Financial Reporting 1st Edition By Loftus, Leo – Test Bank

Chapter 11:
Financial instruments

Multiple Choice Questions

1) Which of the following is NOT an example of a derivative financial instrument?

a) A forward exchange contract.
*b) A commercial bill contract.
c) A futures contract.
d) An option contract.

Answer: b
Learning Objective 4: Explain what is meant by a derivative and an embedded derivative

2) Company A issues preference shares to Company B, the terms of which entitle party B to redeem the preference shares for cash if Company A’s revenues fall below a specified level. From Company A’s perspective the preference shares are:

a) an equity instrument.
*b) a financial liability.
c) a compound financial instrument.
d) a financial asset.

Answer: b
Learning Objective 5: Define an equity instrument and demonstrate using examples

3) All of the following would be regarded as financial instruments except:

a) bank overdraft.
b) notes payable.
c) cash.
*d) equipment.

Answer: d
Learning Objective 1: Define a financial instrument

4) According to AASB 132 Financial Instruments: Presentation, which of the following items would be regarded as a financial liability?

a) Ordinary shares held in another entity.
*b) A contract that is a non-derivative for which the entity is obliged to deliver a variable number of its own equity instruments.
c) A contractual right to exchange under potentially favourable conditions, an option to purchase shares below the market price.
d) The right of a depositor to obtain cash from a financial institution with which it has deposited cash.

Answer: b
Learning Objective 3: Define a financial liability and demonstrate using examples

5) Which of the following are regarded as financial instruments:

I — Deposits held by a financial institution.
II — Ordinary shares.
III — Raw materials inventories.
IV — Property, plant and equipment.
V — Accounts receivable and accounts payable.

a) I, II, IV and V only.
b) II, III and IV only.
*c) I, II and V only.
d) I, IV and V only.

Answer: c
Learning Objective 1: Define a financial instrument

6) Company A issued convertible notes 3 years ago and accounted for them as a compound financial instrument. Complete the following:

At the end of the three year period the portion of the XXX component that relates to the notes which have been converted XXX.

a) equity, is transferred to profit and loss.
b) liability, remains as a liability.
*c) liability, is transferred to equity.
d) liability, is transferred to profit or loss.

Answer: c
Learning Objective 7: Explain the concept of a compound financial instrument and prepare entries for the example of convertible notes based on the residual valuation method
7) Company A has convertible notes on issue. These notes are convertible to ordinary shares of the Company after 3 years. The distributions made to the note holders by Company A are classified by Company A as follows:

a) interest expense.
b) dividends distributed.
*c) a portion representing interest expense and a portion representing dividends distributed.
d) indeterminable based on the information provided.

Answer: c
Learning Objective 7: Explain the concept of a compound financial instrument and prepare entries for the example of convertible notes based on the residual valuation method

8) Which of the following events provide objective evidence that a financial asset has been
impaired:

I — A default in interest payments.
II — The borrower enters into bankruptcy.
III — Significant financial difficulty of the issuer.
IV — The downgrade of an entity’s credit rating.

*a) I, II and III only.
b) II, III and IV only.
c) I, III and IV only.
d) II and IV only.

Answer: a
Learning Objective 12: Outline the requirements for the initial measurement of a financial asset or a financial liability and prepare entries to apply these requirements in specific cases

9) AASB 139 Financial Instruments: Recognition and Measurement, requires that ‘held-to-maturity’ investments be initially measured at:

a) fair value.
*b) fair value plus transaction costs.
c) discounted future cash outflows.
d) discounted future net cash flows.

Answer: b
Learning Objective 12: Outline the requirements for the subsequent measurement of a financial asset and prepare entries to apply these requirements in specific cases

10) The formal documentation of a hedging relationship must include identification of:

I II III IV
The hedging instrument No No Yes Yes
The hedged item No Yes Yes No
The nature of the risk being hedged No Yes Yes Yes
How the entity will assess hedge effectiveness Yes No Yes No

a) I.
b) II.
*c) III.
d) IV.

Answer: c
Learning Objective 15: Summarise the disclosures that are required for financial instruments