provision should be changed to

$13,000.

How should this information be accounted for in Electrode CO's financial statements for

the year ended 31 May 20X9?

• Dr - Other comprehensive income

  Cr - Provision $3,000

• Dr - Provision $3,000

  Cr - Other comprehensive income $3,000

• Dr - Profit or loss $3000

  Cr - Provision $3,000

• Dr - Provision $3,000

  Cr - Profit or loss $3,000

During the year ended 30 April 20X7 Doolittle co a number Of difficulties With

employees. On I April 20X7 Doolittle Co dismissed an employee and subsequently received

notice of a claim for unfair dismissal amounting to $50,cm. Another employee suffered

personal injury on 30 March 20X7 whilst operating machinery at work. On 30 May Doolittle

Co received notice of a claim from that employee for compensation of $100,mo. Doolittle

CO's legal representatives have advised that the claim for unfair dismissal will probably be

successful and result in a compensation award of $5000 to the employee. The lawyer also

advised that the compensation claim for injury suffered is regarded as possible, but not

probable, that compensation will be payable. In the event that compensation was payable

for personal injury suffered, an amount of $ICLOOO is a reliable estimate.

How should this information be accounted for in the financial statements of Doolittle Co

for the year ended 30 April 20X7?

• A provision should be recognised in the financial statement for only.

• A provision should be recognised in the financial statements for $50,000 plus a

  disclosure note included of the possible compensation payment relating to the

  personal injury claim.

• A provision should be recognised in the financial statements for $150,000 only,

• A provision should be recognised in the financial statements for $150,mo and a

  disclosure note included of the possible compensation payment relating to the

  personal injury claim.

Lin's business is being sued by a customer for $20,000. The lawyer advising the business has said that the customer has a good case and it is likely that Lin will have to pay $20,000 in damages and a further $4,000 in legal fees.

What is the amount of the provision that needs to be recognised in the financial statements of Lin's business?

• 1. $NIL

• 1. $4,000

• 1. $20,000

• 1. $24,000