ACCA F3

Provisions and contingencies:

1. Which of the following statements about provisions and contingencies is/are correct?
1 A company should disclose details of the change in carrying amount of a
provision from the beginning to the end of the year.
2 Contingent assets must be recognised in the financial statements in accordance
with the prudence concept.
3 Contingent liabilities must be treated as actual liabilities and provided for if it is
probable that they will arise.
A 3 only
B 2 and 3 only
C 1 and 3 only
D All three statements are correct
(2 marks)

2.

3.
4.

The following items have to be considered in finalising the financial statements of Q, a

limited liability company:

1 The company gives warranties on its products. The company’s statistics show that about
5% of sales give rise to a warranty claim.

2 The company has guaranteed the overdraft of another company. The likelihood of a
liability arising under the guarantee is assessed as possible.

According to IAS 37 Provisions, contingent liabilities and continent assets, what is the
correct action to be taken in the financial statements for these items?

Create a provision Disclose by note only No action

A 1 2

B 1 2

C 1, 2

D 2 1

5.

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

contingent liabilities and contingent assets are correct?

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

probable.

2 No disclosure of a contingent liability is required if the possibility of a transfer of

economic benefits arising is remote.

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

economic benefits is virtually certain to arise.

A All three statements are correct

B 1 and 2 only

C 1 and 3 only

D 2 and 3 only
6.

Wanda Co allows customers to return faulty goods within 14 days of purchase. At 30

November 20X5 a provision of $6,548 was made for sales returns. At 30 November 20X6,
the provision was re-calculated and should now be $7,634.

What should be reported in Wanda Co's statement of profit or loss for the year to 31 October
20X6 in respect of the provision?

A A charge of $7,634

B A credit of $7,634

C A charge of $1,086

D A credit of $1,086

7.

Doggard Co is a business that sells second hand cars. If a car develops a fault within 30
days of the sale, Doggard Co will repair it free of charge.

At 30 April 20X4 Doggard Co had made a provision for repairs of $2,500. At 30 April 20X5
Doggard Co calculated that the provision should be $2,000.

What entry should be made for the provision in Doggard Co's statement of profit or loss for
the year to 30 April 20X5?

A A charge of $500

B A credit of $500

C A charge of $2,000

D A credit of $2,000
8.

Which of the following best describes a provision according to IAS 37 Provisions,

contingent liabilities and contingent assets?

A A provision is a liability of uncertain timing or amount.

B A provision is a possible obligation of uncertain timing or amount.

C A provision is a credit balance set up to offset a contingent asset so that the effect on
the statement of financial position is nil.

D A provision is a possible asset that arises from past events.

9.

10.

Montague’s paint shop has suffered some bad publicity as a result of a customer
claiming to be suffering from skin rashes as a result of using a new brand of paint sold by
Montague’s shop. The customer launched a court action against Montague in November
20X3, claiming damages of $5,000. Montague’s lawyer has advised him that the most
probable outcome is that he will have to pay the customer $3,000.

What amount should Montague include as a provision in his financial statements for the year
ended 31 December 20X3?

A $nil

B $5,000

C $3,000

D $8,000
11.

Mobiles Co sells goods with a one year warranty under which customers are covered
for any defect that becomes apparent within a year of purchase. In calendar year 20X4,
Mobiles Co sold 100,000 units.

The company expects warranty claims for 5% of units sold. Half of these claims will be for a
major defect, with an average claim value of $50. The other half of these claims will be for a
minor defect, with an average claim value of $10.

What amount should Mobiles Co include as a provision in the statement of financial position
for the year ended 31 December 20X4?

A $125,000

B $ 25,000

C $300,000

D $150,000

12.

When a provision is needed that involves a number of outcomes, the provision is

calculated using the expected value of expenditure. The expected value of expenditure is the
total expenditure of:

A Each possible outcome

B Each possible outcome weighted according to the probability of each outcome

happening

C Each possible outcome divided by the number of outcomes

D Each possible outcome multiplied by the number of outcomes

13.