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Toaz - Info Pas37 Theories PR
Toaz - Info Pas37 Theories PR
I. MULTIPLE CHOICE
I. The risks and uncertainties that inevitably surround many events and
circumstances shall be taken into account in reaching the best estimate of a
provision.
II. Where the effect of the time value of money is material, the amount of a
provision shall be the present value of the expenditure expected to settle the
obligation.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
a. I only
b. II only
c. Both I and II
d. Neither I nor II
6. An entity has a self-insurance plan. Each year, the entity appropriated retained
earnings for contingencies in an amount equal to insurance premiums saved less
recognized losses from lawsuits and other claims. As a result of an accident in
the current year, the entity is a defendant in a lawsuit in which it would probably
have to pay measurable amount of damages. What are the effects of lawsuit’s
probable outcome on the entity’s financial statements for the current year?
8. An entity is closing one of its operating divisions, and the conditions for making
restructuring provision have been met. The closure will happen in the first quarter
of the next financial year. At the current year-end, the entity has announced the
formal plan publicly and is calculating the restructuring provision. Which of the
following costs should be included in the restricting provision?
9. An entity signed an agreement with another entity which requires that if the
latter does not meet certain contractual obligations, it must forfeit a piece of land
to the former. How should the former report the land?
10. A factory owned by an entity was destroyed by fire. The entity lodged an
insurance claim for the value of the factory building and plant, and an amount
equal to one year’s net profit. During the year, there were a number of meetings
with the representatives of the insurance company. Finally, before year-end, it
was decided that the entity would receive compensation for 90% of its claim. The
entity received a letter that the settlement check for that amount had been
mailed, but it was not received before year-end. How should the entity treat this
in the financial statements?
a. Wait until next year when the settlement check is actually received and not
recognized or disclose this receivable at all since at year-end it is a
contingent asset.
b. Record 90% of the claim as a receivable as it is virtually cetin that the
contingent asset will be received.
c. Record 100% of the claim as a receivable as it is virtually cetin that the
contingent asset will be received, and adjust the 10% next year when the
settlement check is actually received.
d. Disclose the contingent asset in the footnotes.
ANSWER
1. c
2. a
3. d
4. c
5. a
6. d
7. d
8. c
9. d
10. b
II. PROBLEMS
Solution Answer b
Estimated liability for a lawsuit 5,000,000
Solution Answer d 0
The contingent asset and related contingent gain are only disclosed, because the
case is still under appeal by the defendant.
Solution Answer c
Weighted Probabilities:
. 70 X 2,500,000 X 80 1,400,000
. 40 X 1,000,000 X 80 320,000
Expected cash flows 1,720,000
Multiply by risk adjustment factor (100% + 6%) 1.06
Adjusted cash flows 1,823,200
Multiply by PV of 1 at 10% for one period .91
Present value of cash flows 1,659,112
4. Wolz Company sells motorcycle helmets. In 2015, the entity sold 5,000,000
helmets before discovering a significant defect in their construction. By
December 31, 2015, two lawsuits had been filed against the entity. The first
lawsuit, which the entity has little chance of winning, is expected to be settled out
of court for P3,500,000 in January 2016. The legal counsel believed that the
entity has a 50-50 chance of winning the second lawsuit, which is for P1,000,000.
What is the accrued liability on December 31, 2015 as a result of the lawsuits?
a. 3,500,000
b. 4,500,000
c. 6,000,000
d. 8,500,000
Solution Answer a
The loss on the first lawsuit is both probable and measurable and therefore can
be accrued as a provision.
The loss on the second lawsuit is disclosed as a contingent liability because the
loss is only possible.
Solution Answer a
The amount owing to another entity is a present obligation but technically it is not
a provision because the amount is certain. Of course, it is an accrued liability.