Question 1

When offsetting financial assets and liabilities an entity must settle on a net basis.

Accepted Answer

A) True 
 B)False

Question 2

Basket Plc acquired a parcel of 50 000 call options in Snake and Asp Plc on 1 November 2014.The price of the options was £0.40 each and they may be exercised any time prior to 30 June 2016.The exercise price is £30.On Basket Plc's balance date - 30 June 2016 - the company is still holding the options.The market price of the options at that time was £0.39 each and the price of Snake and Asp Pkc shares had risen to £28 having previously fallen to £15.What are the entries required to record the purchase of the options and the likely action of Basket Plc?

Accepted Answer

A)  $$\begin{array}{l}
1 \text { November } 2014\
\begin{array} { | l | l | c | c | } 
\hline \text { Dr } & \text { lnvestment in share options } & 20000 & \
\hline \mathrm { Cr } & \text { Cash } & & 20000 \
\hline & & & \
\hline  30 \text { June } 2016 & & \
\hline & \begin{array} { l } 
\text { No entry required as shares can be obtained directly at a } \
\text { lower cost. }
\end{array} & & \
\hline
\end{array}
\end{array}$$ 
B)  $$\begin{array}{l}
1 \text { November } 2014\
\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { lnvestment in share options } & 20000 & \
\hline \mathrm { Cr } & \text { Cash } & & 20000 \
\hline & & & \
\hline  { 30 \text { June } 2016 } & & \
\hline \mathrm { Dr } & \text { Loss on share options } & 500 & \
\hline \mathrm { Cr } & \text { Investment in share options } & & 500 \
\hline
\end{array}
\end{array}$$ 
C)  $$\begin{array}{l}
1 \text { November } 2014\
\begin{array} { | c | l | c | c | } 
\hline \text { Dr } & \text { lnvestment in share options } & 150000 & \
\hline \mathrm { Cr } & \text { Cash } & & 150000 \
\hline & & & \
\hline { 30 \text { June } 2016 } & & \
\hline \mathrm { Dr } & \text { Loss on share options } & 10000 & \
\hline \mathrm { Cr } & \text { Investment in share options } & & 10000 \
\hline
\end{array}
\end{array}$$ 
D)  $$\begin{array}{l}
1 \text { November } 2014\
\begin{array} { | c | l | c | c | } 
\hline \text { Dr } & \text { lnvestment in share options } & 20000 & \
\hline \mathrm { Cr } & \text { Cash } & & 20000 \
\hline & & & \
\hline { 30 \text { June } 2016 } & & \
\hline \mathrm { Dr } & \text { Shares } & 140000 & \
\hline \mathrm { Cr } & \text { Cash } & & 140000 \
\hline
\end{array}
\end{array}$$ 
A)  $$\begin{array}{l}
1 \text { November } 2014\
\begin{array} { | l | l | c | c | } 
\hline \text { Dr } & \text { lnvestment in share options } & 20000 & \
\hline \mathrm { Cr } & \text { Cash } & & 20000 \
\hline & & & \
\hline  30 \text { June } 2016 & & \
\hline & \begin{array} { l } 
\text { No entry required as shares can be obtained directly at a } \
\text { lower cost. }
\end{array} & & \
\hline
\end{array}
\end{array}$$ 
B)  $$\begin{array}{l}
1 \text { November } 2014\
\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { lnvestment in share options } & 20000 & \
\hline \mathrm { Cr } & \text { Cash } & & 20000 \
\hline & & & \
\hline  { 30 \text { June } 2016 } & & \
\hline \mathrm { Dr } & \text { Loss on share options } & 500 & \
\hline \mathrm { Cr } & \text { Investment in share options } & & 500 \
\hline
\end{array}
\end{array}$$ 
C)  $$\begin{array}{l}
1 \text { November } 2014\
\begin{array} { | c | l | c | c | } 
\hline \text { Dr } & \text { lnvestment in share options } & 150000 & \
\hline \mathrm { Cr } & \text { Cash } & & 150000 \
\hline & & & \
\hline { 30 \text { June } 2016 } & & \
\hline \mathrm { Dr } & \text { Loss on share options } & 10000 & \
\hline \mathrm { Cr } & \text { Investment in share options } & & 10000 \
\hline
\end{array}
\end{array}$$ 
D)  $$\begin{array}{l}
1 \text { November } 2014\
\begin{array} { | c | l | c | c | } 
\hline \text { Dr } & \text { lnvestment in share options } & 20000 & \
\hline \mathrm { Cr } & \text { Cash } & & 20000 \
\hline & & & \
\hline { 30 \text { June } 2016 } & & \
\hline \mathrm { Dr } & \text { Shares } & 140000 & \
\hline \mathrm { Cr } & \text { Cash } & & 140000 \
\hline
\end{array}
\end{array}$$

Question 3

What is the appropriate accounting treatment for a loan that is the subject of a swap agreement?

Accepted Answer

A) Since the loan has been swapped with another, the two loans should be set-off in accordance with IAS 32. 
B) The original loan should be removed from the statement of financial position and replaced by the other loan in the swap. 
C) The original loan should be removed from the statement of financial position and replaced by the other loan in the swap.In the case of a foreign currency swap this treatment is also appropriate but the gain or loss on foreign currency translation should be deferred and amortised over the life of the loan. 
D) The original loan, for which the entity has the primary obligation, should be retained in the statement of financial position. 
A) Since the loan has been swapped with another, the two loans should be set-off in accordance with IAS 32. 
B) The original loan should be removed from the statement of financial position and replaced by the other loan in the swap. 
C) The original loan should be removed from the statement of financial position and replaced by the other loan in the swap.In the case of a foreign currency swap this treatment is also appropriate but the gain or loss on foreign currency translation should be deferred and amortised over the life of the loan. 
D) The original loan, for which the entity has the primary obligation, should be retained in the statement of financial position.

Question 4

Explain how IAS 32 can require classification of a financial instrument as a liability,rather than equity,even though settlement of the instrument will be in the equity of the entity.

Accepted Answer

In determining whether a financial instr

Question 5

Partridge Plc holds a well-diversified portfolio of shares with a current market value on 1 April 2014 of €1 million.On this date Partridge Plc decides to hedge the portfolio by taking a sell position in 15 CAC 40 futures units.The French CAC 40 is 3130 on 1 April 2014.A unit contract in CAC 40 futures is priced based on the French CAC 40 and a price of €25.The futures broker requires a deposit of €80 000.On 30 June the French CAC 40 has fallen to 2980 and the value of the company's share portfolio has fallen to €950 000.What are the appropriate journal entries to record these events?

Accepted Answer

A)  $$\begin{array}{l}
1 \text { April } 2014\
\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { Deposit on SPl futures } & 80000 & \
\hline \mathrm { Cr } & \text { Cash at bank } & & 80000 \
\hline & & & \
\hline { 30 \text { June } 2014 } & & \
\hline \text { Dr } & \text { Loss on share portfolio } & 50000 & \
\hline \mathrm { Cr } & \text { Share portfolio } & & 50000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Deposit held by broker } & 56250 & \
\hline \mathrm { Cr } & \text { Gain on futures contract } & & 56250 \
\hline
\end{array}
\end{array}$$ 
B)  $$\begin{array}{l}
1 \text { April } 2014\
\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { Futures receivable } & 1173750 & \
\hline \text { Dr } & \text { Deposit on SPI futures } & 80000 & \
\hline \mathrm { Cr } & \text { Futures payable } & & 1093750 \
\hline & & & \
\hline  { 30 \text { June } 2014 } & & \
\hline \mathrm { Dr } & \text { Loss on share portfolio } & 50000 & \
\hline \mathrm { Cr } & \text { Share portfolio } & & 50000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Futures receivable } & 56250 & \
\hline \mathrm { Cr } & \text { Gain on futures contract } & & 56250 \
\hline
\end{array}
\end{array}$$ 
C)  $$\begin{array}{l}
30 \text { June } 2014\
\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Futures receivable } & 56250 & \
\hline \mathrm { Cr } & \text { Gain on futures contract } & & 56250 \
\hline
\end{array}
\end{array}$$ 
D)  $$\begin{array}{l}
1 \text { April } 2014\
\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { Deposit on SPl futures } & 80000 & \
\hline \mathrm { Cr } & \text { Cash at bank } & & 80000 \
\hline  { 30 \text { June } 2014 } & & \
\hline \mathrm { Dr } & \text { Loss on share portfolio } &50000 & \
\hline \mathrm { Cr } & \text { Share portfolio } &  &50000 \
\hline & & &  \
\hline \mathrm { Dr } & \text { Futures receivable } &56250 & \ 
\hline \mathrm { Cr } & \text { Gain on futures contract } &  & 56250\
\hline
\end{array}
\end{array}$$ 
A)  $$\begin{array}{l}
1 \text { April } 2014\
\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { Deposit on SPl futures } & 80000 & \
\hline \mathrm { Cr } & \text { Cash at bank } & & 80000 \
\hline & & & \
\hline { 30 \text { June } 2014 } & & \
\hline \text { Dr } & \text { Loss on share portfolio } & 50000 & \
\hline \mathrm { Cr } & \text { Share portfolio } & & 50000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Deposit held by broker } & 56250 & \
\hline \mathrm { Cr } & \text { Gain on futures contract } & & 56250 \
\hline
\end{array}
\end{array}$$ 
B)  $$\begin{array}{l}
1 \text { April } 2014\
\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { Futures receivable } & 1173750 & \
\hline \text { Dr } & \text { Deposit on SPI futures } & 80000 & \
\hline \mathrm { Cr } & \text { Futures payable } & & 1093750 \
\hline & & & \
\hline  { 30 \text { June } 2014 } & & \
\hline \mathrm { Dr } & \text { Loss on share portfolio } & 50000 & \
\hline \mathrm { Cr } & \text { Share portfolio } & & 50000 \
\hline & & & \
\hline \mathrm { Dr } & \text { Futures receivable } & 56250 & \
\hline \mathrm { Cr } & \text { Gain on futures contract } & & 56250 \
\hline
\end{array}
\end{array}$$ 
C)  $$\begin{array}{l}
30 \text { June } 2014\
\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Futures receivable } & 56250 & \
\hline \mathrm { Cr } & \text { Gain on futures contract } & & 56250 \
\hline
\end{array}
\end{array}$$ 
D)  $$\begin{array}{l}
1 \text { April } 2014\
\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { Deposit on SPl futures } & 80000 & \
\hline \mathrm { Cr } & \text { Cash at bank } & & 80000 \
\hline  { 30 \text { June } 2014 } & & \
\hline \mathrm { Dr } & \text { Loss on share portfolio } &50000 & \
\hline \mathrm { Cr } & \text { Share portfolio } &  &50000 \
\hline & & &  \
\hline \mathrm { Dr } & \text { Futures receivable } &56250 & \ 
\hline \mathrm { Cr } & \text { Gain on futures contract } &  & 56250\
\hline
\end{array}
\end{array}$$

Question 6

The carrying amount of a financial 'held-to-maturity' asset,subject to an impairment loss:

Accepted Answer

A) can be reduced through an allowance account. 
B) can be reduced through a provision account. 
C) must be reduced through an allowance account. 
D) must be reduced directly. 
A) can be reduced through an allowance account. 
B) can be reduced through a provision account. 
C) must be reduced through an allowance account. 
D) must be reduced directly.

Question 7

The amortised cost of a financial asset or financial liability is the amount at which the asset or liability is measured at initial recognition:

Accepted Answer

A) minus principal repayments. 
B) plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount. 
C) minus any reduction for impairment. 
D) All of the given answers are correct. 
A) minus principal repayments. 
B) plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount. 
C) minus any reduction for impairment. 
D) All of the given answers are correct.

Question 8

A compound financial instrument is one that:

Accepted Answer

A) transfers the risks of a primary instrument to another entity. 
B) effectively contains a financial liability and equity instrument. 
C) ultimately requires the exchange of a financial asset for an equity instrument. 
D) offers interest terms such that interest is paid on interest. 
A) transfers the risks of a primary instrument to another entity. 
B) effectively contains a financial liability and equity instrument. 
C) ultimately requires the exchange of a financial asset for an equity instrument. 
D) offers interest terms such that interest is paid on interest.

Question 9

The risks arising from financial instruments are typically:

Accepted Answer

A) credit risk, fair value risk and market risk. 
B) credit risk, liquidity risk and financial risk. 
C) inherent risk, liquidity risk and market risk. 
D) credit risk, liquidity risk and market risk. 
A) credit risk, fair value risk and market risk. 
B) credit risk, liquidity risk and financial risk. 
C) inherent risk, liquidity risk and market risk. 
D) credit risk, liquidity risk and market risk.

Question 10

The central issue in classifying a financial liability is the existence of a present obligation.

Accepted Answer

A) True 
 B)False

When offsetting financial assets and liabilities an entity must settle on a net basis.

What is the appropriate accounting treatment for a loan that is the subject of a swap agreement?

Explain how IAS 32 can require classification of a financial instrument as a liability,rather than equity,even though settlement of the instrument will be in the equity of the entity.

The carrying amount of a financial 'held-to-maturity' asset,subject to an impairment loss:

The amortised cost of a financial asset or financial liability is the amount at which the asset or liability is measured at initial recognition:

A compound financial instrument is one that:

The risks arising from financial instruments are typically:

The central issue in classifying a financial liability is the existence of a present obligation.

An Overview of the International External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

An Overview of Accounting for Liabilities

Accounting for Leases

Share Capital, Reserves and Share Options Employee Bonus Schemes

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Income Taxes

The Statement of Cash Flows

Events Occurring After the Reporting Date

Related-Party Disclosures

Earnings Per Share

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues III: Accounting for Indirect Ownership Interest

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

Filters

Exam 12: Accounting for Financial Instruments

When offsetting financial assets and liabilities an entity must settle on a net basis.

What is the appropriate accounting treatment for a loan that is the subject of a swap agreement?

Explain how IAS 32 can require classification of a financial instrument as a liability,rather than equity,even though settlement of the instrument will be in the equity of the entity.

The carrying amount of a financial 'held-to-maturity' asset,subject to an impairment loss:

The amortised cost of a financial asset or financial liability is the amount at which the asset or liability is measured at initial recognition:

A compound financial instrument is one that:

The risks arising from financial instruments are typically:

The central issue in classifying a financial liability is the existence of a present obligation.

An Overview of the International External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of Financial Accounting

An Overview of Accounting for Assets

Depreciation of Property, Plant and Equipment

Revaluations and Impairment Testing of Non-Current Assets

Inventory

Accounting for Intangibles

An Overview of Accounting for Liabilities

Accounting for Leases

Share Capital, Reserves and Share Options Employee Bonus Schemes

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Income Taxes

The Statement of Cash Flows

Events Occurring After the Reporting Date

Related-Party Disclosures

Earnings Per Share

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues III: Accounting for Indirect Ownership Interest

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

Filters