Applying IFRS Standards 4th Edition Ruth Picker - Test Bank

Applying IFRS Standards 4th Edition Ruth Picker – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Testbank

 

 

 

to accompany

 

Applying IFRS^® Standards 4e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

 

 

 

 

 

 

Prepared by

John Sweeting, Emma Holmes and Elisabetta Barone

 

 

 

 

 

 

 

John Wiley & Sons, Ltd 2016

 

CHAPTER 5

Provisions, contingent liabilities and contingent assets

Learning Objectives

 

5.1       Describe the background to IAS 37

5.2       Identify which items are included within the scope of the standard

5.3       Outline the concept of a provision

5.4       Discuss how to distinguish provisions from other liabilities

5.5       Outline the concept of a contingent liability

5.6       Describe how to distinguish a provision from a contingent liability

5.7       Explain when a provision should be recognised

5.8       Explain how a provision, once recognised, should be measured

5.9       Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations

5.10     Outline the concept of a contingent asset

5.11     Describe the disclosure requirements for provisions, contingent liabilities and contingent assets

5.12     Compare the requirements of IFRS 3 regarding contingent liabilities with those of IAS 37

5.13     Explain the expected future developments for IAS 37.

 

Multiple Choice Questions

 

 

1. Provisions in relation to which of the following balances are within the scope of IAS 37?

Learning Objective 5.2 Identify which items are included within the scope of the standard

*a.       warranties

1. employee benefits
2. financial instruments
3. operating leases

 

 

2. The uncertainty that exists in relation to provisions is one of:

Learning Objective 5.3 Outline the concept of a provision

1. timing
2. amount
3. timing and amount

*d.       timing or amount

 

 

3. Which of the following is an example of a provision falling within the scope of IAS 37?

Learning Objective 5.4  Discuss how to distinguish provisions from other liabilities

1. accruals

*b.       onerous contracts

1. employee benefits
2. future operating losses

 

 

4. An event that gives rise to a present obligation, but which cannot be measured with sufficient reliability is an example of a:

Learning Objective 5.5 Outline the concept of a contingent liability

1. liability
2. accrual
3. provision

*d.          contingent liability

 

 

5. Entity A has provided a bank guarantee to a bank in relation to a loan provided to entity B. Entity B is solvent and shows no signs of defaulting on the loan.  The treatment of the bank guarantee in the records of entity A is to:

Learning Objective 5.6 Describe how to distinguish a provision from a contingent liability

1. recognise a liability
2. recognise a provision

*c.       recognise a contingent liability

1. do nothing

 

6. Provisions shall be recognised when:

 

I           an entity has a present obligation

II it is possible that an outflow of resources will be required to settle the obligation

III            the amount of the obligation can be reliably estimated

IV           there has been a past event

 

Learning Objective 5.7 Explain when a provision should be recognised

1. I, II and III
2. II, III and IV

*c.          I, III and IV

1. I, II and IV

 

 

7. Liabilities which fail the recognition criteria and where the possibility of an outflow is remote should:

Learning Objective 5.7 Explain when a provision should be recognised

1. be recognised as an accrual
2. be recognised as a provision
3. be recognised as a contingent liability

*d.       not be recognised in the financial statement at all

 

 

8. JayJay Limited estimated that the future cash outflows relating to settlement of warranty obligations would be as follows:

In 1 year   $40 000

In 2 years $50 000

In 3 years $60 000.

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

Learning Objective 5.8 Explain how a provision, once recognised, should be measured

*a.          $132 563;

1. $140 510;
2. $150 000;
3. $159 000.

 

 

9. According to IAS 37, 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:

Learning Objective 5.8 Explain how a provision, once recognised, should be measured

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

*b.          measured separately of the provision;

1. recognised directly in equity in the period in which the cash inflows arose;
2. recognised as a deferred asset.

 

10. 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 item under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, is to:

Learning Objective 5.8 Explain how a provision, once recognised, should be measured

1. disclose in the notes, but do not recognise in the financial statements;

*b.          recognise the best estimate of costs as a provision;

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

 

 

11. 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:

Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations

1. recognise as a provision for future maintenance costs;

*b.     estimate the future maintenance costs and charge as depreciation over the next three years;

1. disclose in the notes as a contingent liability, but do not recognise;
2. estimate the future cash outflows and discount to determine the amount to be recognised as a deferred liability.

 

 

12. The following is statement made in IAS 37:

‘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:

Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations

*a.          an onerous contract;

1. a deferred liability;
2. a future operating loss;
3. a present obligation.

 

 

13. McCann Limited announced its plans for a major restructuring of its operations. Under IAS 37, the entity is able to:

Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations

1. capitalise all direct and indirect restructuring costs;
2. set up a provision for the best estimate of all restructuring costs;

*c.     provide only for restructuring costs that are directly and necessarily caused by the restructuring;

1. provide for restructuring costs that are associated with the ongoing activities of the entity.

 

 

14. According to IAS 37, the appropriate accounting treatment for future operating losses is to:

Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations

1. determine a reasonable estimate of the cost and provide for the future liability;
2. determine the cost and charge it directly against retained earnings;

*c.          not recognise such items in the financial statements;

1. measure on the basis of estimated future cash flows.

 

 

15. The following statement, contained in IAS 37, defines:

‘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’

Learning Objective 5.10 Outline the concept of a contingent asset

1. a deferred liability;
2. a contingent liability;
3. a deferred asset;

*d.          a contingent asset.

 

16. 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?

Learning Objective 5.10 Outline the concept of a contingent asset

1. do not recognise or disclose in the financial statements as the possibility of receiving damages is remote;
2. recognise as an asset in the financial statements as the receipt of damages is probable;

*c.     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;

1. recognise as a deferred asset in the statement of financial position and re-classify as a non-current asset when the court decision is known.

 

17. According to IAS 37, the appropriate treatment for a contingent asset in the financial statements of an entity is:

Learning Objective 5.10 Outline the concept of a contingent asset

*a.     disclosure of information in the notes, but do not recognise in the financial statements;

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

 

 

18. In respect to a contingent liability, IAS 37 requires disclosure of

Learning Objective 5.11 Describe the disclosure requirements for provisions, contingent liabilities and contingent assets

1. any increase in the contingent liability during the period;

*b.          an estimate of its financial effect;

1. the carrying amount at the beginning and end of the period;
2. an indication of the uncertainties about the amount or timing of expected outflows.

 

 

19. For each class of provision, an entity is required by IAS 37 to disclose the following information:

 

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

II Amounts incurred and charged against the provision during the period.

III            Comparative information.

IV           Unused amounts reversed during the period.

V Additional provisions made during the period.

 

Learning Objective 5.11 Describe the disclosure requirements for provisions, contingent liabilities and contingent assets

*a.          I, II, IV and V only;

1. I, II, and III only;
2. II, III and IV only;
3. I, III, IV and V only.

 

 

20. The June 2005 Exposure Draft issued in relation to proposed changes to IAS 37:

Learning Objective 5.13 Explain the expected future developments for IAS 37

1. will be issued as a standard applicable for reporting periods ending on or after 1 June 2014
2. has been withdrawn by the IASB

*c.          is still under consideration by the IASB

1. is already applicable

 

21. Which of the following is not within the scope of IAS 37?

Learning Objective 5.2 Identify which items are included within the scope of the standard.

1. The treatment of future operating losses
2. The treatment of contingent assets

*c.       The treatment of restructuring provisions arising from a business combination

1. The treatment of onerous contracts

 

 

22. An example of where an entity has a present obligation is:

Learning Objective 5.3 Outline the concept of a provision.

*a.          a public announcement made by an entity’s management to undertake restructuring.

1. a recommendation from the HR manager to the Board as to the level of bonuses to be paid at year end.
2. a historical pattern of performing a major overhaul of machinery every two years.
3. the declaration of a dividend by directors which is required to be ratified at a meeting of shareholders

 

 

23. Which of the following statements is correct?

Learning Objective 5.3 Outline the concept of a provision.

1. A present obligation is an example of a legal obligation.
2. A legal obligation is an example of a constructive obligation.
3. A constructive obligation is an example of an equitable obligation.

*d.       An equitable obligation is an example of a present obligation.

 

 

24. Which of the following statements is correct?

Learning Objective 5.4 Discuss how to distinguish provisions from other liabilities.

*a.       a provision is a class of liabilities

1. a contingent liability is a class of liabilities
2. a provision is a class of contingent liabilities
3. contingent liabilities and provisions are classes of liabilities

 

 

25. A contingent liability is defined as a:

	I	II	III	IV
possible obligation that arises from past events	Yes	Yes	No	No
possible obligation whose existence will be confirmed by the occurrence of an uncertain future event	Yes	No	Yes	No

Learning Objective 5.5 Outline the concept of a contingent liability.

*a.          I;

1. II;
2. III;
3. IV.

 

26. Contingent liabilities are:

Learning Objective 5.6 Describe how to distinguish a provision from a contingent liability.

1. recognised in the financial statements unless the possibility of an outflow in settlement is remote.

*b.     recognised in the notes to the financial statements unless the possibility of an outflow in settlement is remote.

1. recognised in the notes to the financial statements because the possibility of an outflow in settlement is remote.
2. not recognised in the notes to the financial statements because the possibility of an outflow in settlement is remote.

 

 

27. An entity sells goods under warranty and past experience shows that minor defects account for 10% of sales and major defects account for 2% of sales. If all minor defects were repaired the warranty cost would be €300 000, and if all major defects were repaired the warranty cost would be €800 000.  The expected value of the warranty cost is:

Learning Objective 5.8 explain how a provision, once recognised, should be measured.

1. €0;
2. €22 000;

*c.          €46 000;

1. €86 000.

 

 

28. The costs under an onerous contract are measured using which valuation method?

Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations.

1. the lower of cost or net market value;

*b.     the lower of the cost of fulfilling the contract and the penalties arising from failure to fulfil the contract;

1. the present value method using a risk-free discount rate;
2. the unavoidable costs of meeting the obligations discounted by reference to market yields at reporting date.

 

 

29. Entities are not required to disclose which of the following in relation to provisions?

Learning Objective 5.11 Describe the disclosure requirements for provisions, contingent liabilities and contingent assets.

1. carrying amounts of provisions at the beginning of the period
2. amounts used during the period
3. the effect of any change in the discount rate used

*d.       comparatives

 

30. The June 2005 exposure draft issued in relation to IAS 37 proposed changes to:

 

I	the name of the standard
II	recognition and measurement criteria
III	the definition of contingencies
IV	the method of disclosure for provisions

 

Learning Objective 5.13 Explain the expected future developments for IAS 37.

*a.       I, II and III

1. II, III and IV
2. I, III and IV
3. I, II and IV