Exam 8: Provisions, Contingent Liabilities and Contingent Assets

AASB 137 Provisions, Contingent Liabilities and Contingent Assets, defines a as: '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'

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

Collins Limited estimated the future cash outflows over the next three years relating to settlement of warranty obligations would be as follows: 1 year from now: $20 000 2 years from now: $38 000 3 years from now: $45 000 Collins Limited calculates that the present value of the total expected future cash outflow, using a discount rate of 8%, is:

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

As per AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the appropriate treatment for a contingent asset in the financial statements of an entity is:

In respect to a contingent liability, AASB 137 Provisions, Contingent Liabilities and Contingent Assets, requires disclosure of:

For each class of provision, AASB 137 Provisions, Contingent Liabilities and Contingent Assets requires an entity to disclose the following information: I Comparative information. II Unused amounts reversed during the period. III Additional provisions made during the period. IV The carrying amount at the beginning and end of the period. V A brief description of the nature of the obligation and the expected timing.

Which of the following statements is correct?

AASB 137 requires provisions to be recognised when: I there has been a past event. II an entity has a present obligation. III the amount of the obligation can be reliably estimated. IV it is possible that an outflow of resources will be required to settle the obligation.

Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the appropriate accounting treatment for future operating losses is to:

McAllister Limited announced its plans for a major restructuring of its operations. Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the entity is able to:

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

Percy Limited is a manufacturer of playground equipment. Percy provides its customers with five-year warranties from the date of sale. Past experience shows that there will be some claims under the warranties. The appropriate treatment of this item under AASB 137 Provisions, Contingent Liabilities and Contingent Assets is to:

AASB 137 prescribes the accounting and disclosure for all provisions, contingent liabilities and contingent assets except for:

At the end of the financial period, Rosella 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 approximately three months' time. How should Rosella Limited recognise this situation when preparing the financial statements?

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 minor defects were detected in all goods sold the repair costs would be $260 000, and if major defects were detected in all goods sold the repair costs would be $990 000. The expected value of the warranty costs is:

AASB 137 Provisions, Contingent Liabilities and Contingent Assets provides the definition of a/an as: 'a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it'.

Accountants are required to use professional judgement in determining the best estimate of provisions. Which of the following is an example of when judgement is required?

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 present obligation not recognised because the outflow of economicbenefits to settle the obligation is not probable. Yes No Yes No present obligation that is measured reliably. No No Yes Yes

Angus Ltd has provided a bank guarantee to a bank in relation to a loan provided to Brown Ltd. Brown Ltd is solvent and shows no signs of defaulting on the loan. The treatment of the bank guarantee in the records of Angus Ltd is to: