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Chapter 26
Provisions, Contingent Liabilities & Contingent Assets

NAME: Date:
Professor: Section: Score:

QUIZ:
1. In 20x1, an entity, a defendant, recognized a ₱100,000 provision for estimated losses from a
pending lawsuit. In 20x2, the entity wins the lawsuit and pays nothing. Which of the following
statements is correct in 20x2?
a. The entity shall restate its 20x1 financial statements to remove the provision.
b. The entity shall recognize a gain of ₱100,000 in 20x2.
c. The entity shall recognize a ₱100,000 deduction in its 20x2 expenses.
d. The entity shall only disclose the event in its 20x2 financial statements.

2. The board of directors of ABC Inc. decided on December 15, 20XX, to 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 restructuring the
operations in the Far East as per this detailed plan was P2 million. How should ABC Inc. treat
this restructuring in its financial statements for the year-end December 31, 20XX?
a. Because ABC Inc. has not announced the restructuring to those affected by the decision and
thus has not raised an expectation that ABC Inc. will actually carry out the restructuring
(and as no constructive obligation has arisen), only disclose the restructuring decision and
the cost of restructuring of ₱2 million in footnotes to the financial statements.
b. Recognize a provision for restructuring since the board of directors has approved it and it
has been announced in the headquarters of ABC Inc. in Europe.
c. Mention the decision to restructure and the cost involved in the chairman’s statement in the
annual report since it 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 year’s financial statements.

3. Which of the following is the proper way to report a gain contingency?

a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the
contingency.
d. As a disclosure only.

4. Which of the following contingencies need not be disclosed in the financial statements or the
notes thereto?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
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c. Guarantees of indebtedness of others

d. All of these must be disclosed.

5. To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. none of these.

6. In December 20x1, Mill Co. began including one coupon in each package of candy that it sells
and offering a toy in exchange for 50 centavos and five coupons. The toys cost Mill 80 centavos
each. Eventually 60% of the coupons will be redeemed. During December, Mill sold 110,000
packages of candy and no coupons were redeemed. In its December 31, 20x1, balance sheet,
what amount should Mill report as estimated liability for coupons?
a. 3,960
b. 10,560
c. 19,800
d. 52,800

7. In May 20x6, Caso Co. filed suit against Wayne, Inc. seeking ₱1,900,000 damages for patent
infringement. A court verdict in November 20x9 awarded Caso ₱1,5000,000 in damages, but
Wayne’s appeal is not expected to be decided before 2x10. Caso’s counsel believes it is probable
that Caso will be successful against Wayne for an estimated amount in the range between
₱800,000 and ₱1,100,000, with ₱1,000,000 considered the most likely amount. What amount
should Caso record as income from the lawsuit in the year ended December 31, 20x9?
a. 0
b. 800,000
c. 1,000,000
d. 1,500,000

8. During 20x0, Smith Co. filed suit against West, Inc. seeking damages for patent infringement. At
December 31, 20x0, Smith's legal counsel believed that it was probable that Smith would be
successful against West for an estimated amount in the range of ₱75,000 to ₱150,000, with all
amounts in the range considered equally likely. In March 20x1, Smith was awarded ₱100,000 and
received full payment thereof. In its 20x0 financial statements, issued in February 20x1, how
should this award by reported?
a. As a receivable and revenue of ₱100,000.
b. As a receivable and deferred revenue of ₱100,000.
c. As a disclosure of a contingent gain of ₱100,000.
d. As a disclosure of a contingent gain of an undetermined amount in the range of ₱75,000 to
₱150,000.

9. During January 20x9, Haze Corp. won a litigation award for ₱15,000 which was tripled to
₱45,000 to include punitive damages. The defendant, who is financially stable, has appealed only
the ₱30,000 punitive damages. Haze was awarded ₱50,000 in an unrelated suit it filed, which is
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being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals. In
its 20x9 financial statements, Haze should report what amount of pretax gain?
a. 15,000
b. 45,000
c. 50,000
d. 95,000

10. National Appliance Center sells washing machines that carry a three-year warranty against
manufacturer's defects. Based on company experience, warranty costs are estimated at ₱60 per
machine. During the year, National sold 48,000 washing machines and paid warranty costs of
₱340,000. In its income statement for the year ended December 31, National should report
warranty expense of
a. 680,000 b. 960,000 c. 2,200,000 d. 2,880,000

"So, if you think you are standing firm, be careful that you don’t fall! No
temptation has overtaken you except what is common to mankind. And God is
faithful; he will not let you be tempted beyond what you can bear. But when
you are tempted, he will also provide a way out so that you can endure it."
(1 Corinthians 10:12-13)
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