Deck 24: Provisions, Contingent Liabilities, and Contingent Assets

Question 1

Which of the following is not a provision?

A) Warranty
B) Insurer Contracts
C) Worker's Compensation
D) Guarantor Contract
E) All of the above are provisions

Answer 1

All of the above are provisions

Question 2

Rank the following liabilities from 1-4 by degree of uncertainty, with 1 being the most certain and 4 being the most uncertain.

A) Rent Payable ________
B) A lawsuit where a loss is possible but inestimable _________
C) Mortgage guarantee for an individual with good credit ________
D) Flood insurance on a skyscraper not in a flood zone _______

Answer 2

Rent Payable ________
A lawsuit where a loss is possible but inestimable _________
Mortgage guarantee for an individual with good credit ________
Flood insurance on a skyscraper not in a flood zone _______

Question 3

Lily Company signed a contract to produce their one-of-a-kind toy flowers for Han Company. Lily Company was to receive $100,000 upon filling the obligation to produce 1,000 toy flowers. The cost of a certain rare-metal rose 200 percent just after the contract was signed. The unexpected rise in the metal meant that Lily Company would lose $30,000 on the contract. The Contract included a nonfulfillment penalty of $10,000. At what amount should Lily Company recognize for the provision?

A) $30,000
B) $130,000
C) $10,000
D) none of the above

Answer 3

$10,000

Question 4

Which of the following is recognized in the financial statements under IFRS?

A) Contingent Assets
B) Contingent Liabilities
C) Provisions
D) None of the above

Question 5

Which of the following is a required disclosure for a provision?

A) An explanation of the nature of the obligation
B) Information about the timing of Cash Flows
C) Any assumptions made
D) All of the above

Question 6

Remington Entity (RE) developed a patent in waffle making. The patent is completely unique. Flap Jack & Jill Entity (FJJE) violated the patent and RE sued FJJE. RE's lawyers are optimistic that they will win and that the winnings will be $80,000 in three years. RE has a discount rate of 10 percent. How much of a contingent asset is RE allowed to recognize at this time?

A) $80,000
B) $60,015
C) $0
D) none of the above

Question 7

Recently Silph Entity (SE) discovered a defect in one of their long-range cameras. The Head of Product Development has stated that it is more likely than not that they would have to replace or reimburse a significant number of cameras. SE estimates that there is a 30 percent chance of $100,000, a 45 percent chance of $500,000, a 20 percent chance of $1,000,000, and a 5 percent chance of $2,000,000 in warranty damages in each of the respective scenarios. What is SE's credit in the journal entry to recognize the provision?

A) Warranty Expense $3,600,000
B) Warranty Expense $555,000
C) Warranty Provision $555,000
D) Warranty Provision $500,000

Question 8

What is the correct treatment of an event if the likelihood is remote that a possible loss will result in an outflow of benefits?

A) The event must be disclosed.
B) A provision must be established for the event.
C) Management must use judgment in determining how to report the event.
D) The event does not need to be disclosed or a provision provided.

Question 9

What is the correct treatment of an event if the likelihood is probable that a possible gain will result in an inflow of benefits?

A) The event must be disclosed.
B) A provision must be established for the event.
C) Management must use judgment in determining how to report the event.
D) The event does not need to be disclosed or a provision provided.

Question 10

Contingent liabilities are not recognized in the financial statements under IFRS.

Question 11

When a provision involves a large number of items, the entity may report the most likely scenario.

Question 12

If management cannot reliably establish a percentage, but instead an estimated range, management should recognize the provision using the midpoint.

Question 13

Under IFRS, a provision may be reversed if it is no longer probable that an outflow of assets is likely to occur to settle the obligation.

Question 14

To disclose a Contingent Asset under IFRS, the likelihood of realizing the asset must be at least 50 percent.

Question 15

With regards to restructuring a business, a liability is only recognized after the entity has incurred the cost of the restructuring.

Question 16

Provisions related to operating losses are not recognized under IFRS.

Question 17

Even if the use of assets to settle a provision is several years away, you do not need to take into account the time value of money.

Question 18

To recognize a provision for restructuring, the plan for restructuring has been announced to those affected by the plan.

Question 19

Contingent Assets are not disclosed, even if the contingency is probable.

Question 20

The textbook discusses the three liability recognition criteria, what are they? And why are they important for contingencies?

Question 21

Papenfuss' Pet Pampering Palace is a dog grooming service and producer of specialty shampoos for dogs. Recently, a product has been causing rashes on the dogs. Their attorneys estimate that the likelihood that the defendant loses is high, and that the most likely payout will be $10,000,000 in three years. Papenfuss' Pet Pampering Palace can normally earn an 8 percent return on their investment. At what amount should they disclose the amount of the probable loss from the lawsuit? What amount would they have disclosed if the likelihood of losing were low?

Question 22

Compare and contrast US GAAP's interpretation of probable, to IFRS's. What are the implications of the differences in interpretation?

Question 23

Climbing Entity (CE) started selling harnesses to mountain climbers around the world in 20X7. In November, 20X8, CE discovered that a buckle on its harnesses was defective and failed when the harness was heavily stressed. FE has a warranty policy against defective harnesses and anticipates (it is more likely than not) that thousands of harnesses will be returned to the entity.
-How will CE determine whether to recognize a provision according to IAS 37?

Question 24

Climbing Entity (CE) started selling harnesses to mountain climbers around the world in 20X7. In November, 20X8, CE discovered that a buckle on its harnesses was defective and failed when the harness was heavily stressed. FE has a warranty policy against defective harnesses and anticipates (it is more likely than not) that thousands of harnesses will be returned to the entity.

-CE has determined that it needs to recognize a provision relating to the faulty harnesses it sold. Management has assembled the following data:
• Number of harnesses sold - 75,000
• Harnesses anticipated to have no defects - 70%
• Harnesses anticipated to have minor defects - 20%
• Harnesses anticipated to have major defects - 10%
• Management estimates that the cost of repairing each harness with a minor defect is $40 and a major defect $120,
What is CE's journal entry on December 31, 20X8?

Question 25

In May 20X7, Chengu Entity (CE) decided to consolidate its operating facilities into one office located in Xaimen, China. In order to do this, CE had to shut down one of its facilities located in Surabaya, Indonesia. The Indonesian location was vacated in September, 20X7. CE has 2 years remaining on its lease in Indonesia and the lease is only cancellable under a $40,000 penalty payment. The present value of Elite's remaining payments is $27,000. How does CE account for this event?