Testbank

to accompany

Applying International
Accounting Standards
by
Alfredson, Leo, Picker, Pacter & Radford
Prepared by
Victoria Wise

John Wiley & Sons Australia, Ltd 2005

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CHAPTER 4 Provisions, contingent liabilities and contingent assets

Question 1
JayJay Limited estimated that the future cash outflows relating to settlement of warranty
obligations would be as follows:
In 1 year
In 2 years
In 3 years.

$40 000
$50 000
$60 000.

A government rate for bonds with similar terms, is 6%. What is the present value of the total
expected future cash outflow?
A
B
C
D

$132 563;
$140 510;
$150 000;
$159 000.

Question 2
According to IAS 37 Provisions, Contingent Liabilities and Contingent Asset, when providing
for the future a future event such as the clean-up of a contaminated site, gains and other cash
inflows that are expected to arise on the sale of asset related to the clean-up, must be treated as
follows:
A
B
C
D

set-off against the provision for the clean-up;

measured separately of the provision;
recognised directly in equity in the period in which the cash inflows arose;
recognised as a deferred asset.

Question 3
The following is statement made in IAS 37 Provisions, Contingent Liabilities and Contingent
Assets:
a contract in which the unavoidable costs of meeting the obligations under the contract
exceed the economic benefits expected to be received under it.
This statement provides a definition of:
A
B

an onerous contract;
a deferred liability;

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D

a future operating loss;

a present obligation.

Question 4
McCann Limited announced its plans for a major restructuring of its operations. Under IAS 37
Provisions, Contingent Liabilities and Contingent Assets, the entity is able to:
A
B
C
D

capitalise all direct and indirect restructuring costs;

set up a provision for the best estimate of all restructuring costs;
provide only for restructuring costs that are directly and necessarily caused by the
restructuring;
provide for restructuring costs that are associated with the ongoing activities of the
entity.

Question 5
Purcell Limited is a manufacturer of swimming pools and provides its customers with warranties
at the time of sale. The warranty applies for three years from the date of sale. Past experience
shows that there will be some claims under the warranties. The appropriate treatment of this
items under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, is to:
A
B
C
D

note disclosure is required, but do not recognise in the financial statements;

recognise the best estimate of costs as a provision;
charge the costs directly to profit or loss in the period in which the economic
outflows occur;
transfer the expected amount of the warranty from retained earnings to a special
reserve account in equity.

Question 6
A railway company is required, under law, to overhaul its rail-tracks every three years as a safety
measure. The appropriate treatment of this event for the purposes of preparing financial
statements is:
A
B
C
D

recognise as a provision for future maintenance costs;

estimate the future maintenance costs and charge as depreciation over the next three
years;
disclose in the notes as a contingent liability, but do not recognise;
estimate the future cash outflows and discount to determine the amount to be
recognised as a deferred liability.

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Question 7
The following statement, contained in IAS 37 Provisions, Contingent Liabilities and Contingent
Assets, defines:
A
B
C
D

a deferred liability;
a contingent liability;
a deferred asset;
a contingent asset.

Question 8
At balance sheet date, Raschella Limited was awaiting the final details of a court case for
damages awarded in its favour. The amount and possible receipt of damages is unknown and
will not be decided until the court sits again in several months time. How is this event dealt with
in the preparation of the financial statements?
A
B
C
D

do not recognise or disclose in the financial statements as the possibility of receiving

damages is remote;
recognise as an asset in the financial statements as the receipt of damages is
probable;
disclose in the notes to the financial statements as it is possible that the entity will
receive the damages and the court decision is out of its control;
recognise as a deferred asset in the balance sheet and re-classify as a non-current
asset when the court decision is known.

Question 9
In respect to a contingent liability, IAS 37 Provisions, Contingent Liabilities and Contingent
Assets, requires disclosure of
A
B
C
D

any increase in the contingent liability during the period;

an estimate of its financial effect;
the carrying amount at the beginning and end of the period;
an indication of the uncertainties about the amount or timing of expected outflows.

Question 10
For each class of provision, an entity is required under IAS 37 Provisions, Contingent Liabilities
and Contingent Assets, to disclose the following information:
I.

The carrying amount at the beginning and end of the period.

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-5II.
III.
IV.
V.
A
B
C
D

Amounts incurred and charged against the provision during the period.
Comparative information.
Unused amounts reversed during the period.
Additional provisions made during the period.

I, II, IV and V only;

I, II, and III only;
II, III and IV only;
I, III, IV and V only.

Question 11
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the appropriate
accounting treatment for future operating losses is to:
A
B
C
D

determine a reasonable estimate of the cost and provide for the future liability;
determine the cost and charge it directly against retained earnings;
not recognise such items in the financial statements;
measure on the basis of estimated future cash flows.

Question 12
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the appropriate
treatment for a contingent asset in the financial statements of en entity is:
A
B
C
D

disclosure of information in the notes, but do not recognise in the financial

statements;
recognition in the financial statements, and note disclosure;
recognition in the financial statements, but no further disclosure in the notes;
do not recognise in the financial statements, and do not disclose in the notes.

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ANSWERS
1

10

11

12

Applying International Accounting Standards - Chapter 4