1.

When can a provision be recognized in

accordance
with IAS 37?
(a) When there is a legal obligation arising
from
a past (obligating) event, the probability of
the outflow of resources is more than remote
(but less than probable), and a reliable
estimate
can be made of the amount of the
obligation.
(b) When there is a constructive obligation
as a
result of a past (obligating) event, the
outflow
of resources is probable, and a reliable
estimate can be made of the amount of the
obligation.
(c) When there is a possible obligation
arising
from a past event, the outflow of resources
is probable, and an approximate amount can
be set aside toward the obligation.
(d) When management decides that it is
essential
that a provision be made for unforeseen
circumstances and keeping in mind this year
the profits were enough but next year there
may be losses.
Answer: (b)
2. Amazon Inc. has been served a legal
notice on
December 15, 20X1, by the local
environmental protection
agency (EPA) to fit smoke detectors in its
factory on or before June 30, 20X2 (before
June 30 of
the following year). The cost of fitting smoke
detectors
in its factory is estimated at $250,000. How
should Amazon Inc. treat this in its financial
statements
for the year ended December 31, 20X1?
(a) Recognize a provision for $250,000 in the
financial statements for the year ended
December
31, 20X1.
(b) Recognize a provision for $125,000 in the
financial statements for the year ended
December
31, 20X1, because the other 50% of
the estimated amount will be recognized
next year in the financial statement for the
year ended December 31, 20X2.
(c) Because Amazon Inc. can avoid the
future
expenditure by changing the method of
operations

and thus there is no present obligation

for the future expenditure, no provision
is required at December 31, 20X1, but as
there is a possible obligation, this warrants
disclosure in footnotes to the financial
statements for the year ended December 31,
20X1.
(d) Ignore this for the purposes of the
financial
statements for the year ended December 31,
20X1, and neither disclose nor provide the
estimated amount of $250,000.
Answer: (c)
3. A competitor has sued an entity for
unauthorized
use of its patented technology. The amount
that the
entity may be required to pay to the
competitor if the
competitor succeeds in the lawsuit is
determinable
with reliability, and according to the legal
counsel it is
less than probable (but more than remote)
that an
outflow of the resources would be needed to
meet the
obligation. The entity that was sued should
at yearend:
(a) Recognize a provision for this possible
obligation.
(b) Make a disclosure of the possible
obligation
in footnotes to the financial statements.
(c) Make no provision or disclosure and wait
until the lawsuit is finally decided and then
expense the amount paid on settlement, if
any.
(d) Set aside, as an appropriation, a
contingency
reserve, an amount based on the best
estimate
of the possible liability.
Answer: (b)
4. A factory owned by XYZ Inc. was
destroyed by
fire. XYZ Inc. lodged an insurance claim for
the value
of the factory building, plant, and an amount
equal to
one years net profit. During the year there
were a
number of meetings with the representatives
of the
insurance company. Finally, before year-end,
it was
decided that XYZ Inc. would receive
compensation

for 90% of its claim. XYZ Inc. received a

letter that
the settlement check for that amount had
been mailed,
but it was not received before year-end. How
should
XYZ Inc. treat this in its financial
statements?
(a) Disclose the contingent asset in the
footnotes.
(b) Wait until next year when the settlement
check is actually received and not recognize
or disclose this receivable at all since at
year-end it is a contingent asset.
(c) Because the settlement of the claim was
conveyed by a letter from the insurance
company that also stated that the
settlement
check was in the mail for 90% of the claim,
record 90% of the claim as a receivable as it
is virtually certain that the contingent asset
will be received.
(d) Because the settlement of the claim was
conveyed by a letter from the insurance
company that also stated that the
settlement
check was in the mail for 90% of the claim,
record 100% of the claim as a receivable at
year-end as it is virtually certain that the
contingent asset will be received, and adjust
the 10% next year when the settlement
check is actually received.
Answer: (c)
5. 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 IAS 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 $2 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
thatABC 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 chairmans 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
years financial statements.
Answer: (a)
as its financial advisor. The entity has
recently completed
one of its highly publicized research and
development
projects and seeks your advice on the
accuracy of the following statements made
by one of
its stakeholders. Which one is it?
(a) Costs incurred during the research
phase
can be capitalized.
(b) Costs incurred during the development
phase can be capitalized if criteria such as
technical feasibility of the project being
established
are met.
(c) Training costs of technicians used in
research
can be capitalized.
(d) Designing of jigs and tools qualify as
research
activities.
Answer: (b)
2. Which item listed below does not qualify
as an
intangible asset?
(a) Computer software.
(b) Registered patent.
(c) Copyrights that are protected.
(d) Notebook computer.
Answer: (d)
3. Which of the following items qualify as an
intangible
asset under IAS 38?
(a) Advertising and promotion on the launch
of

a huge product.
(b) College tuition fees paid to employees
who
decide to enroll in an executive M.B.A.
program
at Harvard University while working
with the company.
(c) Operating losses during the initial stages
of
the project.
(d) Legal costs paid to intellectual property
lawyers
to register a patent.
Answer: (d)
4. Once recognized, intangible assets can be
carried
at
(a) Cost less accumulated depreciation.
(b) Cost less accumulated depreciation and
less
accumulated amortization.
(c) Revalued amount less accumulated
depreciation.
(d) Cost plus a notional increase in fair value
since the intangible asset is acquired.
Answer: (b)
5. Which of the following disclosures is not
required by IAS 38?
(a) Useful lives of the intangible assets.
(b) Reconciliation of carrying amount at the
beginning
and the end of the year.
(c) Contractual commitments for the
acquisition
of intangible assets.
(d) Fair value of similar intangible assets
used
by its competitors.
Answer: (d)
1. A gain arising from a change in the fair
value of
an investment property for which an entity
has opted
to use the fair value model is recognized in
(a) Net profit or loss for the year.
(b) General reserve in the shareholders
equity.
(c) Valuation reserve in the shareholders
equity.
(d) None of the above.
Answer: (a)
2. An investment property should be
measured initially
at
(a) Cost.
(b) Cost less accumulated impairment
losses.

(c) Depreciable cost less accumulated

impairment
losses.
(d) Fair value less accumulated impairment
losses.
Answer: (a)
3. The applicable IFRS/IAS for a property
being
constructed or developed for future use as
investment
property is
(a) IAS 2, Inventories, until construction is
complete and then it is accounted for under
IAS 40, Investment Property.
(b) IAS 40, Investment Property.
(c) IAS 11, Construction Contracts, until
construction
is complete and then it is accounted
for under IAS 40, Investment Property.
(d) IAS 16, Property, Plant, and Equipment,
until
construction is complete and then it is
accounted
for under IAS 40, Investment Property.
Answer: (d)
4. In case of property held under an
operating lease
and classified as investment property
(a) The entity has to account for the
investment
property under the cost model only.
(b) The entity has to use the fair value model
only.
(c) The entity has the choice between the
cost
model and the fair value model.
(d) The entity needs only to disclose the fair
value and can use the cost model under
IAS 38.
Answer: (b)
5. Transfers from investment property to
property,
plant, and equipment are appropriate
(a) When there is change of use.
(b) Based on the entitys discretion.
(c) Only when the entity adopts the fair
value
model under IAS 38.
(d) The entity can never transfer property
into
another classification on the balance sheet
once it is classified as investment property.
Answer: (a)
6. An investment property is derecognized
(eliminated
from the balance sheet) when
(a) It is disposed to a third party.
(b) It is permanently withdrawn from use.

(c) No future economic benefits are expected

from its disposal.
(d) In all of the above cases.
Answer: (d)
7. An entity has a factory that has been shut
down
for a year due to various reasons, including
worker
unrest and strike. The entity plans to sell this
factory.
It should
(a) Classify the factory as investment
property.

(b) Classify the factory as property held for

sale
in the ordinary course of business under IAS
2.
(c) Classify the factory as property, plant,
and
equipment under IAS 16.
(d) Write off the net book value and disclose
that fact in the footnotes to the financial
statements.
Answer: (b)