Quiz 12 September 2020, questions and answers PDF

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NEW ERA UNIVERSITYCOLLEGE OF ACCOUNTANCYDEPARTMENTAL EXAM Which of the following is the correct definition of a provision? a. A possible obligation arising from past event. b. A liability of uncertain timing or amount. c. A liability which cannot be easily measured. d. An obligation to transfer fund...

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NEW ERA UNIVERSITY COLLEGE OF ACCOUNTANCY DEPARTMENTAL EXAM #2

1. Which of the following is the correct definition of a provision? a. A possible obligation arising from past event. b. A liability of uncertain timing or amount. c. A liability which cannot be easily measured. d. An obligation to transfer funds to an entity. 2. An outflow of resources embodying economic benefits is regarded as “probable” when a. The probability that the event will occur is greater than the probability that the event will not occur. b. The probability that the event will not occur is greater than the probability that the event will occur. c. The probability that event will occur is the same as the probability that the event will not occur. d. The probability that the event will occur is 90% likely. 3. Which is a cost of restructuring? a. Cost of retraining or relocating continuing staff. b. Marketing or advertising cost. c. Investment in new system and distribution network. d. Cost of relocating business activities from one location to another. 4. An entity operates chemical plants. It published policies include a commitment to making good any damage caused to the environment by its operations. It has always honored this commitment. Which of the following scenarios would give rise to an environmental provision? a. On past experience it is likely that a chemical spill which would result in having to pay fines and penalties will occur in the next year. b. Recent research suggests there is a possibility that the entity’s actions may damage surrounding wildlife. c. The government has outlined plans for a new law requiring all environmental damage to be rectified. d. A chemical spill from one of the entity’s plants has caused harm to the surrounding area and wildlife.

5. Which of the following is the proper accounting treatment of a contingent asset? a. An accrued account. b. Deferred earnings c. An account receivable with additional disclosure explaining the nature of the transaction. d. A disclosure only.

6. XYZ Company has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be a. Zero. b. The midpoint of the range. c. The minimum of the range. d. The maximum of the range. 7. Which of the following statements about the measurement of a provision is false? a. A risk adjustment may increase the amount at which a liability is measured. b. Future events that affect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient evidence that they will occur. c. Gains from expected disposal of assets shall not be taken into account in measuring a provision. d. When some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognized when it is probable that it would be received. 8. The following circumstances give rise to the recognition of a provision, except a. An entity has an environmental policy such that other parties would expect the entity to clean up any contamination it causes. b. An entity expects future operating losses. c. An entity gives a guarantee of certain borrowings of another entity which has filed a petition for bankruptcy. d. An entity plans to relocate its headquarters from one country to another and communicates it to all parties affected. 9. Which one of the following will usually be accounted for by recognizing a provision? a. Just prior to the end of the reporting period, the board decided to close a division. No implementation steps have been taken. b. A law requires an airline to overhaul its aircraft once every 3 years. c. The entity offered premiums to customers. d. As of the end of the reporting period, the board was aware that a new law would require the entity to fit smoke filters to its factories within the next year. No such filters have been fitted.

10. A contingent liability a. Definitely exists as a liability but its amount and due date are indeterminable. b. Is the result of a loss possibility. c. Is accrued even though not reasonably estimated. d. Is not disclosed in the financial statements. 11. Contingent liabilities will or will not become actual liabilities depending on a. Whether they are probable and measurable b. The degree of uncertainty. c. The present condition suggesting a liability. d. The outcome of a future event.

12. Which of the following should be disclosed in the notes to financial statements? Contingency Probability a. Loss Remote b. Loss Possible c. Gain Remote d. Gain Possible

13. When is a contingent liability recorded? a. When the amount can be reasonably estimated. b. When the future events are probable to occur and the amount can be reasonably estimated. c. When the future events are probable to occur. d. When the future events will possibly occur and the amount can be reasonably estimated. 14. ABC Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be a. zero. b. the minimum of the range. c. the mean of the range. d. the maximum of the range. 15. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? a. Amount of loss is reasonably estimable and event occurs infrequently. b. Amount of loss is reasonably estimable and occurrence of event is probable. c. Event is unusual in nature and occurrence of event is probable. d. Event is unusual in nature and event occurs infrequently.

16. Disclosures usually is not required for a. Contingent gains that are probable and can be reliably measured. b. Contingent losses that are reasonably possible and cannot be reliably measured. c. Contingent losses that are probable and cannot be reliably measured. d. Contingent losses that are remote and can be reliably measured. 17. Gain contingencies that are remote and can be reliably measured a. Must be disclosed in a note to the financial statements. b. May be disclosed in a note to the financial statements. c. Must be reported in the body of the financial statements. d. Should not be reported or disclosed. 18. Pending litigation would generally be considered a. Nonmonetary liability. b. Contingent liability c. Estimated liability d. Current liability 19. Contingent assets are usually recognized when a. Realized b. Occurrence is reasonably possible and the amount can be measured reliably. c. Occurrence is probable and the amount can be reliably measured. d. The amount can be reliably measured. 20. Which of the following should be disclosed in the financial statements as a contingent liability? a. The entity has accepted liability prior to the year-end for unfair dismissal of an employee and is to pay damages. b. The entity has received a letter from a supplier complaining about an old unpaid invoice. c. The entity is involved in a legal case which it may possible lose, although this is not probable. d. The entity has not yet paid certain claims under sales warranties.

PROBLEMS 1. Jerico Company sells electrical goods covered by a one-year warranty for any defects. Of the sales of P70,000,000 for the year, the entity estimated that 3% will have major defect, 5% will have minor defect and 92% will have no defect. The cost of repairs would be P5,000,000 if all the products sold had a major defect and P3,000,000 if all had minor defect. What amount should be recognized as a warranty provision? a. P300,000 b. P640,000 c. P560,000

d. P150,000 2.On January 3, 2020, Chris Co. owned a machine that had cost P300,000. The accumulated depreciation was P180,000, estimated salvage value was P18,000, and fair value was P480,000. On January 4, 2020, this machine was irreparably damaged by Angel Co. and became worthless. In October 2020, a court awarded damages of P480,000 against Angel Co. in favor of Chris Co. At December 31, 2020, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Chris Co’s attorney, Angel Co’s appeal will be denied. At December 31, 2020, what amount should Chris Co. accrue for this gain contingency? a. P480,000. b. P390,000. c. P300,000. d. P0. 3. On January 1, 2009, Pearly Company purchased a gas detoxification facility for P9,000,000. The cost of cleaning up the routine contamination caused by the initial location of gas on the property is estimated to be P1,500,000. This cost will be incurred in 10 years when all of the existing stockpile of gas is detoxified, and the facility is decommissioned. Additional contamination may occur in succeeding years that the facility is in operation. On January 1, 2020, additional contamination cleanup cost is estimated at P200,000. What amount should Pearly report as decommissioning liability as of December 31, 2020? a. b. c. d.

P9,000,000 P1,700,000 P1,400,000 P1,500,000

4. In May 2020, Khrys Company relocated an employee from the Manila office to a branch in Cebu City. At the end of reporting period on June 30, 2020, the costs are estimated at P350,000 analyzed as follows: Cost for shipping goods Airfare Temporary accommodation cost for May and June Temporary accommodation cost for July and August Reimbursement for lease break cost paid in July (lease was terminated in May) Reimbursement for cost of living increases for the period May 1, 2020 to May 1, 2021 Total

30,000 10,000 80,000 90,000 20,000 120,00 350,00

What amount should be recognized as provision for relocation costs on June 30, 2020? a. P250,000 b. P240,000 c. P160,000 d. P140,000

5 On April 1, 2019, Mac Company entered into a lease contract for premises in Manila. The lease is to run for a period of four years (the contract expires on 31 March 2023). As a result of several factors, the board decided to relocate to Global City effective April 1, 2021. The following information is available: • • •

Operating lease payments payable annually in arrears (with no escalation), P120,000 Penalty payable on early cancellation of the contract, P250,000 Assume a discount rate of 10% and the reporting date is June 30, 2021.

What amount of provision, if any, should Mac Company recognize? a. P120,000 b. P275,000 c. P250,000 d. P370,000 6.Peatz Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Peatz's lawyer states that it is probable that Peatz will lose the suit and be found liable for a judgment costing Peatz anywhere from P1,600,000 to P8,000,000. However, the lawyer states that the most probable cost is P4,800,000. As a result of the above facts, Peatz should accrue a. a loss contingency of P1,600,000 and disclose an additional contingency of up to P6,400,000. b. a loss contingency of P4,800,000 and disclose an additional contingency of up to P3,200,000. c. a loss contingency of P4,800,000 but not disclose any additional contingency. d. no loss contingency but disclose a contingency of P1,600,000 to P8,000,000 7. On November 10, 2020, a Roycee Co. truck was in an accident with an auto driven by Arjay. Roycee received notice on January 15, 2021 of a lawsuit for P700,000 damages for personal injuries suffered by Arjay. Roycee’s counsel believed it is probable that Arjay will be awarded an estimated amount in the range between P200,000 and P450,000, and no amount is a better estimate of potential liability than any other amount because each point in the range is likely as any other. The 2020 financial statements were issued on March 1,2021. What amount of loss should Roycee accrue on December 31, 2020? a. P450,000 b. P200,000 c. P325,000 d.P0 8. On November 25, 2020, an explosion at a Bhabes Co. plant causing extensive property damage to area buildings. By March 10,2021, claims had been asserted against Bhabes. Bhabes’s management and counsel concluded that it is probable Bhabes will be responsible for damages, and that P3,500,000 would be a reasonable estimate of its liability. Bhabes’ P10,000,000

comprehensive public liability policy has a P500,000 deductible clause. What should be reported in the December 31, 2020 financial statements, issued on March 25, 2020, in relation to this item? a. A disclosure indicating the probable loss of P3,500,000. b. An accrued liability of P3,500,000. c. An accrued liability of P500,000. d. A footnote disclosure indicating the probable loss of P500,000. 9. Marge Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be P500,000. What is the required journal entry as a result of this litigation? a. Debit Litigation Expense for P500,000 and credit Litigation liability for P500,000. b. No journal entry is required. c. Debit Litigation Expense for P200,000 and credit Litigation Liability for P200,000. d. Debit Litigation Expense for P300,000 and credit Litigation Liability for P300,000. 10.Elorah Exploration is involved with innovative approaches to finding energy reserves. Elorah recently built a facility to extract natural gas at a cost of P15 million. However, Elorah is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be P21 million (the present value of which is P8 million). What is the journal entry required to record the asset retirement obligation? a. No journal entry required. b. Debit Natural Gas Facility for P21,000,000 and credit Asset Retirement Obligation for P21,000,000 c. Debit Natural Gas Facility for P6,000,000 and credit Asset Retirement Obligation for P6,000,000. d. Debit Natural Gas Facility for P8,000,000 and credit Asset Retirement Obligation for P8,000,000. 11. Essa Company buys an oil rig for P2,000,000 on January 1, 2020. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is P400,000 (present value at 10% is P154,220). 10% is an appropriate interest rate for this company. What expense should be recorded for 2020 as a result of these events? a. Depreciation expense of P240,000 b. Depreciation expense of P200,000 and interest expense of P15,422 c. Depreciation expense of P200,000 and interest expense of P40,000 d. Depreciation expense of P215,420 and interest expense of P15,422 12.

Luwi Company self insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them P1,500,000 per year. The company estimates that on average it will incur losses of P1,200,000 per year. During 2020, P525,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Luwi Company for 2020? a. P525,000 in losses and no insurance expense b. P525,000 in losses and P675,000 in insurance expense

c. P0 in losses and P1,200,000 in insurance expense d. P0 in losses and P1,500,000 in insurance expense

13. Bambarach Company is defendant in a breach of patent lawsuit. Its lawyers believe there is an 80% chance that the court will not dismiss the case and the entity will incur outflow of benefits. If the court rules in favor of the claimant, the lawyers believe that there is a 60% chance that the entity will be required to pay damages of P2,000,000 and a 40% chance the entity will be required to pay damages of P1,000,000. Other amounts of damages are unlikely. The court is expected to rule in late December 2020. There is no indication that the claimant will settle out of court. A 7% risk adjustment factor to the cash flows is considered appropriate to reflect the uncertainties in the cash flow estimates. An appropriate discount rate us 10% per year. The present value of 1 at 10% for one period is 0.91. What is the measurement of the provision on December 31, 2020? a. b. c. d.

P1,280,000 P1,369,000 P1,500,000 P1,246,336

14. In March 2020, an explosion occurred at Julius Co.'s plant, causing damage to area properties. By May 2020, no claims had yet been asserted against Julius. However, Julius’ management and legal counsel concluded that it was reasonably possible that Julius would be held responsible for negligence, and that P4,000,000 would be a reasonable estimate of the damages. Julius’ P5,000,000 comprehensive public liability policy contains a P400,000 deductible clause. In Julius’ December 31, 2020 financial statements, for which the auditor's fieldwork was completed in April 2021 how should this casualty be reported? a. As a note disclosing a possible liability of P4,000,000. b. As an accrued liability of P400,000. c. As a note disclosing a possible liability of P400,000. d. No note disclosure of accrual is required for 2020 because the event occurred in 2021 15. During January 2020, Carlo Company won a litigation award for P5,000,000 which was tripled to P15,000,000 to include punitive damages. The defendant, who is financially stable, has appealed only the 10,000,000 punitive damages. Carlo was also awarded P18,000,000 in an unrelated suit it filed, which is being appealed by the defendant. Counsel is unable to estimate the outcome of these appeals. In its 2020 financial statements, Carlo should report what amount of pre-tax gain? a.P5,000,000 b. P3,000,000 c. P10,000,000 d. P33,000,000...