Question 1

A put option on a company's shares entitles the holder to buy that company's shares at a future time for a specified price.

Accepted Answer

A) True 
 B)False  False

Question 2

The most commonly issued equity instrument would be a redeemable preference share.

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following items is not a financial instrument?

Accepted Answer

A)  cash 
B)  derivative instrument that is unfavourable to the entity 
C)  goodwill 
D)  trade accounts receivable 
A)  cash 
B)  derivative instrument that is unfavourable to the entity 
C)  goodwill 
D)  trade accounts receivable C

Question 4

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 AASB 132. 
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 AASB 132. 
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 5

A key characteristic of a financial instrument is that it involves the ultimate transfer of an equity instrument.

Accepted Answer

A) True 
 B)False

Question 6

Describe the key issue for determining the existence of a financial asset or financial liability.How does 'exchanging financial assets or financial liabilities with another entity under conditions that are potentially favourable or potentially unfavourable' help determine the classification of an instrument as an asset or liability?

Accepted Answer

According to AASB 132 Financial Instrume

Question 7

The exercise price of an option:

Accepted Answer

A)  varies with changes in the market price of an underlying share 
B)  remains fixed for the duration of the option. 
C)  is always at a price below market price when issued. 
D)  All of the given answers are correct. 
A)  varies with changes in the market price of an underlying share 
B)  remains fixed for the duration of the option. 
C)  is always at a price below market price when issued. 
D)  All of the given answers are correct.

Question 8

Discuss the economic effect of issuing a compound instrument.

Accepted Answer

Paragraph 29 of AASB 132 states,the econ

Question 9

In differentiating between a financial liability and equity,the report preparer must consider:

Accepted Answer

A)  the existence of a contractual obligation to deliver cash or another financial asset. 
B)  the consequences of recording a financial liability and the associated impacts on profit. 
C)  the substance of the agreement over its form. 
D)  the existence of a contractual obligation to deliver cash or another financial asset and the substance of the agreement over its form. 
A)  the existence of a contractual obligation to deliver cash or another financial asset. 
B)  the consequences of recording a financial liability and the associated impacts on profit. 
C)  the substance of the agreement over its form. 
D)  the existence of a contractual obligation to deliver cash or another financial asset and the substance of the agreement over its form.

Question 10

Explain how AASB 132 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 11

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 12

Which of the following are examples of derivative financial instruments?

Accepted Answer

A)  deferred tax and future income tax benefits 
B)  mortgage loans 
C)  participating, redeemable preference shares 
D)  share options 
A)  deferred tax and future income tax benefits 
B)  mortgage loans 
C)  participating, redeemable preference shares 
D)  share options

Question 13

Which of the following ratios are used as an indicator of the inherent risk in investing in an entity?

Accepted Answer

A)  quick 
B)  current 
C)  leverage 
D)  gross profit 
A)  quick 
B)  current 
C)  leverage 
D)  gross profit

Question 14

An equity instrument of another entity is classified as a 'financial instrument'.

Accepted Answer

A) True 
 B)False

Question 15

Sampras Ltd issued $20 million of convertible notes on 1 July 2013.The notes have a life of 6 years and a face value of $20 each.Annual interest of 5% is payable at the end of each year.The notes were issued at their face value and can be converted at any time over their lives.Organisations with a similar risk profile to Sampras Ltd have issued debt with similar terms but without the option to convert at the rate of 7%.What are the appropriate accounting entries to record the issue of the convertible notes and the first payment of interest in accordance with guidance provided in AASB 132?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 16

Golden Doors enters into a forward exchange rate contract to purchase US$300 000 on 1 September at a rate of A$1 = US$0.69.On 2 September Golden Doors takes delivery of inventory from its US supplier at a price of US$300 000.On 2 September A$1 = US$ 0.65.Calculate the amount Golden Doors would have paid on 2 September in A$ if it had not entered into the forward exchange rate contract,and any gain or loss it has made (rounded to the nearest dollar).

Accepted Answer

A)  cost in A$434 782; loss of $134 782 
B)  cost in A$434 782; loss of $26 756 
C)  cost in A$461 538; gain of $161 538 
D)  cost in A$461 538; gain of $26 756 
A)  cost in A$434 782; loss of $134 782 
B)  cost in A$434 782; loss of $26 756 
C)  cost in A$461 538; gain of $161 538 
D)  cost in A$461 538; gain of $26 756

Question 17

In disclosing information about how a financial asset or financial liability meets the conditions to be classified as 'at fair value through profit and loss',an entity must have a narrative description of how this designation is consistent with:

Accepted Answer

A)  industry practice. 
B)  its own documented investment strategy. 
C)  ASIC's requirements. 
D)  the law. 
A)  industry practice. 
B)  its own documented investment strategy. 
C)  ASIC's requirements. 
D)  the law.

Question 18

It has been common practice to keep derivative financial instruments 'off balance sheet':

Accepted Answer

A) True 
 B)False

Question 19

Companies may be motivated to enter into a foreign currency swap in order to hedge receivables held in the currency of the loan,the obligations of which they will undertake in the swap.

Accepted Answer

A) True 
 B)False

Question 20

What is a foreign currency swap and discuss why organisations enter into swap arrangements with other parties?

Accepted Answer

A foreign currency swap is an agreement

Exam 14: Accounting for Financial Instruments

A put option on a company's shares entitles the holder to buy that company's shares at a future time for a specified price.

The most commonly issued equity instrument would be a redeemable preference share.

Which of the following items is not a financial instrument?

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

A key characteristic of a financial instrument is that it involves the ultimate transfer of an equity instrument.

The exercise price of an option:

Discuss the economic effect of issuing a compound instrument.

In differentiating between a financial liability and equity,the report preparer must consider:

Explain how AASB 132 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:

Which of the following are examples of derivative financial instruments?

Which of the following ratios are used as an indicator of the inherent risk in investing in an entity?

An equity instrument of another entity is classified as a 'financial instrument'.

In disclosing information about how a financial asset or financial liability meets the conditions to be classified as 'at fair value through profit and loss',an entity must have a narrative description of how this designation is consistent with:

It has been common practice to keep derivative financial instruments 'off balance sheet':

Companies may be motivated to enter into a foreign currency swap in order to hedge receivables held in the currency of the loan,the obligations of which they will undertake in the swap.

What is a foreign currency swap and discuss why organisations enter into swap arrangements with other parties?

An Overview of the Australian External Reporting Environment

The Conceptual Framework of Accounting and Its Relevance to Financial Reporting

Theories of 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

Accounting for Heritage Assets and Biological Assets

An Overview of Accounting for Liabilities

Accounting for Leases

Accounting for Employee Benefits

Share Capital and Reserves

Revenue Recognition Issues

The Statement of Comprehensive Income and Statement of Changes in Equity

Accounting for Share-Based Payments

Accounting for Income Taxes

The Statement of Cash Flows

Accounting for the Extractive Industries

Accounting for General Insurance Contracts

Accounting for Superannuation Plans

Events Occurring After the End of the Reporting Period

Segment Reporting

Related Party Disclosures

Earnings Per Share

Accounting for Group Structures

Further Consolidation Issues I: Accounting for Intragroup Transactions

Further Consolidation Issues II: Accounting for Non-Controlling Interests

Further Consolidation Issues IV: Accounting for Changes in the Degree of Ownership of a Subsidiary

Accounting for Equity Investments,including Investments in Associates and Joint Arrangements

Accounting for Foreign Currency Transactions

Translating the Financial Statements of Foreign Operations

Accounting for Corporate Social Responsibility

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