QUESTIONS

11.20 A business commenced trading on 01 January 20X1. The following transactions with Supplier A have
been recorded in the purchase ledger.
01 January 20X1 Opening balance $nil
(1) 01 January 20X1 Purchase of goods $50
(2) 01 February 20X1 Purchase of goods $435
(3) 30 March 20X1 Payment $385
31 March 20X1 Closing balance $100
On 31 March 20X1, the business receives the following statement from the supplier.
Opening balance $nil
(4) 1 January 20X1 Invoice #365 $50
(5) 1 February 20X1 Invoice #490 $435
(6) 31 March 20X1 Invoice #533 $35
Closing balance $520
Which transactions should be noted as reconciling items on the supplier statement reconciliation at
31 March 20X1? A
A
B
3 only
6 only
C
C 3 and 6 only C
D 1 to 6 (2 marks)
A
(Total = 40 marks)

G
12 Provisions and contingencies 31 mins L
12.1 Identify, by indicating the relevant box in the table below, whether each of the following statements
O
about provisions and contingencies is true or false. B
A company should disclose
details of the change in
True False
A
carrying amount of a provision L
from the beginning to the end
of the year.
Contingent assets must be
recognised in the financial
True False
B
statements in accordance with
the prudence concept.
O
Contingent liabilities must be True False X
treated as actual liabilities and
provided for if it is probable .
that they will arise.
C
(2 marks)
O
M

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12.2 Which of the following statements about contingent assets and contingent liabilities are correct?
1 A contingent asset should be disclosed by note if an inflow of economic benefits is probable.
2 A contingent liability should be disclosed by note if it is probable that a transfer of economic
benefits to settle it will be required, with no provision being made.
3 No disclosure is required for a contingent liability if it is not probable that a transfer of economic
benefits to settle it will be required.
4 No disclosure is required for either a contingent liability or a contingent asset if the likelihood of a
payment or receipt is remote.
A 1 and 4 only
B 2 and 3 only
C 2, 3 and 4
D 1, 2 and 4 (2 marks)

12.3 A former director of Biss Co has commenced an action against the company claiming substantial
damages for wrongful dismissal. The company's solicitors have advised that the former director is
unlikely to succeed with his claim, although the chance of Biss Co paying any monies to the ex-director
is not remote. The solicitors' estimates of Biss Co's potential liabilities are:
$
Legal costs (to be incurred whether the claim is successful or not) 50,000
Settlement of claim if successful 500,000
550,000

According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, how should this claim be
treated in Bliss Co's financial statements?
A Provision of $550,000
B Disclose a contingent liability of $550,000
C Disclose a provision of $50,000 and a contingent liability of $500,000
D Provision for $500,000 and a contingent liability of $50,000 (2 marks)

12.4 The following items have to be considered in finalising the financial statements of Q, a limited liability
company:
1 The company gives warranties on its products. The company's statistics show that about 5% of
sales give rise to a warranty claim.
2 The company has guaranteed the overdraft of another company. The likelihood of a liability
arising under the guarantee is assessed as possible.
According to IAS 37 Provisions, Contingent Liabilities and Contingent assets, what is the correct action
to be taken in the financial statements for these items?
Create a provision Disclose by note only No action
A 1 2
B 1 2
C 1, 2
D 2 1
(2 marks)

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 QUESTIONS

12.5 Which of the following statements about the requirements of IAS 37 Provisions, Contingent Liabilities
and Contingent Assets are correct?
1 A contingent asset should be disclosed by note if an inflow of economic benefits is probable.
2 No disclosure of a contingent liability is required if the possibility of a transfer of economic
benefits arising is remote.
3 Contingent assets must not be recognised in financial statements unless an inflow of economic
benefits is virtually certain to arise.
A All three statements are correct
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only (2 marks)

12.6 Wanda Co allows customers to return faulty goods within 14 days of purchase. At 30 November 20X5 a
provision of $6,548 was made for sales returns. At 30 November 20X6, the provision was re-calculated
and should now be $7,634. A
What should be reported in Wanda Co's statement of profit or loss for the year to 31 October 20X6 in C
respect of the provision?
C
A A charge of $7,634
B A credit of $7,634 A
C A charge of $1,086
D A credit of $1,086 (2 marks)

12.7 Doggard Co is a business that sells second hand cars. If a car develops a fault within 30 days of the
G
sale, Doggard Co will repair it free of charge. L
At 30 April 20X4 Doggard Co had made a provision for repairs of $2,500. At 30 April 20X5 Doggard Co O
calculated that the provision should be $2,000.
What entry should be made for the provision in Doggard Co's statement of profit or loss for the year to
B
30 April 20X5? A
A
B
A charge of $500
A credit of $500
L
C A charge of $2,000
D A credit of $2,000 (2 marks)
B
12.8 Which of the following best describes a provision according to IAS 37 Provisions, Contingent Liabilities
and Contingent Assets? O
A A provision is a liability of uncertain timing or amount. X
B A provision is a possible obligation of uncertain timing or amount. .
C A provision is a credit balance set up to offset a contingent asset so that the effect on the
statement of financial position is nil.
C
D A provision is a possible asset that arises from past events. (2 marks)
O
12.9 Which of the following items does the statement below describe?
M
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, 'A possible obligation 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 entity's control'
A A provision
B A current liability
C A contingent liability
D A contingent asset (2 marks)

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12.10 Montague's paint shop has suffered some bad publicity as a result of a customer claiming to be suffering
from skin rashes as a result of using a new brand of paint sold by Montague's shop. The customer
launched a court action against Montague in November 20X3, claiming damages of $5,000.
Montague's lawyer has advised him that the most probable outcome is that he will have to pay the
customer $3,000.
What amount should Montague include as a provision in his financial statements for the year ended 31
December 20X3?
$_________ (2 marks)

12.11 Mobiles Co sells goods with a one year warranty under which customers are covered for any defect that
becomes apparent within a year of purchase. In calendar year 20X4, Mobiles Co sold 100,000 units.
The company expects warranty claims for 5% of units sold. Half of these claims will be for a major
defect, with an average claim value of $50. The other half of these claims will be for a minor defect,
with an average claim value of $10.
What amount should Mobiles Co include as a provision in the statement of financial position for the year
ended 31 December 20X4?
A $125,000
B $ 25,000
C $300,000
D $150,000 (2 marks)

12.12 When a provision is needed that involves a number of outcomes, the provision is calculated using the
expected value of expenditure. The expected value of expenditure is the total expenditure of:
A Each possible outcome
B Each possible outcome weighted according to the probability of each outcome happening
C Each possible outcome divided by the number of outcomes
D Each possible outcome multiplied by the number of outcomes (2 marks)

12.13 X Co sells goods with a one year warranty and had a provision for warranty claims of $64,000 at
31 December 20X0. During the year ended 31 December 20X1, $25,000 in claims were paid to
customers. On 31 December 20X1, X Co estimated that the following claims will be paid in the
following year:
Scenario Probability Anticipated cost
Worst case 5% $150,000
Best case 20% $25,000
Most likely 75% $60,000
What amount should X Co record in the statement of profit or loss for the year ended
31 December 20X1 in respect of the provision?
A $57,500
B $6,500
C $18,500
D $39,000 (2 marks)

(Total = 26 marks)

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