1.

Which of the following statements is correct:

a) The amount of audit fees remaining unpaid may be referred to as a Provision.
b) When an asset is acquired a provision will need to be made for all repairs
needed during its use.
c) A liability with uncertainty regarding either its timing or amount may be
called a Provision
d) There is no need to account for a liability if the amount is not known for
certain.
2. Which of the following statements is incorrect:
a) If the occurrence of the obligation is in doubt there is no need to account for
the liability
b) A liability is a present obligation, arising from past transaction, which
probably has to be paid
c) Damages awarded by court against the business may be ignored because it will
be appealed.
d) A liability has to be accounted for at the best reliable estimate even if the
amount is not certain
3. Which of the following requirements in IAS 37 are calculated to ensure that
Provisions are not created and used to either understate or overstate the
performance and net assets of a business:
i) A provision cannot be made for anticipated future losses
ii) A provision is defined as a liability with uncertainty in timing or amount
iii) A provision cannot be used for any purpose other than what it was
intended for
iv) The need for & amount of provision shall be reviewed on every reporting
date
a)
b)
c)
d)

ii, iii and iv

i and ii only
All four
i, ii and iii

4. Alan Smith received summons dated 7th March for an interview, attended the
interview on 28th March, received the appointment letter dated 11th April and
assumed duties on 15th April. Which of those listed on right is the obligating
event triggering recognition of liability by the employer?
a)
b)
c)
d)

Summoning for the interview on 7th March

Receipt of the letter of appointment 11th April
Attendance at interview on 28th March
Assumption of duties on 15th April.

5. A fashion designer received a claim for P100,000 as damages because some

wedding garments were not delivered in time for a wedding. The designer
admits the delay but disputes the amount of the claim pointing out that

alternative wedding garments cost no more than P18,000. How would you
advise the designer to treat the claim when finalising the financial statements
for the year?
a)
b)
c)
d)
6.

Ignore the claim

Account for a liability of P18,000
Account for a liability of P100,000
Account for the best estimate as liability
A manufacturer of audio equipment offers a warranty to remedy
manufacturing defects, at no cost to the customer, if identified within six
months of sale, but customarily has extended this facility for up to nine
months. During the year to 31st December 2015 the sales, made evenly
through the year, amounted to P24 million. Past experience has been that
around 5% of items sold return for remedial treatment and remedial work
costs, on average, 3% of sale price. How should the manufacturer report its
obligation for remedying manufacturing defects as at 31st December 2015?

a)
b)
c)
d)

P27,000 as a provision
P18,000 as a liability
P27,000 as a liability
P18,000 as a provision

7. Papertown Inc. is facing a claim for P500,000 from a customer, in respect of a

fire the cause of which has been traced to defective electric circuit in a
refrigerator sold by Papertown. The legal opinion is that the claim will
succeed; but Papertown will be able to re-claim 75% of the amount from
Fallon who supplied the circuit- breakers which malfunctioned. How should
Papertown report this on its Statement of financial position?
a)
b)
c)
d)

P125,000 as a liability
P125,000 as a Provision
P500,000 as Provision and P375,000 as asset
P500,000 as a liability and P375,000 as asset

8. A builder finds that, on account of the negligence of his workmen, he has to

replace the bathroom suite in a residence still under construction. The
replacement is expected to cost P15,000; but it is anticipated that the
damaged suite may fetch around P1000. At what amount should the builder
account for his obligation to replace the bathroom suite on his year-end
Statement of financial position?
a.
b.
c.
d.

P15,000 as a liability
P14,000 as a Provision
P15,000 as a liability and P1,000 as an asset
P14,000 as a liability

9. Which of the following statements is correct:

a. A contingent liability should be disclosed as a note, unless its

occurrence is remote
b. A contingent liability may be accounted for if its occurrence is certain
c. A contingent liability should always be disclosed in a note
d. A contingent liability may always be ignored
10. Which of the following should be disclosed as a note to financial statements as
a contingent liability?
a. A customers claim that is unlikely to succeed
b. A customers claim which, according to legal opinion, has a 75% chance
of success.
c. A customers claim for injuries suffered on company premises with 5%
chance of success
d. Damages awarded against a company by court, for wrongful dismissal
of an employee