Problem 4-6 Multiple choice (IFRS)

1. A provision shall be recognized when

a. There is a legal obligation arising from a past obligating event, the probability of
the outflow of resources is more than remote but less than probable, and a
reliable estimate can be made of the amount of the obligation.

b. There is a constructive obligation as a result of a past obligating event, the

outflow of resources is probable, and a reliable estimate can be made of the
amount of the obligation

c. There is a possible obligation arising from a past event, the outflow of resources
is probable, and an approximate amount can be set aside toward the obligation

d. Management decides that it is essential that a provision be made for unforeseen

circumstances and keeping in mind this year the profits were enough but next
year there may be losses

2. A competitor has sued an entity for unauthorized use of its patented technology.
The amount that the entity may be required to pay to the competitor if the
competitor succeeds in the lawsuit is determinable with reliability, and according to
the legal counsel it is less than probable but more than remote that an outflow of
the resources would be needed to meet the obligation. The entity that was sued
shall at year-end

a. Recognize a provision for this possible obligation

b. Make a disclosure of the possible obligation in footnotes to the financial
statements
c. Make no provision or disclosure and wait until the lawsuit is finally decided and
then expense the amount paid on settlement, if any
d. Set aside, as an appropriation, a contingency reserve, an amount based on the
best estimate of the possible liability

3. 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
years net profit. During the year, there were a number of meetings with th
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 yer-end. How should the entity treat this in the financial
statements?

a. Disclose the contingent asset in the footnotes

b. Wait until next year when the settlement check is actually received and not
 recognize this receivable at all since at year-end it is a contingent asset
c. Record 90% of the claim as a receivable as it is virtually certain that the
contingent asset will be received.
d. Record 100% of the claim as a receivable at year-end as it is virtually certain
that the contingent asset will be received, and adjust the 10% next year when
the settlement check is actually received

4. An entity has been served a legal notice at year-end by the Department of

Environment and Natural Resources to fit smoke detectors in its factory on or
before middle of the next year. The cost of fitting smoke detector can be
measured reliably. How should the entity treat this in its financial statements at
year-end?

a. Recognize a provision for the current year equal to the estimated amount
b. Recognize a provision for the current year equal to one-half only of the
estimated amount
c. No provision is recognized at year-end because there is no present obligation
for the future expenditure since the entity can avoid the future expenditure by
changing the method of operations, but disclosure is required
d. Ignore the event

5. The board of directors of an entity decided in the latter part of the current year o
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 this restructuring plan can be measured
reliably, how should the entity treat this restructuring in the financial statements for
the current year-end?

a. Disclose only the restructuring decision and the cost of restructuring because
the entity has not announced the restructuring to those affected by the decision
and thus has not raised an expectation that the entity would actually carry out
the restructuring.
b. Recognize a provision for restructuring since the board of directors has
approved it and it has been announced in the headquarters of the entity in
Europe.
c. Mention the decision to restructure and the cost involved in the chirmas
statement in the annual report since it is 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 years financial statements

ANSWERS:
1. B
2. B
3. C
4. C
5. A