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Supplementary objective test questions

CHAPTER 8 – PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS

8.1 Which of the following statements regarding IAS 37 is true?

A A provision will be recognised in the financial statements only when it is
virtually certain that the transfer of economic benefit will occur.

B A provision can only be recognised when a legal obligation exists.

C Provisions should only be recognised when they are capable of reliable
measurement. Therefore, estimated figures cannot be used to value a
provision.

D Contingent liabilities will be disclosed in the financial statements when
there is a possibility that the company will have to settle an obligation in
the future.

8.2 AP has the following two legal claims outstanding:

 A legal action claiming compensation of $500,000 filed against AP in
March 20X4.

 A legal action taken by AP against a third party, claiming damages of
$200,000 was started in January 20X3 and is nearing completion.

In both cases, it is more likely than not that the amount claimed will have to be
paid.

How should AP report these legal actions in its financial statements for
the year ended 31 March 20X5?

Legal action against AP Legal action by AP

A Disclose by a note No disclosure

B Make a provision No disclosure

C Make a provision Disclosure as a note

D Make a provision Accrue the income

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