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CHAPTER 26
QUIZ:
1. In 20x1, an entity, a defendant, recognized a ₱100,000 provision for estimated losses from a
pending lawsuit. In 20x2, the entity wins the lawsuit and pays nothing. Which of the following
statements is correct in 20x2?
a. The entity shall restate its 20x1 financial statements to remove the provision.
b. The entity shall recognize a gain of ₱100,000 in 20x2.
c. The entity shall recognize a ₱100,000 deduction in its 20x2 expenses.
d. The entity shall only disclose the event in its 20x2 financial statements.

2. The board of directors of ABC Inc. decided on December 15, 20XX, to wind up international
operations in the Far East and move them to Australia. The decision was based on a detailed
formal plan of restructuring as required by PAS 37. This decision was conveyed to all workers
and management personnel at the headquarters in Europe. The cost of restructuring the
operations in the Far East as per this detailed plan was P2 million. How should ABC Inc. treat
this restructuring in its financial statements for the year-end December 31, 20XX?
a. Because ABC Inc. has not announced the restructuring to those affected by the decision and
thus has not raised an expectation that ABC Inc. will actually carry out the restructuring
(and as no constructive obligation has arisen), only disclose the restructuring decision and
the cost of restructuring of ₱2 million in footnotes to the financial statements.
b. Recognize a provision for restructuring since the board of directors has approved it and it
has been announced in the headquarters of ABC Inc. in Europe.
c. Mention the decision to restructure and the cost involved in the chairman’s statement in the
annual report since it a decision of the board of directors.
d. Because the restructuring has not commenced before year-end, based on prudence, wait
until next year and do nothing in this year’s financial statements.

3. Which of the following is the proper way to report a gain contingency?

a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.

4. Which of the following contingencies need not be disclosed in the financial statements or the
notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.

5. To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
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c. included in a separate account.

d. none of these.

6. National Appliance Center sells washing machines that carry a three-year warranty against
manufacturer's defects. Based on company experience, warranty costs are estimated at ₱60 per
machine. During the year, National sold 48,000 washing machines and paid warranty costs of
₱340,000. In its income statement for the year ended December 31, National should report
warranty expense of
a. 680,000 b. 960,000 c. 2,200,000 d. 2,880,000

"So, if you think you are standing firm, be careful that you don’t fall! No temptation has overtaken you
except what is common to mankind. And God is faithful; he will not let you be tempted beyond what you
can bear. But when you are tempted, he will also provide a way out so that you can endure it."
(1 Corinthians 10:12-13)
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