Problem 4-1 Multiple Choice (PAS 37)

1. Which is the correct definition of provision?

a. A possible obligation arising from past events.

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. A provision shall be recognized when:

I. An entity has a present obligation as a result of past event.

II. It is probable that an outflow of resources embodying economic benefits will

be required to settle the obligation.

a. I and II only.
b. I and III only
c. II and III only
d. I, II and III

3. A constructive obligation is an obligation.

I. That is derived from an entitys action that the entity will accept certain
responsibilities because of past practice, published policy or current
statement.

II. The entity has created a valid expectation in other parties that it will
discharge those responsibilities.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. It is an event that creates a legal or constructive obligation because that entity has
no other realistic alternative but to settle the obligation.

a. Obligating event
b. Past event
c. Subsequent event
d. Current event

5. An outflow of resources embodying economic benefits

 a. The probability that the event will occur is greater than the probability at 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 the event will not occur is the same as the probability that
the event will not occur.
d. The probability that the event will occur is 90% likely.

6. What amount is recognized as provision?

a. Best estimate of the expenditure

b. Minimum of the range
c. Maximum of the range
d. Midpoint of the range

7. Where there is continuous range of possible outcomes , and each point in that range
as likely as any other, the range to be used is the:

a. Minimum
b. Maximum
c. Midpoint
d. Summation of Maximum and Minimum.

8. When the provision involves a large population of items, the estimate of the
amount.

a. Reflects the weighting of all possible outcomes by their associated

probabilities.
b. Is determined as the individual most likely outcome.
c. May be the individual most likely outcome.
d. May be the individual most likely outcome.

9. When the provision arises from a single obligation, the estimate of the amount

a. Reflects him weighting of all possible outcomes by their associated

probabilities.
b. Is determined as the individual most likely outcome.

c. Is the individual most likely outcome adjusted for the effect of other possible
outcomes?
d. Midpoint of the possible outcomes.
10. Which of the following statements is incorrect where some or all of the
expenditure required to settle a provision is expected to be reimbursed by another
party?

a. The reimbursement shall be recognized only when it is virtually certain that the
reimbursement will be received if the entity settles the obligation.
b. The amount of the reimbursement shall not exceed the amount of provision.
c. The reimbursement shall be netted against the estimated liability for the
provision.
d. In the income statement, the expense relating to the provision may be presented
net of the reimbursement.

ANSWERS:

1. B 6. A
2. D 7. C
3. C 8. A
4. A 9. C
5. A 10. C