Deck 8: Provisions, Contingent Liabilities and Contingent Assets

Question 1

An example of where an entity has a present obligation is:

A) a public announcement made by an entity's management to undertake restructuring.
B) a recommendation from the HR manager to the Board of Directors as to the level of bonuses to be paid at the end of the financial period.
C) a historical pattern of performing a major overhaul of plant and machinery every three years.
D) the declaration of a dividend by directors which is yet to be approved at a meeting of shareholders.

Answer 1

A

Question 2

Percy Limited is a manufacturer of playground equipment. Percy provides its customers with five-year warranties from the date of sale. Past experience shows that there will be some claims under the warranties. The appropriate treatment of this item under AASB 137 Provisions, Contingent Liabilities and Contingent Assets is to:

A) recognise the best estimate of costs as a provision.
B) disclose in the notes, but do not recognise in the financial statements.
C) charge the costs directly to profit or loss in the period in which the economic outflows occur.
D) transfer the expected amount of the warranty from retained earnings to a special reserve account in equity.

Answer 2

A

Question 3

Which of the following statements is correct?

A) A constructive obligation is an example of an equitable obligation.
B) An equitable obligation is an example of a present obligation.
C) A present obligation is an example of a legal obligation.
D) A legal obligation is an example of a constructive obligation

Answer 3

B

Question 4

Which of the following statements is correct?

A) A contingent liability is a class of liabilities.
B) A provision is a class of contingent liabilities.
C) A provision is a class of liabilities.
D) Contingent liabilities and provisions are classes of liabilities.

Question 5

An event that gives rise to a present obligation, but which cannot be measured with sufficient reliability is an example of a:

A) accrual.
B) provision.
C) liability.
D) contingent liability.

Question 6

Which of the following is an example of a provision falling within the scope of AASB 137?

A) Accruals.
B) Onerous contracts.
C) Insurance contracts.
D) Employee benefits.

Question 7

Collins Limited estimated the future cash outflows over the next three years relating to settlement of warranty obligations would be as follows: 1 year from now: $20 000
2 years from now: $38 000
3 years from now: $45 000
Collins Limited calculates that the present value of the total expected future cash outflow, using a discount rate of 8%, is:

A) $ 86 820
B) $ 88 301
C) $ 95 370
D) $103 000

Question 8

AASB 137 requires provisions to be recognised when: I there has been a past event.
II an entity has a present obligation.
III the amount of the obligation can be reliably estimated.
IV it is possible that an outflow of resources will be required to settle the obligation.

A) I, II and III.
B) II, III and IV.
C) I, III and IV.
D) I, II and IV.

Question 9

Liabilities which do not meet the recognition criteria and where the possibility of an outflow of economic resources is remote should:

A) be recognised as an accrual.
B) be recognised as a provision.
C) be recognised as a contingent liability.
D) not be recognised in the financial statement at all.

Question 10

AASB 137 Provisions, Contingent Liabilities and Contingent Assets provides the definition of a/an as: 'a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it'.

A) future operating loss.
B) deferred liability.
C) onerous contract.
D) present obligation.

Question 11

A contingent liability is defined as a: $\begin{array}{|l|l|l|l|l|} \hline& \text { I } & \text { II } & \text { III } & \text { IV } \\\hline \text { possible obligation that arises from past events. } & \text { Yes } & \text { Yes } & \text { No } & \text { No } \\\hline \begin{array}{l}\text { possible obligation whose existence will be confirmed } \\\text { by the occurrence of an uncertain future event. }\end{array} & \text { Yes } & \text { No } & \text { Yes } & \text { No } \\\hline \begin{array}{l}\text { present obligation not recognised because the outflow } \\\text { of economicbenefits to settle the obligation is not } \\\text { probable. }\end{array} & \text { Yes } & \text { No } & \text { Yes } & \text { No } \\\hline \text { present obligation that is measured reliably. } & \text { No } & \text { No } & \text { Yes } & \text { Yes }\\\hline\end{array}$

A) I.
B) II.
C) III.
D) IV.

Question 12

Angus Ltd has provided a bank guarantee to a bank in relation to a loan provided to Brown Ltd. Brown Ltd is solvent and shows no signs of defaulting on the loan. The treatment of the bank guarantee in the records of Angus Ltd is to:

A) do nothing.
B) recognise a contingent liability.
C) recognise a liability.
D) recognise a provision.

Question 13

The costs under an onerous contract are measured as:

A) the lower of cost or net market value.
B) the present value method using a risk-free discount rate.
C) the unavoidable costs of meeting the obligations discounted by reference to market yields at reporting date.
D) the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil the contract.

Question 14

The uncertainty that exists in relation to provisions is one of:

A) timing.
B) amount.
C) timing or amount.
D) timing and amount.

Question 15

An entity sells goods under warranty and past experience shows that minor defects account for 10% of sales and major defects account for 2% of sales. If minor defects were detected in all goods sold the repair costs would be $260 000, and if major defects were detected in all goods sold the repair costs would be $990 000. The expected value of the warranty costs is:

A) $ 0.
B) $ 19 800.
C) $ 45 800.
D) $ 99 000.

Question 16

AASB 137 prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets except for:

A) those arising for insurance entities from contracts with policyholders.
B) those relating to employee benefits.
C) those relating to leases.
D) none. All of these are exceptions to AASB 137.

Question 17

McAllister Limited announced its plans for a major restructuring of its operations. Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the entity is able to:

A) capitalise all direct and indirect restructuring costs.
B) set up a provision for the best estimate of all restructuring costs.
C) provide for restructuring costs that are associated with the ongoing activities of the entity.
D) provide only for restructuring costs that are directly and necessarily caused by the restructuring.

Question 18

Accountants are required to use professional judgement in determining the best estimate of provisions. Which of the following is an example of when judgement is required?

A) Assessing the likely consideration that will be required to settle the obligation.
B) Determining if various scenarios may arise.
C) Determining when the consideration is likely to be settled.
D) All of these options.

Question 19

Contingent liabilities are:

A) recognised in the financial statements unless the possibility of an outflow in settlement is remote.
B) recognised in the notes to the financial statements because the possibility of an outflow in settlement is remote.
C) recognised in the notes to the financial statements unless the possibility of an outflow in settlement is remote.
D) not recognised in the notes to the financial statements because the possibility of an outflow in settlement is remote.

Question 20

Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, when providing for a future event such as the clean-up of a construction site at the end of a long-term project, gains and other cash inflows that are expected to arise on the sale of assets related to the clean-up, must be:

A) set-off against the provision for the clean-up.
B) recognised as a deferred asset.
C) measured separately of the provision.
D) recognised directly in equity in the period in which the cash inflows arise.

Question 21

Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the appropriate accounting treatment for future operating losses is to:

A) determine a reasonable estimate of the future losses and recognise as a provision.
B) determine the future losses and charge them directly against retained earnings.
C) not recognise such items in the financial statements.
D) determine the future losses and discount them to present value.

Question 22

At the end of the financial period, Rosella Limited was awaiting the final details of a court case for damages awarded in its favour. The amount and possible receipt of damages is unknown and will not be decided until the court sits again in approximately three months' time. How should Rosella Limited recognise this situation when preparing the financial statements?

A) Disclose in the notes to the financial statements as it is possible that the entity will receive the damages and the court decision is out of its control.
B) Do not recognise or disclose in the financial statements as the possibility of receiving damages is remote.
C) Recognise as an asset in the financial statements as the receipt of damages is probable.
D) Recognise as a deferred asset in the statement of financial position and re-classify as a non-current asset when the court decision is known.

Question 23

Entities are not required to disclose which of the following in relation to provisions?

A) Comparatives.
B) Amounts used during the period.
C) The effect of any change in the discount rate used.
D) Carrying amounts of provisions at the beginning of the period.

Question 24

As per AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the appropriate treatment for a contingent asset in the financial statements of an entity is:

A) recognition in the financial statements, and note disclosure.
B) recognition in the financial statements, but no further disclosure in the notes.
C) do not recognise in the financial statements, and do not disclose in the notes.
D) disclosure of information in the notes, but do not recognise in the financial statements.

Question 25

AASB 137 Provisions, Contingent Liabilities and Contingent Assets, defines a as: '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) deferred liability.
B) contingent asset.
C) deferred asset.
D) contingent liability.

Question 26

In respect to a contingent liability, AASB 137 Provisions, Contingent Liabilities and Contingent Assets, requires disclosure of:

A) an estimate of its financial effect.
B) any increase in the contingent liability during the period.
C) the carrying amount at the beginning and end of the period.
D) an indication of the uncertainties about the amount and timing of expected outflows.

Question 27

For each class of provision, AASB 137 Provisions, Contingent Liabilities and Contingent Assets requires an entity to disclose the following information: I Comparative information.
II Unused amounts reversed during the period.
III Additional provisions made during the period.
IV The carrying amount at the beginning and end of the period.
V A brief description of the nature of the obligation and the expected timing.

A) I, II, and III only.
B) II, III, IV and V only.
C) II, III and IV only.
D) I, III, IV and V only.