Saint Paul School of Business and Law

CPA REVIEW CENTER

Financial
Accounting &
Reporting
Liabilities (FAR-007)

Name

BASIC
CONCEPTS
ON
CONTINGENT LIABILITIES:

PROVISIONS

AND

Provision existing liability of uncertain timing or

amount, the entity has present obligation, legal or
constructive as a result of past events(obligating event).
This is also equivalent to an estimated liability.
It is the uncertainty of a provision that primarily
distinguishes it from other liabilities.
Legal obligation arises from a contract, legislation or
other operation of law.
Constructive obligation derived from entities action
where:
a. the entity has indicated to other parties that it will
accept certain responsibilities by reason of
established pattern of past practices, published
policy, or a sufficiently specific current statement;
and
b. the entity has created a valid expectation that it
will discharge those responsibilities.
Obligating event - event that creates a legal or
constructive obligation because the entity has no option
but to settle the obligation created by the event.
Reliable estimate since the provision is uncertain,
estimation is essential in measuring a provision. (PAS 37,
par. 25). Where no reliable estimate can be made, no
liability is recognized.
MEASUREMENT OF A PROVISION:
- the amount recognized as a provision should be the
best estimate of the expenditure required to settle the
present obligation at the end of the reporting period.

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Best estimate is the amount that the entity would

rationally pay to settle the obligation at the end of the
reporting period or transfer it to a third party at the that
time.
a. Single obligation amount adjusted for the effect of
other outcomes
b. Range of possible outcomes the midpoint of the
range
c. Large population of items expected value(weights
of all possible outcomes)
Other measurement considerations:
1. Risk and uncertainties inevitable events and
circumstances are taken into account when
reaching an estimate.
2. Present value of obligation effects of time value of
money, if material, shall be considered using a
pretax discount rate.
3. Future events future events that affect the
amount required to settle the obligation is reflected
where there is sufficient evidence that they will
occur.
4. Expected disposal of assets gains or losses from
expected disposal of assets shall not be taken into
account in measuring a provision.
5. Reimbursements will only be recognized if it is
virtually certain that reimbursement will be made in
relation to a provision. This shall be accounted for
separately and not netted against the estimated
liability.
6. Change in provision provisions shall be reviewed
at the end of the reporting period and adjusted to
reflect the current best estimate.
7. Use of provision provision shall be used only for
expenditures for which the provision was originally
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recognized. (i.e. provision for plant dismantling

cannot be used for environment pollution claims)
8. Future operating losses provision shall not be
recognized for future operating losses.
9. Onerous contract if an entity has an onerous
contract, the present obligation under such
contract shall be recognized and measured as a
provision at the least net cost of exiting from the
contract (PAS 37, par 68) which is the lower
amount between the cost of fulfilling the contract
or the compensation or penalty arising from failure
to fulfill the contract.
Examples of provisions:
1. Warranties
2. Environmental contamination
3. Decommissioning or abandonment cost
4. Court case
5. Guarantee
Change in decommissioning liability (IFRIC 1) shall
be accounted for as follows:
a. A decrease in the liability is deducted from the cost
of the asset. If the decrease in liability exceeds the
carrying amount, the excess is recognized in the
profit or loss.
b. An increase in liability is added to the cost of the
asset. However, the entity shall consider whether
this is an indication that the carrying amount of the
asset may not be fully recoverable. If there is such
an indication, the asset should be tested for
impairment.
Restructuring program that is planned and controlled
by the management and materially changes either the
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scope of a business of an entity or the manner in which

that business is conducted. (PAS 37, par 10)
Events that may qualify as restructuring:
a. Sale or termination of a line of business
b. Closure of business location in a region or
relocation of business activities from one location
to another or relocation of headquarter from one
country to another.
c. Change in management structure, such as
elimination of a layer of management or making all
functional units autonomous.
d. Fundamental reorganization of an entity that has a
material and significant impact on its operations.
Provision for Restructuring is required since a
constructive obligation may arise from the decision to
restructure. Two conditions should be met for a
recognizing a provision for restructuring:
A. The entity has a detailed formal plan for the
restructuring which includes:
i.
Business being restructured
ii.
Principal location affected
iii.
Location, function and approximate number
of employees who will be compensated for
terminating their employment
iv.
Date when the plan will be implemented
v.
Expenditures that will be undertaken.
B. The entity has raised a valid expectation in the
minds of those affected that the entity will carry
out the restructuring by starting to implement the
plan and announcing the main features to those
affected by it.
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Amount of restructuring provision includes only

direct expenditures arising from the restructuring.
Expenditures related to ongoing activities of the entity are
not included.
PAS 37, par 81 specifically excludes the following
expenditures from the restructuring provisions:
a. Cost of retraining or relocating continuing staff
b. Marketing or advertising program to promote the
new company image
c. Investment in new system and distribution network.
Contingent Liability 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. It is not recognized since it is not probable that
an outflow of resources embodying economic benefits will
be required to settle the obligation or the amount of the
obligation cannot be measured reliably. (PAS 37, par 10)
Treatment of contingent liability:
Contingent liability shall not be recognized in the face
of the financial statements but shall be disclosed only. The
required disclosures are:
a. Brief description of the nature of the contingent
liability.
b. An estimate of its financial effects
c. An indication of the uncertainties that exist.
d. Possibility of any reimbursement.
If contingent liability is remote, no disclosure is necessary.
SPECIFIC PROVISIONS:
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I. Premiums - are articles of value such as toys, dishes,

silverware, and other goods and in some cases cash
payments given to customers as result of past sales or
sales promotion activities.
A. The accounting procedures for the acquisition of
premiums and recognition of the premium liability
are as follows:
When the premiums are purchased:
Premiums
xx
Cash

When the premiums

customers:
Premium expense
Premiums

are

distributed

xx

to

xx
xx

At the end of the year, if premiums are still

outstanding:
Premium expense
xx
Estimated premium liability
xx

B. Financial statement classification

Premiums current asset
Estimated premium liability current liability
Premium expense distribution cost

II. Warranties - is a term of a contract between the

buyer and the seller giving the buyer additional protection
on the quality of the product. This gives the seller or
manufacturer a responsibility to repair or replace the
product if it is damaged or faulty.
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A. Two approaches in accounting warranties

1. Accrual Approach matches costs with revenue,
at the time of sale, a liability for warranty cost arises
and is accounted for. The estimated warranty cost is
recorded as follows:
Warranty Expense
xx
Estimated Warranty Liability
xx
Entry for actual warranty cost subsequently incurred
and paid
Estimated Warranty Liability
xx
Cash
xx
Note: any difference between estimate and actual
cost is a change in estimate. If the actual cost >
estimated cost, the difference is charged to warranty
expense:
Warranty Expense
xx
Estimated Warranty Liability
xx
If actual cost is < estimated cost, the difference is an
adjustment to warranty expense as follows:
Estimated Warranty Liability
xx
Warranty Expense
xx

2. Expense as incurred Approach warranty costs

are immediately expensed.
B. Sale of warranty sometimes warranties are sold
separately from the product. The amount received
from the sale of the extended warranty is recognized
initially as deferred revenue and subsequently
amortized using straight line over the life of the
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warranty contract. The sale of the product with the

usual warranty is recorded separately from the sale
of the extended warranty.

III. Customer loyalty program is generally designed to

reward customers for past purchases and to provide them
with incentives to make further purchases
A. Recognition and measurement
IFRIC 13, an entity shall account for the reward
credits as a separately component of the initial
sale transaction
The fair value of the consideration received with
respect to the initial sale shall be allocated
between the award credits and the sale.
The consideration allocated to the award credits
is measured at fair value.
Subsequent recognition of the amount of award
credits depends on the following:
1. The entity supplies the awards itself
amount of revenue recognized shall be
based on the number of award credits that
have been redeemed relative to the total
number expected to be redeemed.
2. A third party supplies the awards
revenue is recognized at the point of sale.
Accounting treatment depends if the entity
is the principal or the agent.
a. Principal collector the amount
of revenue is equal to the net amount
retained
on
its
own
account.
(Consideration allocated vs amount
payable to the third party)
b. Agent of the third party the
amount of revenue is equal to the net
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amount retained on its own account.

(Consideration allocated vs amount
payable to the third party)

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PROVISION AND CONTINGENT LIABILITY (IAS

37)
Objective
The objective of IAS 37 is to ensure that appropriate
recognition criteria and measurement bases are applied
to provisions, contingent liabilities and contingent assets
and that sufficient information is disclosed in the notes to
the financial statements to enable users to understand
their nature, timing and amount. The key principle
established by the Standard is that a provision should be
recognised only when there is a liability i.e. a present
obligation resulting from past events. The Standard thus
aims to ensure that only genuine obligations are dealt
with in the financial statements planned future
expenditure, even where authorised by the board of
directors or equivalent governing body, is excluded from
recognition.
Scope
IAS 37 excludes obligations and contingencies arising
from: [IAS 37.1-6]
financial instruments that are in the scope of IAS 39
Financial
Instruments:
Recognition
and
Measurement (or IFRS 9 Financial Instruments)
non-onerous executory contracts
insurance
contracts
(see
IFRS 4
Insurance
Contracts), but IAS 37 does apply to other
provisions, contingent liabilities and contingent
assets of an insurer
items covered by another IFRS. For example, IAS 11
Construction Contracts applies to obligations
arising under such contracts; IAS 12 Income Taxes
applies to obligations for current or deferred
income taxes; IAS 17 Leases applies to lease
obligations; and IAS 19 Employee Benefits applies
to pension and other employee benefit obligations.

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Key definitions [IAS 37.10]

Provision: a liability of uncertain timing or amount.
Liability:
present obligation as a result of past events
settlement is expected to result in an outflow of
resources (payment)
Contingent liability:
a possible obligation depending on whether some
uncertain future event occurs, or
a present obligation but payment is not probable or
the amount cannot be measured reliably
Contingent asset:
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.
Recognition of a provision
An entity must recognise a provision if, and only if: [IAS
37.14]
a present obligation (legal or constructive) has
arisen as a result of a past event (the obligating
event),
payment is probable ('more likely than not'), and
the amount can be estimated reliably.
An obligating event is an event that creates a legal or
constructive obligation and, therefore, results in an entity
having no realistic alternative but to settle the obligation.
[IAS 37.10]

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A constructive obligation arises if past practice creates a

valid expectation on the part of a third party, for example,
a retail store that has a long-standing policy of allowing
customers to return merchandise within, say, a 30-day
period. [IAS 37.10]
A possible obligation (a contingent liability) is disclosed
but not accrued. However, disclosure is not required if
payment is remote. [IAS 37.86]
In rare cases, for example in a lawsuit, it may not be clear
whether an entity has a present obligation. In those cases,
a past event is deemed to give rise to a present obligation
if, taking account of all available evidence, it is more likely
than not that a present obligation exists at the balance
sheet date. A provision should be recognized for that
present obligation if the other recognition criteria
described above are met. If it is more likely than not that
no present obligation exists, the entity should disclose a
contingent liability, unless the possibility of an outflow of
resources is remote. [IAS 37.15]
Measurement of provisions
The amount recognized as a provision should be the best
estimate of the expenditure required to settle the present
obligation at the balance sheet date, that is, the amount
that an entity would rationally pay to settle the obligation
at the balance sheet date or to transfer it to a third party.
[IAS 37.36] This means:
Provisions
for one-off events (restructuring,
environmental clean-up, settlement of a lawsuit)
are measured at the most likely amount. [IAS
37.40]
Provisions
for large populations of events
(warranties, customer refunds) are measured at a
probability-weighted expected value. [IAS 37.39]
Both measurements are at discounted present
value using a pre-tax discount rate that reflects the
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current market assessments of the time value of

money and the risks specific to the liability. [IAS
37.45 and 37.47]
In reaching its best estimate, the entity should take into
account the risks and uncertainties that surround the
underlying events. [IAS 37.42]
If some or all of the expenditure required to settle a
provision is expected to be reimbursed by another party,
the reimbursement should be recognized as a separate
asset, and not as a reduction of the required provision,
when, and only when, it is virtually certain that
reimbursement will be received if the entity settles the
obligation. The amount recognized should not exceed the
amount of the provision. [IAS 37.53]
In measuring a provision consider future events as
follows:
forecast reasonable changes in applying existing
technology [IAS 37.49]
ignore possible gains on sale of assets [IAS 37.51]
consider changes in legislation only if virtually
certain to be enacted [IAS 37.50]
Remeasurement of provisions [IAS 37.59]
Review and adjust provisions at each balance sheet
date
If an outflow no longer probable, provision is
reversed.
Some examples of provisions
Circumstance Recognise a provision?
Restructuring Only when the entity is committed to a
by sale of an sale, i.e. there is a binding sale
operation
agreement [IAS 37.78]
Restructuring Only when a detailed form plan is in
by closure or place and the entity has started to
reorganisation implement the plan, or announced its
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main features to those affected. A Board

decision is insufficient [IAS 37.72,
Appendix C, Examples 5A & 5B]
When an obligating event occurs (sale of
product with a warranty and probable
Warranty
warranty claims will be made) [Appendix
C, Example 1]
A
provision
is
recognised
as
contamination occurs for any legal
obligations
of
clean
up,
or
for
constructive obligations if the company's
Land
published policy is to clean up even if
contamination there is no legal requirement to do so
(past event is the contamination and
public expectation created by the
company's policy) [Appendix C, Examples
2B]
Recognise a provision if the entity's
established policy is to give refunds (past
Customer
event is the sale of the product together
refunds
with the customer's expectation, at time
of purchase, that a refund would be
available) [Appendix C, Example 4]
Recognise a provision for removal costs
Offshore oil rig arising from the construction of the the
must
be oil rig as it is constructed, and add to the
removed
and cost of the asset. Obligations arising
sea
bed from the production of oil are recognised
restored
as the production occurs [Appendix C,
Example 3]
Abandoned
leasehold, four A provision is recognised for the
years to run, no unavoidable lease payments [Appendix
re-letting
C, Example 8]
possible
CPA firm must No provision is recognised (there is no
staff
training obligation to provide the training,
for
recent recognise a liability if and when the
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changes in tax retraining occurs) [Appendix C, Example

law
7]
Major overhaul No provision is recognised (no obligation)
or repairs
[Appendix C, Example 11]
Onerous (lossmaking)
Recognise a provision [IAS 37.66]
contract
Future
No provision is recognised (no liability)
operating
[IAS 37.63]
losses
Restructurings
A restructuring is: [IAS 37.70]
sale or termination of a line of business
closure of business locations
changes in management structure
fundamental reorganisations.
Restructuring provisions should be recognised as follows:
[IAS 37.72]
Sale of operation: recognise a provision only
after a binding sale agreement [IAS 37.78]
Closure or reorganisation: recognise a provision
only after a detailed formal plan is adopted and has
started being implemented, or announced to those
affected. A board decision of itself is insufficient.
Future operating losses: provisions are not
recognised for future operating losses, even in a
restructuring
Restructuring
provision
on
acquisition:
recognise a provision only if there is an obligation
at acquisition date [IFRS 3.11]
Restructuring provisions should include only direct
expenditures necessarily entailed by the restructuring,
not costs that associated with the ongoing activities of the
entity. [IAS 37.80]
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What is the debit entry?

When a provision (liability) is recognised, the debit entry
for a provision is not always an expense. Sometimes the
provision may form part of the cost of the asset.
Examples: included in the cost of inventories, or an
obligation for environmental cleanup when a new mine is
opened or an offshore oil rig is installed. [IAS 37.8]
Use of provisions
Provisions should only be used for the purpose for which
they were originally recognised. They should be reviewed
at each balance sheet date and adjusted to reflect the
current best estimate. If it is no longer probable that an
outflow of resources will be required to settle the
obligation, the provision should be reversed. [IAS 37.61]
Contingent liabilities
Since there is common ground as regards liabilities that
are uncertain, IAS 37 also deals with contingencies. It
requires that entities should not recognize contingent
liabilities but should disclose them, unless the possibility
of an outflow of economic resources is remote. [IAS 37.86]
Contingent assets
Contingent assets should not be recognised but should
be disclosed where an inflow of economic benefits is
probable. When the realisation of income is virtually
certain, then the related asset is not a contingent asset
and its recognition is appropriate. [IAS 37.31-35]
Disclosures
Reconciliation for each class of provision: [IAS 37.84]
opening balance
additions
used (amounts charged against the provision)
unused amounts reversed

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unwinding of the discount, or changes in discount

rate
closing balance

A prior year reconciliation is not required. [IAS 37.84]

For each class of provision, a brief description of: [IAS
37.85]
nature
timing
uncertainties
assumptions
reimbursement, if any.

THEORIES
1. It is a marketing scheme whereby an entity grants
award credits to customers and the entity can
redeem the award credits in exchange for free or
discounted goods or services.
a. Customer loyalty program

b. Premium plan

c. Marketing program

d. Loyalty award

2. The award credits granted to customers under a

customer loyalty program is often described as
a. Points

b. Awards

c. Credits

d. Royalty

3. The consideration allocated to the award credits is

measured at
a. Fair value of the award credits
b. Carrying amount of goods to be received in
exchange
c. Fair value of the goods to be received in
exchange
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d. The proportion of the fair value of the award

credits relative to the total consideration from
initial sale of the goods
4. Under a customer loyalty program, if the entity
supplies the awards itself, the consideration to the
award credits
a. Shall be recognized as revenue immediately
b. Shall not be accounted for as revenue
separately
c. Shall be recognized initially as deferred revenue
and amortized as revenue over a reasonable
period not exceeding five years
d. Shall be recognized initially as deferred revenue
and subsequently recognized as revenue upon
the redemption of the award credits
5. Under the customer loyalty program, if a third party
supplies the awards and the entity is collecting the
consideration for the award credits as principal in
the transaction
a. The entity shall not recognized revenue from the
award credits
b. The entity shall recognized initially a deferred
revenue equal to the gross consideration
allocated to the award credits
c. The entity shall recognize initially a deferred
revenue equal to the difference between the
consideration for the award credits and the
amount paid by the entity to the third party
d. The entity shall recognize immediately revenue
equal to the gross consideration allocated to the
award credits
6. A retail store received cash and issued gift
certificates that are redeemable in merchandise.
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How would the deferred revenue account be

affected by the redemption and non-redemption of
certificates, respectively?
a. Decrease and no effect
b. Decrease and decrease
c. No effect and no effect
d. No effect and decrease
7. A retail store received cash and issued a gift
certificate that is redeemable in merchandise.
When the gift certificate was issued
a. Deferred revenue account should be decreased
b. Deferred revenue account should be increased
c. Revenue account should be decreased
d. Revenue account should be increased
8. Magazine subscription collected in advance are
treated as
a. A contra account to magazine subscription
receivable
b. Deferred revenue in the liability section
c. Deferred revenue in the shareholders equity
section
d. Magazine subscription refund in the income
statement in the period collected
9.

When an entity received an advance payment for

special order goods that are to be manufacture and
delivered within six months, the advance payments
shall be reported as
a. Deferred charge

c. Current liability

b. Contra asset account

d. Noncurrent liability

10.An entity is a retailer of home appliances and offers

a service contract on each appliance sold. The
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entity sells appliances on installment contracts but

all service contracts must be paid in full at the time
of sale. Collections received for service contracts
shall be recorded as an increase in
a. Deferred revenue account
b. Sales contracts receivable valuation account
c. Shareholders equity valuation account
d. Service revenue account
11.Under a royalty agreement with other entity, an
entity will receive royalties from the assignment of
a patent for four years. The royalties received in
advance shall be reported as revenue
a. In the period received
b. In the period earned
c. Evenly over the life of the royalty agreements
d. At the date of the royalty agreement
12.In June of the current year, an entity sold
refundable merchandise coupons. The entity
received a certain amount of each coupon
redeemable from July 1 to December 31 of the
current year, for merchandise with a certain retail
price. At June 30 of the current year, how should
the entity report these coupon transactions?
a. Unearned revenue at the merchandise retail
price
b. Unearned revenue at the cash received
c. Revenue at the merchandises retail price
d. Revenue at the cash received
13.How would the proceeds received from the advance
sale of nonrefundable tickets for a theatrical
performance be reported in the sellers financial
statements before the performance?
a. Revenue for the entire proceeds
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b.

Revenue to the extent of related costs

expended
c. Unearned revenue to the extent of related costs
expended
d. Unearned revenue for the entire proceeds
14.At the end of the current year, an entity received
an advance payment of 60% of the sales price for
special order goods to be manufactured and
delivered within five months. At the same time, the
entity subcontracted for production of the special
order goods at a price equal to 40% of the main
contract price. What liabilities should be reported in
the entitys year-end statement of financial
position?
a. None
b. Deferred revenue equal to 60% of the main
contract price and payable to subcontractor
equal to 40% of the main contract price
c. Deferred revenue equal to 60% of the main
contract price and no payable to subcontractor
d. No
deferred
revenue
but
payable
to
subcontractor is reported at 40% of the main
contract price
15.An entity sells appliances that include a three-year
warranty. Service calls under the warranty are
performed by an independent mechanic under a
contract with the entity. Based on experience,
warranty costs are expected to be incurred for each
machine sold. When should the entity recognize
these warranty costs?
a. Evenly over the life of the warranty
b. When the service calls are performed
c. When payments are made to the machine
d. When the machines are sold

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16.Estimated liabilities are disclosed in financial

statements by
a. Note to the financial statements
b. Showing the amount among the liabilities but
not extending to the liability total
c. An appropriation of retained earnings
d. Appropriately classifying them as regular
liabilities in the statement of financial position
17.Unearned rent revenue would normally appear in
the statement of financial position as
a. Plant asset

b. Current liability

c. Noncurrent liability

d. Current asset

18.Rent revenue collected one year in advance should

be reported as
a. Revenue in the year collected
b. Current liability
c. Separate item of shareholders equity
d. Accrued liability
19.An entity sells furnaces that include a three-year
warranty. The entity can contract with a third party
to provide these warranty services. The entity
elects the fair value option for reporting financial
liabilities. At what amount should the entity report
the warranty liability?
a. The cost of expected warranty services
b. The present value of expected warranty costs
c. The fair value of the contract to settle the
warranty services
d. The fair value of the contract less the cost to
provide the services.
20.The accrual approach in accounting for product
warranty cost
a. Is required for income tax purposes

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b. Is frequently justified on the basis of expediency

when warranty cost is immaterial.
c. Finds the expense account being charged when
the seller performs in compliance with the
warranty.
d. Represents accepted practice and should be
used whenever the warranty is an integral and
inseparable part of the sale.
21.Which of the following best describes the accrual
approach of accounting for warranty cost?
a. Expensed when paid
b. Expensed when warranty claims are certain
c. Expensed based on estimate in year of sale
d. Expensed when incurred
22.Which of the following describes the expense
approach of accounting for warranty cost?
a. Expensed based in estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.
23.When an entity has a continuing policy of
guaranteeing new products against defects for
three years, the liability arising from the warranty
a. Should be reported as noncurrent
b. Should be recorded as current
c. Should be reported as part current and part
noncurrent
24.Which of the following is a characteristic of the
accrual of warranty but not the sale of warranty?
a. Warrant liability
c. Unearned warranty revenue
b. Warranty expense

d. Warranty revenue

25.Which of the following is the correct definition of a

provision?
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a.
b.
c.
d.

A possible obligation arising from past event.

A liability of uncertain timing or amount
A liability which cannot be easily measured
An obligation to transfer funds to an entity.

26.A provision shall be recognized as liability when

I.
An entity has a present obligation as a result of
a past event.
II.
It is probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation.
III.
The amount of the obligation can be measured
reliably
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
27.A constructive obligation is an obligation
I.
That is derived from a entitys action that the
entity will accept certain responsibilities
because of past practice, published policy or
current statement.
II.
The entity has created a valid expectation in
other parties that it will discharge those
responsibilities
a. I only
b. II only
c. Both I and II
d. Ether I or II
28.It is an event that creates a legal or constructive
obligation because has no other realistic alternative
but to settle the obligation.
a. Obligation event
c. Subsequent event
b. Past event

d. Current event

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29.An outflow 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
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%
30.What amount is recognized as provision?
a. Best estimate of the expenditure
b. Minimum of the range
c. Maximum of the range
d. Midpoint of the range
31.Where there is a continuous range of possible
outcomes, and each point in that range is as likely
as any other, the range to be used is the
a. Minimum
b. Maximum
c. Midpoint
d. Sum of the minimum and maximum
32.When the provision involves a large population of
items, the estimate of the amount
a. Reflects the weighing of all possible outcomes
by their associated probabilities.
b. Is determined as the individual most likely
outcome
c. May be the individual most likely adjusted for
the effect of other possible outcome.
d. Midpoint of the possible outcomes
33.When the provision arises from a single obligation,
the estimate of the amount
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a. Reflects the weighing of all possible outcomes

by their associated probabilities.
b. Is determined as the individual most likely
outcomes
c. Is the individual most likely outcome adjusted
for the effect of other possible outcomes
d. Midpoint of the possible outcomes
34.Which statement is incorrect where some or all of
the expenditure required setting a provision is
expected to be reimbursed by another party?
a. The reimbursement shall be recognized only
when
it
is
virtually
certain
that
the
reimbursement would be received if the entity
settles the obligation.
b. The amount of the reimbursement shall not
exceed the amount of the provision.
c. In the income statement, the expense relating
to the provision may be presented net of the
reimbursement.
d. The reimbursement shall not be treated as
separate asset and therefore netted against
the estimated liability for the provision.
35.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
c. Certain
b. Reasonably possible

d. Remote

36.An entity did not record an accrual for a present

obligation but disclosed the nature of the obligation
and the range of the loss. How likely is the loss?
a. Remote
c. Probable
b. Reasonably possible

d. Certain

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37.A present obligation that is probable and for which

the amount can be reliably measured shall
a. Not be accrued but shall be disclosed in the
notes to the financial statements.
b. Be accrued by debiting an appropriated retained
earnings account and crediting a 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.
38.An item that is not a contingent liability is
a. Premium offer to customers for labels or box
tops
b. Accommodation endorsement on customer note
c. Additional compensation that may be payable
on a dispute now being arbitrated.
d. Pending lawsuit
39.Contingent assets are usually recognized when
a. Realized
b. Occurrence is reasonably possible and the
amount can be reliably measured.
c. Occurrence is probable and the amount can be
reliably measure
d. The amount can be reliably measured
40.Which is the following is the proper accounting
treatment of 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.

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41.When the occurrence of a contingent asset is

probable and its amount can be reliably measured,
the contingent asset shall be
a. Recognized in the statement of financial
position and disclosed
b. Classified as an appropriation of retained
earnings
c. Disclosed but not recognized in the statement
of financial position.
d. Neither recognized in the statement of financial
position nor disclosed.
42.Contingent liabilities will or will not become actual
liabilities depending on
a. Whether they are probable and measurable
b. The degree of uncertainty
c. The present condition suggesting a liability
d. The outcome of a future event
43.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
even though the amount of the lose cannot be
reliably measured
d. The amount of the loss can be reliably measured
and it is probable prior to issuance
44.How should a contingent liability be reported in the
financial statements when it is reasonably
possible that the entity will have to pay the
liability at a future date?
a. As a deferred liability
b. As an accrued liability
c. As an disclosure only
d. As an account payable with an additional
disclosure explaining the nature of the
transaction.
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45.Disclosure usually is not required for

a. Contingent gains that are probable and can be
reliably measured
b. Contingent losses that are reasonably possible
and cannot be reliably measured
c. Contingent losses that are probable and cannot
be reliably measured
d. Contingent losses that are remote and can be
reliably measured
46.Reporting in the body of financial statement is
required for
a. Loss contingencies that are probable and can be
reliably measured
b. Gain contingencies that are probable and can be
reliably measured
c. Loss contingencies that are possible and can be
reliably measured
d. All loss contingencies
47.Pending litigation would generally be considered
a. Nonmonetary liability
b. Contingent liability
c. Estimated liability
d. Current liability
48.Gain contingencies that are remote and can be
reliably measured
a. Must be disclosed in a note to the financial
statements
b. May be disclosed in a note to the financial
statements
c. Must be reported in the body of the financial
statements
d. Should not be reported or disclosed
49.A contingent liability

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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 but the amount or
due date is indeterminate.
c. Is commonly associated with loss carry forward
d. Is not disclosed in the financial statements
50.Which of the following should be disclosed in the
financial statements as a contingent liability?
a. The entity has accepted liability prior to the
year-end for unfair dismissal of an employee
and is to pay damages.
b. The entity has received a letter from supplier
complaining about an old unpaid invoice
c. The entity is involved in a legal case which it
may be possible.
d. The entity has not yet paid certain claims under
product warranties

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