Question 1

Under the requirements of the AASB Framework how would convertible notes be classified in the statement of financial position?

Accepted Answer

A)  They have the essential characteristics of debt and, using the principle of prudence, would be classified as a liability. 
B)  They would be classified in a separate category between liabilities and equity. 
C)  They would be classified as either liabilities or equity at any balance date based on the probability at that time that the notes would, or would not, be converted. 
D)  They have the essential characteristics of shares and, using the principle of substance over form, they would be classified as equity. 
A)  They have the essential characteristics of debt and, using the principle of prudence, would be classified as a liability. 
B)  They would be classified in a separate category between liabilities and equity. 
C)  They would be classified as either liabilities or equity at any balance date based on the probability at that time that the notes would, or would not, be converted. 
D)  They have the essential characteristics of shares and, using the principle of substance over form, they would be classified as equity.

Question 2

Documentation that constitutes a financial instrument as a hedging instrument must include:

Accepted Answer

A)  how the entity will assess the effectiveness of the hedging instrument. 
B)  the nature of the risk being hedged. 
C)  the risk management objective and strategy. 
D)  all of the given answers. 
A)  how the entity will assess the effectiveness of the hedging instrument. 
B)  the nature of the risk being hedged. 
C)  the risk management objective and strategy. 
D)  all of the given answers.

Question 3

Catchup Company buys a contract in SPI futures,taking a buy position on 1 April 2013 to 'take delivery' on 30 May 2013.A unit contract in SPI futures is priced at the All Ordinaries SPI multiplied by $25.On 1 April the All Ordinaries SPI is 2950.By 1 May the index has dropped to 2600 and Catchup decides to close out the contract.What is Catchup's gain or loss on the futures contract?

Accepted Answer

A)  gain of $22 
B)  loss of $8750 
C)  loss of $350 
D)  gain of $8750 
A)  gain of $22 
B)  loss of $8750 
C)  loss of $350 
D)  gain of $8750

Question 4

Once a financial instrument has been classified as a liability in the statement of financial position,under AASB 132 the reporting entity is not permitted to reclassify it unless a specific transaction or other specific action by the holder or issuer of the instrument alters the substance of the financial instrument.

Accepted Answer

A) True 
 B)False

Question 5

An entity that has taken a buy position in a futures contract on a particular item will make a gain when the price of the item decreases.

Accepted Answer

A) True 
 B)False

Question 6

Two companies enter into loan agreements on 1 July 2012.On that date they also enter into an agreement to swap the loans.The details for each company and loan are: $$\begin{array} { | l | l | } 
\hline \text { Andre Ltd } & \text { Agassi Ltd } \
\hline \text { Australian company } & \text { Australian company } \
\hline \text { Borrows UK£1500 000 } & \text { Borrows A\$4 } 980000 \
\hline \text { Interest rate } 8 \% \text { payable annually } & \text { Interest rate } 11 \% \text { payable annually } \
\hline \text { Repayable in UK£ } & \text { Repayable in A\$ } \
\hline \text { Loan repayable in 3 years } & \text { Loan repayable in 3 years } \
\hline
\end{array}$$ Exchange rates:
$$\begin{array} { | l | l | } 
\hline 1 \text { July } 2012 & \text { A\$1.00 } = \text { UK£ } 0.3012 \
\hline 30 \text { June } 2013 & \text { A\$1.00 } = \text { UK£.0.3150 } \
\hline
\end{array}$$ The balance date for both companies is 30 June 2013.What are the accounting entries in the books of Agassi Ltd on 1 July 2002 and 30 June 2013?

Accepted Answer

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

Question 7

If an entity issued a convertible note at a price of $40.00 and it was determined that a debt instrument of similar risk and rate of interest of 10%-but without the option to convert to equity-could be sold for $32.00,what would be the liability component of the convertible note?

Accepted Answer

A)  $40.00 
B)  $32.00 
C)  $44.00 
D)  $36.00 
A)  $40.00 
B)  $32.00 
C)  $44.00 
D)  $36.00

Question 8

Identify which of the following financial instruments are required under AASB 139 Financial Instruments: Recognition and Measurement to be measured at amortised cost:
$\begin{array}{|l|l|}
\hline \text { I } & \text { Loans receivable } \
\hline \text { II } & \text { Debentures } \
\hline \text { III } & \text { Investments in associates } \
\hline \text { IV } & \text { Debt portion of a convertible note } \
\hline V & \text { Unfavourable derivative instruments }\
\hline
\end{array}$

Accepted Answer

A)  I, II and III 
B)  I, II and IV 
C)  II, III and IV 
D)  II, IV and V 
A)  I, II and III 
B)  I, II and IV 
C)  II, III and IV 
D)  II, IV and V

Question 9

David Ltd acquired a parcel of 50 000 call options in Goliath Ltd on 1 November 2012.The price of the options was $1.50 each and they may be exercised any time prior to 30 June 2015 at exercise price of $30.On the same date the market price for Goliath Ltd shares is $25.On David Ltd's balance date - 30 June 2013 - the company is still holding the options.The market price of the options at that time was $1.80 each and the share price is $27. What is the financial effect of the above transactions on David Ltd's statement of comprehensive income for the year ending 30 June 2013?

Accepted Answer

A)  Increase by $15 000 
B)  Decrease by $15 000 
C)  Increase by $100 000 
D)  Decrease by $100 000 
A)  Increase by $15 000 
B)  Decrease by $15 000 
C)  Increase by $100 000 
D)  Decrease by $100 000

Question 10

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 11

AASB 132 defines a financial instrument as:

Accepted Answer

A)  any commitment that gives rise to either a financial asset or a financial liability of the reporting entity. 
B)  any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. 
C)  any commitment that ultimately gives rise to an equity instrument of the reporting entity. 
D)  any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of the same entity. 
A)  any commitment that gives rise to either a financial asset or a financial liability of the reporting entity. 
B)  any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. 
C)  any commitment that ultimately gives rise to an equity instrument of the reporting entity. 
D)  any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of the same entity.

Question 12

Basket Ltd acquired a parcel of 50 000 call options in Snake and Asp Ltd 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 Ltd'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 Ltd 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 Ltd?

Accepted Answer

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

Question 13

The characteristics of a call option are best described as follows:

Accepted Answer

A)  It allows the holder to sell the shares of the specified company at a prespecified (strike or exercise) price. The exercise price remains fixed, but the option can be traded in a market and its value will depend on the value of the underlying share such that an increase in the price of the share will lead to a decrease in the value of the option (and vice versa). The holder usually does not have to exercise the option and would choose not to if the share price were above the exercise price. 
B)  It allows the holder to buy the shares of the specified company at a prespecified (strike or exercise) price. The exercise price will depend on the value of the underlying share such that an increase in the price of the share will lead to an increase in the exercise price (and vice versa). The holder is committed to exercise the option or close out the contract by taking a put option position in the market. 
C)  It allows the holder to buy the shares of the specified company at a prespecified (strike or exercise) price. The exercise price remains fixed, but the option can be traded in a market and its value will depend on the value of the underlying share such that an increase in the price of the share will lead to an increase in the value of the option (and vice versa). The holder usually does not have to exercise the option and would choose not to if the share price fell below the exercise price. 
D)  It allows the holder to sell the shares of the specified company at a prespecified (strike or exercise) price. The exercise price remains fixed, but the option can be traded in a market and its value will depend on the value of the underlying share such that an increase in the price of the share will lead to an increase in the value of the option (and vice versa). While the holder of a put option usually does not have to exercise the option and would choose not to if the share price fell below the exercise price, the holder of a call option must either complete the contract or close it out by taking out a put option for the same number of shares in the market. 
A)  It allows the holder to sell the shares of the specified company at a prespecified (strike or exercise) price. The exercise price remains fixed, but the option can be traded in a market and its value will depend on the value of the underlying share such that an increase in the price of the share will lead to a decrease in the value of the option (and vice versa). The holder usually does not have to exercise the option and would choose not to if the share price were above the exercise price. 
B)  It allows the holder to buy the shares of the specified company at a prespecified (strike or exercise) price. The exercise price will depend on the value of the underlying share such that an increase in the price of the share will lead to an increase in the exercise price (and vice versa). The holder is committed to exercise the option or close out the contract by taking a put option position in the market. 
C)  It allows the holder to buy the shares of the specified company at a prespecified (strike or exercise) price. The exercise price remains fixed, but the option can be traded in a market and its value will depend on the value of the underlying share such that an increase in the price of the share will lead to an increase in the value of the option (and vice versa). The holder usually does not have to exercise the option and would choose not to if the share price fell below the exercise price. 
D)  It allows the holder to sell the shares of the specified company at a prespecified (strike or exercise) price. The exercise price remains fixed, but the option can be traded in a market and its value will depend on the value of the underlying share such that an increase in the price of the share will lead to an increase in the value of the option (and vice versa). While the holder of a put option usually does not have to exercise the option and would choose not to if the share price fell below the exercise price, the holder of a call option must either complete the contract or close it out by taking out a put option for the same number of shares in the market.

Question 14

An entity that holds a well diversified portfolio of shares and wishes to use futures to protect its investments for possible downturns should enter into a sell position in a futures contract.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements are true?
I.The initial measurement of financial assets is to be at fair value.
II.The initial measurement of financial liabilities is to be at present value.
III.The initial measurement of financial liabilities is to be at fair value.
IV.The subsequent measurement of financial assets and financial liabilities will be at fair value.
V.The subsequent measurement of financial assets and financial liabilities will be dependent upon the category to which the financial instrument belongs.

Accepted Answer

A)  I, II and V 
B)  I, II and IV 
C)  I, III and IV 
D)  I, III and V 
A)  I, II and V 
B)  I, II and IV 
C)  I, III and IV 
D)  I, III and V

Question 16

The following journal entry pertains to convertible notes with a face value of $10 million: $$\begin{array} { | c | l | r | r | } 
\hline \text { Dr } & \text { Convertible notes liability } & 9814806 & \
\hline \text { Dr } & \text { Convertible notes (equity component) } & 662432 & \
\hline \mathrm { Cr } & \text { Share capital } & & 10477238 \
\hline
\end{array}$$ Which of the following statements are correct?

Accepted Answer

A)  The instrument was over-valued when it was initially recognised. 
B)  The convertible note has been converted. 
C)  The value of the option to convert has increased over the period from initial recognition to conversion, by $477 238. 
D)  The instrument was over-valued when it was initially recognised and the value of the option to convert has increased over the period from initial recognition to conversion, by $477 238. 
A)  The instrument was over-valued when it was initially recognised. 
B)  The convertible note has been converted. 
C)  The value of the option to convert has increased over the period from initial recognition to conversion, by $477 238. 
D)  The instrument was over-valued when it was initially recognised and the value of the option to convert has increased over the period from initial recognition to conversion, by $477 238.

Question 17

What is hedging?

Accepted Answer

A)  It is a method of leveraging returns when a company has foreign currency receivables or payables or has outstanding commitments that will be affected by changes in market prices. 
B)  It is a system for investing in financial instruments such that the entity is guaranteed increased returns and lower risks. 
C)  It is any activity, entered into by the entity, designed to increase returns and reduce risk. 
D)  It is an action taken with the object of avoiding or minimising possible adverse effects of movements in things such as exchange rates or market prices. 
A)  It is a method of leveraging returns when a company has foreign currency receivables or payables or has outstanding commitments that will be affected by changes in market prices. 
B)  It is a system for investing in financial instruments such that the entity is guaranteed increased returns and lower risks. 
C)  It is any activity, entered into by the entity, designed to increase returns and reduce risk. 
D)  It is an action taken with the object of avoiding or minimising possible adverse effects of movements in things such as exchange rates or market prices.

Question 18

For a designated cash flow hedge,AASB 139 Financial Instruments:
 Recognition and Measurement requires the gain or loss on the hedging instrument to be transferred initially to equity and subsequently to profit or loss to offset the gains or losses on the hedged item.

Accepted Answer

A) True 
 B)False

Question 19

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 20

If an entity issued a convertible note at a price of $40.00 and it was determined that a debt instrument of similar risk and rate of interest of 10%-but without the option to convert to equity-could be sold for $32.00,what would be the equity component of the convertible note?

Accepted Answer

A)  $40.00 
B)  $32.00 
C)  $8.00 
D)  $12.00 
A)  $40.00 
B)  $32.00 
C)  $8.00 
D)  $12.00

Exam 14: Accounting for Financial Instruments

Under the requirements of the AASB Framework how would convertible notes be classified in the statement of financial position?

Documentation that constitutes a financial instrument as a hedging instrument must include:

An entity that has taken a buy position in a futures contract on a particular item will make a gain when the price of the item decreases.

If an entity issued a convertible note at a price of $40.00 and it was determined that a debt instrument of similar risk and rate of interest of 10%-but without the option to convert to equity-could be sold for $32.00,what would be the liability component of the convertible note?

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

AASB 132 defines a financial instrument as:

The characteristics of a call option are best described as follows:

An entity that holds a well diversified portfolio of shares and wishes to use futures to protect its investments for possible downturns should enter into a sell position in a futures contract.

The following journal entry pertains to convertible notes with a face value of $10 million: Dr Convertible notes liability 9814806 Dr Convertible notes (equity component) 662432 Share capital 10477238 Which of the following statements are correct?

What is hedging?

For a designated cash flow hedge,AASB 139 Financial Instruments: Recognition and Measurement requires the gain or loss on the hedging instrument to be transferred initially to equity and subsequently to profit or loss to offset the gains or losses on the hedged item.

The risks arising from financial instruments are typically:

If an entity issued a convertible note at a price of $40.00 and it was determined that a debt instrument of similar risk and rate of interest of 10%-but without the option to convert to equity-could be sold for $32.00,what would be the equity component of the convertible note?

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

Filters