Exam 14: Accounting for Financial Instruments

Penitent Ltd acquired a parcel of 10 000 call options in Remorse Company Ltd on 1 May 2014.The price of the options was $0.50 each and they may be exercised any time over the next 3 years.The exercise price is $11.On Penitent Ltd's balance date - 30 June 2014 - the company is still holding the options.The market price of the options at that time was $1.20 each and the price of Remorse Company's shares had risen to $19.What are the entries required to record the purchase of the options and the adjusting entry to mark the options to market in Penitent's books?

AASB 132 does not apply to obligations arising under insurance contracts.

Which of the following are examples of primary financial instruments?

AASB 139 stipulates how financial instruments are to be recognised and measured.Specifically these instruments could be:

When financial instruments are issued that are to appear in the statement of financial position the issuer is required to determine whether the item should be disclosed as a liability or as equity.

On 31 October 2012 Gordon Investment Ltd has a well diversified portfolio of shares that it is intending to sell in 3 months time.To hedge against the adverse movements in the price of these shares,the manager obtained four 'sell' contracts with DSI Futures.A deposit of $20 000 was required by the broker.A standard futures contract is $25 per basis point.On 31 January 2013,Gordon Investment Ltd closed out all four contracts.The following information is provided. 31 October 2012 31 December 2012 31 January 2013 Fair value–share portfolio \ 350000 \ 335000 \ 330000 January 2013 DSI Futures price 3700 3600 3500 What is the fair value of the futures contract on 31 December 2012 and the cash received from DSI Futures on 31 January 2013 respectively?

Explain the reason for the rise in the development and use of financial instruments in recent years.Describe some of the key accounting issues regulators have had to face in light of this increased use and development.

Derivative instruments generally result in a transfer of the underlying primary financial instrument on maturity of the contract.

A derivative financial instrument is one which:

Which of the following statements is true about a share option:

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

For a financial instrument to be classified as an equity instrument,the instrument must include:

Partridge Ltd holds a well-diversified portfolio of shares with a current market value on 1 April 2014 of $1 million.On this date Partridge Ltd decides to hedge the portfolio by taking a sell position in 15 SPI futures units.The All Ordinaries SPI is 3130 on 1 April 2014.A unit contract in SPI futures is priced based on All Ordinaries SPI and a price of $25.The futures broker requires a deposit of $80 000.On 30 June the All Ordinaries SPI 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?

Derivatives are sometimes called 'secondary' financial instruments.

A potential downturn in the share market can be overcome by:

Financial assets do not include:

A change in classification of a financial instrument may occur as a result of 'revised probabilities' of,for example,conversion.

Which of the following financial instruments can underlie an option contract?

A compound financial instrument is one that:

Distinguish futures contracts entered for hedge purposes from futures contracts entered for speculative purposes.