Financial accounting F3 acca Practice questions Financial accounting F3 acca Practice questions Financial accounting F3 acca Practice questions
Trang 1IAS 37 Provisions, Contingent
Liabilities, and Contingent Assets
Prepared for Educational Purposes
August 14, 2025
Contents
1
Trang 21 Part 1: List of Questions
This section contains 50 multiple-choice questions based on IAS 37 Provisions, Contin-gent Liabilities, and ContinContin-gent Assets, focusing on their recognition and disclosure in financial statements
1 How should a contingent liability be included in a companys financial statements
if the likelihood of a transfer of economic benefits to settle it is remote?
a No disclosure or provision is required
b Disclosed by note with no provision being made
2 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 6% 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 What is the correct action to be taken in the financial statements for these items?
a Item 1: disclose by note only; Item 2: disclose by note only
b Item 1: create a provision; Item 2: create a provision
c Item 1: create a provision; Item 2: disclose by note only
d Item 1: disclose by note only; Item 2: no action
3 Shirley makes hair shampoo and has suffered some bad publicity as a result of
a customer claiming to have lost his hair due to using Shirley’s shampoo The customer launched a court action in December 2012 claiming damages of $5,000 Shirley’s lawyer has advised her that the most probable outcome is that she will have
to pay the customer $3,000 What amount should Shirley include as a provision in her accounts for the year ended 31 December 2012?
a $5,000
b $3,000
c $2,000
d $0
4 June Ltd is being taken to court by a customer who had an accident in her building
on 18 June 2013 The customer says that the accident was the fault of June Ltd, and is claiming damages of $100,000 Lawyers have advised that the chance of June losing the case and having to pay damages is 60% The lawyers’ fees are estimated
at $10,000 What action should June Ltd take when preparing their accounts for the year ended 30 June 2013?
a Take no action (no provision and no disclosure)
b Provide for an expense of $110,000
c Provide for an expense of $10,000, and disclose details of the $100,000 by way
of a note to the accounts
d Make no provision, but disclose the details by way of a note to the accounts
Trang 35 Under IAS 37, a provision is recognized when:
a A possible obligation exists
b An outflow of resources is probable and can be reliably estimated
c A legal obligation exists only
d A contingent liability is disclosed
6 A company faces a lawsuit with a 20% chance of losing and paying $50,000 How should this be treated in the financial statements?
a Create a provision for $50,000
b Disclose by note only
c No action required
d Create a provision for $10,000
7 A company estimates that 5% of its $1,000,000 sales will result in warranty claims, with an average claim cost of $200 What should be done in the financial state-ments?
a Disclose by note only
b Create a provision for $10,000
c Create a provision for $50,000
d No action required
8 A business has a legal obligation to decommission a plant at the end of its useful life in 10 years, estimated at $500,000 The obligation is probable and measurable What should be done?
a Disclose by note only
b Create a provision for the present value of $500,000
c No action required
d Create a provision for $500,000
9 A company is involved in a tax dispute with a 40% chance of paying $100,000 How should this be treated in the financial statements?
a Create a provision for $100,000
b Disclose by note only
c No action required
d Create a provision for $40,000
10 A retailer offers a refund policy where 2% of sales are expected to be refunded, based on past experience Total sales for the year are $2,000,000 What should be done?
a Create a provision for $40,000
b Disclose by note only
c No action required
Trang 4d Create a provision for $20,000
11 A company has guaranteed a loan for a supplier, with a remote likelihood of default How should this be treated?
a Create a provision
b Disclose by note only
c No action required
d Create a contingent asset
12 A lawsuit against a company claims $200,000, but the companys lawyers estimate
a 70% chance of paying $150,000 What provision should be made?
a $200,000
b $150,000
c $50,000
d $0
13 A company expects to incur $20,000 in legal fees for an ongoing case with a 50% chance of losing How should the legal fees be treated if the case outcome is uncer-tain?
a Create a provision for $20,000
b Disclose by note only
c Create a provision for $10,000
d No action required
14 A contingent asset with a probable inflow of $50,000 should be:
a Recognized as an asset
b Disclosed by note only
c Ignored in the financial statements
d Recognized as income
15 A company faces a potential fine of $10,000 with a 10% likelihood How should this
be treated?
a Create a provision for $10,000
b Disclose by note only
c No action required
d Create a provision for $1,000
16 A business has a contract requiring environmental cleanup costing $300,000 in 5 years, with a present value of $250,000 What should be done?
a Create a provision for $300,000
b Create a provision for $250,000
c Disclose by note only
Trang 5d No action required
17 A company is sued for $80,000, with a 55% chance of losing Legal fees are estimated
at $5,000 What provision should be made?
a $80,000
b $85,000
c $5,000
d $0
18 A company expects 3% of its $500,000 sales to result in warranty repairs costing
$100 each What should be done?
a Create a provision for $1,500
b Create a provision for $15,000
c Disclose by note only
d No action required
19 A contingent liability with a 30% chance of paying $60,000 should be:
a Provided for at $60,000
b Disclosed by note only
c Ignored
d Provided for at $18,000
20 A company has a probable obligation to pay $25,000 for a lease termination in 2 years, with a present value of $22,000 What should be done?
a Create a provision for $25,000
b Create a provision for $22,000
c Disclose by note only
d No action required
21 A company faces a lawsuit with a 90% chance of paying $40,000, including $5,000
in legal fees What provision should be made?
a $40,000
b $35,000
c $5,000
d $0
22 A business offers a 1-year warranty on products, with 4% of $1,500,000 sales ex-pected to result in claims averaging $150 each What should be done?
a Create a provision for $9,000
b Create a provision for $60,000
c Disclose by note only
d No action required
Trang 623 A contingent asset with a 20% chance of receiving $30,000 should be:
a Recognized as an asset
b Disclosed by note only
c Ignored
d Recognized as income
24 A company is involved in a dispute with a 45% chance of paying $70,000 How should this be treated?
a Create a provision for $70,000
b Disclose by note only
c No action required
d Create a provision for $31,500
25 A business has a legal obligation to restore a site costing $200,000 in 8 years, with
a present value of $150,000 What should be done?
a Create a provision for $200,000
b Create a provision for $150,000
c Disclose by note only
d No action required
26 A company faces a lawsuit with a 65% chance of paying $120,000 What provision should be made?
a $120,000
b $78,000
c $0
d Disclose by note only
27 A retailer expects 10% of its $800,000 sales to result in returns costing $50 each What should be done?
a Create a provision for $4,000
b Create a provision for $40,000
c Disclose by note only
d No action required
28 A contingent liability with a 5% chance of paying $15,000 should be:
a Provided for at $15,000
b Disclosed by note only
c Ignored
d Provided for at $750
29 A company has a probable obligation to pay $50,000 for a contract breach in 3 years, with a present value of $45,000 What should be done?
Trang 7a Create a provision for $50,000
b Create a provision for $45,000
c Disclose by note only
d No action required
30 A company faces a lawsuit with a 75% chance of paying $90,000, including $10,000
in legal fees What provision should be made?
a $90,000
b $80,000
c $100,000
d $0
31 A business expects 2% of its $2,000,000 sales to result in warranty claims costing
$200 each What should be done?
a Create a provision for $8,000
b Create a provision for $40,000
c Disclose by note only
d No action required
32 A contingent asset with a 70% chance of receiving $20,000 should be:
a Recognized as an asset
b Disclosed by note only
c Ignored
d Recognized as income
33 A company is involved in a tax dispute with a 35% chance of paying $25,000 How should this be treated?
a Create a provision for $25,000
b Disclose by note only
c No action required
d Create a provision for $8,750
34 A company has a legal obligation to pay $100,000 for environmental cleanup in 5 years, with a present value of $80,000 What should be done?
a Create a provision for $100,000
b Create a provision for $80,000
c Disclose by note only
d No action required
35 A company faces a lawsuit with an 80% chance of paying $60,000 What provision should be made?
a $60,000
Trang 8b $48,000
c $0
d Disclose by note only
36 A business expects 5% of its $1,200,000 sales to result in warranty claims costing
$100 each What should be done?
a Create a provision for $6,000
b Create a provision for $60,000
c Disclose by note only
d No action required
37 A contingent liability with a 15% chance of paying $30,000 should be:
a Provided for at $30,000
b Disclosed by note only
c Ignored
d Provided for at $4,500
38 A company has a probable obligation to pay $15,000 for a lease termination in 2 years, with a present value of $13,000 What should be done?
a Create a provision for $15,000
b Create a provision for $13,000
c Disclose by note only
d No action required
39 A company faces a lawsuit with a 60% chance of paying $50,000, including $5,000
in legal fees What provision should be made?
a $50,000
b $45,000
c $55,000
d $0
40 A retailer expects 8% of its $500,000 sales to result in returns costing $50 each What should be done?
a Create a provision for $2,000
b Create a provision for $20,000
c Disclose by note only
d No action required
41 A contingent asset with a 10% chance of receiving $40,000 should be:
a Recognized as an asset
b Disclosed by note only
Trang 9c Ignored
d Recognized as income
42 A company is involved in a dispute with a 50% chance of paying $80,000 How should this be treated?
a Create a provision for $80,000
b Disclose by note only
c No action required
d Create a provision for $40,000
43 A company has a legal obligation to restore a site costing $150,000 in 7 years, with
a present value of $120,000 What should be done?
a Create a provision for $150,000
b Create a provision for $120,000
c Disclose by note only
d No action required
44 A company faces a lawsuit with a 70% chance of paying $70,000 What provision should be made?
a $70,000
b $49,000
c $0
d Disclose by note only
45 A business expects 3% of its $1,000,000 sales to result in warranty claims costing
$200 each What should be done?
a Create a provision for $6,000
b Create a provision for $30,000
c Disclose by note only
d No action required
46 A contingent liability with a 25% chance of paying $20,000 should be:
a Provided for at $20,000
b Disclosed by note only
c Ignored
d Provided for at $5,000
47 A company has a probable obligation to pay $30,000 for a contract breach in 4 years, with a present value of $25,000 What should be done?
a Create a provision for $30,000
b Create a provision for $25,000
c Disclose by note only
Trang 10d No action required
48 A company faces a lawsuit with an 85% chance of paying $100,000, including
$15,000 in legal fees What provision should be made?
a $100,000
b $85,000
c $115,000
d $0
49 A retailer expects 6% of its $600,000 sales to result in returns costing $100 each What should be done?
a Create a provision for $3,600
b Create a provision for $36,000
c Disclose by note only
d No action required
50 A contingent asset with a 60% chance of receiving $10,000 should be:
a Recognized as an asset
b Disclosed by note only
c Ignored
d Recognized as income
51 A company is involved in a tax dispute with a 30% chance of paying $50,000 How should this be treated?
a Create a provision for $50,000
b Disclose by note only
c No action required
d Create a provision for $15,000
52 A company has a legal obligation to pay $200,000 for environmental cleanup in 6 years, with a present value of $160,000 What should be done?
a Create a provision for $200,000
b Create a provision for $160,000
c Disclose by note only
d No action required
2 Part 2: Answers with Detailed Explanations
1 a No disclosure or provision is required Explanation: Per IAS 37 paragraph
28, if the likelihood of an outflow of economic benefits is remote, no provision is recognized, and no disclosure is required in the financial statements
2 c Item 1: create a provision; Item 2: disclose by note only Explanation: Item
Trang 111: Warranty claims (6% of sales) indicate a probable obligation with a reliable estimate, requiring a provision (IAS 37 paragraph 14) Item 2: A possible obli-gation from the guarantee (not probable) requires disclosure by note only (IAS 37 paragraph 86)
3 b $3,000 Explanation: The court action creates a present obligation, and the
lawyers advice of a probable $3,000 payment indicates a probable and measurable outflow Per IAS 37 paragraph 40, the provision is the best estimate, $3,000
4 b Provide for an expense of $110,000 Explanation: The 60% chance of losing
indicates a probable obligation The total outflow (damages $100,000 + legal fees
$10,000 = $110,000) is reliably measurable and should be provided for (IAS 37 paragraph 14)
5 b An outflow of resources is probable and can be reliably estimated Explanation:
IAS 37 paragraph 14 requires a provision when there is a present obligation, a probable outflow, and a reliable estimate
6 b Disclose by note only Explanation: A 20% chance is not probable (less than
50%), so no provision is made It is possible, requiring disclosure by note (IAS 37 paragraph 86)
7 b Create a provision for $10,000 Explanation: Warranty claims: 5% of $1,000,000
= $50,000; $50,000× $200 = $10,000 Probable and measurable, so a provision is
required (IAS 37 paragraph 14)
8 b Create a provision for the present value of $500,000 Explanation: The
obliga-tion is probable and measurable IAS 37 paragraph 45 requires provisions for future obligations to be measured at present value, so $500,000 discounted is recognized
9 b Disclose by note only Explanation: A 40% chance is possible but not probable,
requiring disclosure by note only (IAS 37 paragraph 86)
10 a Create a provision for $40,000 Explanation: Refunds: 2% of $2,000,000 =
$40,000 Probable and measurable based on past experience, requiring a provision (IAS 37 paragraph 14)
11 c No action required Explanation: A remote likelihood requires no provision or
disclosure (IAS 37 paragraph 28)
12 b $150,000 Explanation: A 70% chance indicates a probable obligation The
best estimate is $150,000, requiring a provision (IAS 37 paragraph 40)
13 b Disclose by note only Explanation: A 50% chance is not probable (equal
likelihood), so disclose by note only (IAS 37 paragraph 86)
14 b Disclosed by note only Explanation: Contingent assets are disclosed when
inflow is probable (IAS 37 paragraph 89)
15 c No action required Explanation: A 10% chance is remote, requiring no
provi-sion or disclosure (IAS 37 paragraph 28)
16 b Create a provision for $250,000 Explanation: Probable and measurable
obli-gation, recognized at present value (IAS 37 paragraph 45)
17 b $85,000 Explanation: A 55% chance is probable Total obligation (damages
$80,000 + legal fees $5,000) = $85,000, requiring a provision (IAS 37 paragraph