Question 1

On January 1,2014,Ross Corporation issued bonds with a maturity value of $200,000;the bond's stated rate of interest equaled the market interest rate on the issue date.On December 31,2014,the market value of the bonds was $188,926;on December 31,2015,the market value of the bonds was $191,325.Which of the following correctly describes Ross Corporation's financial reporting if Ross elects to measure the bond liability using the fair value option?

Accepted Answer

The 2015 unrealized loss ($2,399)is due to the increase in the market value of the bond liability from the end of 2014 ($188,926)to the end of 2015 ($191,325).

Question 2

On February 1,2015,Hills Company had 10,000 pounds of inventory costing $1.50 per pound;the market value per pound was $1.95 on this date.Hills entered into a futures contract to sell the 10,000 pounds of inventory during May 2015 at $2.25 per pound.Which of the following statements does not accurately describe the impact of this futures contract?

Accepted Answer

The statement "Hills' gross profit in May will be $3,000 regardless of the actual price per pound in May" is not accurate. The gross profit in May will depend on the actual price per pound in May, minus the cost of the inventory and any expenses related to the futures contract. The $3,000 represents the difference between the contracted price of $2.25 per pound and the cost of $1.50 per pound, multiplied by the 10,000 pounds of inventory.

Question 3

A hedge of the exposure to changes in the fair market value of an existing asset or liability or a firm commitment is a/an

Accepted Answer

A fair value hedge is used to hedge the exposure to changes in the fair market value of an existing asset or liability or a firm commitment. It is designed to offset changes in the fair value of the hedged item with corresponding changes in the fair value of the hedge instrument.

Question 4

A bond with a $500,000 maturity value is immediately retired for $515,000 plus accrued interest.The premium on bonds payable (bond premium)at the retirement date is $17,500.Which of the following statements is correct?

Accepted Answer

The gain ($2,500)is the difference between the book value ($517,500)and the amount paid ($515,000)to retire the bonds;a gain results because the payment is less than book value.

Question 5

When two parties agree to the sale of some asset or commodity on some specified future date at a price specified today it is a/an

Accepted Answer

A forward contract is an agreement between two parties to buy or sell an asset or commodity at a predetermined future date and at a price agreed upon today. This futures contract is an obligation to both the buyer and the seller, as they are obligated to fulfill the contract at the agreed-upon date and price.

Question 6

Some financial analysts contend that reporting debt at amortized historical cost rather than current market value

Accepted Answer

Reporting debt at amortized historical cost rather than current market value can make it easier to manipulate accounting numbers because it may not reflect the true market conditions or the current value of the debt, allowing for potential manipulation in how the debt is presented in financial statements.

Question 7

Which of the following statements does not accurately describe the accounting for derivatives?

Accepted Answer

The holding loss from a cash flow hedge is recognized in other comprehensive income (OCI), not in net income, until the forecasted transaction affects earnings.

Question 8

Which of the following statements does not properly describe GAAP accounting for derivatives?

Accepted Answer

A derivative's unrealized holding gain or loss for a particular year is a component of that year's comprehensive income but not a component of income from operations.

Question 9

A variation of a forward contract that is traded daily in a market with many buyers and sellers and does not have a predetermined settlement date is a/an

Accepted Answer

A futures contract fits the description provided. It is a standardized contract traded on an exchange that specifies the delivery of a particular asset at a certain price and time in the future, but it does not have a predetermined settlement date. The contract is settled daily in a process known as marking-to-market, where profits and losses are settled each day based on the current market price of the underlying asset.

Question 10

A contingent liability that is probable and can be reasonably estimated will immediately result in

Accepted Answer

The probable and reasonably estimable contingent liability will lead to an increase in liabilities as it is recognized in the financial statements as an obligation. This recognition will also result in a decrease in net income as the expenses related to the liability are recognized. Therefore, option B is the correct answer. Options A and D are incorrect as there is no net effect on stockholders' equity or assets. Option C is also incorrect as financial statement disclosure is required for significant contingent liabilities even if they are not probable or estimable.

Question 11

Which of the following is not an accurate description of the controversies surrounding the fair value option?

Accepted Answer

Advocates argue that financial reporting is more accurate and transparent for those companies in financial distress. This is not an accurate description of the controversies surrounding the fair value option.

Question 12

When interest rates have increased and bonds are retired before maturity,market value is

Accepted Answer

When interest rates increase, the market value of existing bonds typically falls below their book value. If these bonds are retired before maturity, it results in an accounting gain because the company can repurchase the bonds at a lower market value than their book value.

Question 13

All of the statements below are true of futures contracts except that futures contracts

Accepted Answer

Futures contracts lock in prices, eliminating both downside risk and upside potential, not just downside risk.

Question 14

On December 1,2014 a company bought a call option costing $100,000 as a speculative investment.The call option gave the company the right to purchase 100,000 barrels of oil for $110 per barrel during April 2015.As of December 31,2014 the call option had a value of $125,000.The company liquidated the call option on April 15,2015 in exchange for $175,000.Which of the following accurately describes GAAP accounting for this call option?

Accepted Answer

Under GAAP, the call option is reported at its fair value of $125,000 on the December 31, 2014 balance sheet, and the $25,000 increase in value from the purchase price is recognized as an unrealized gain in income from continuing operations for the year ending December 31, 2014.

Question 15

A hedged item can be any of the following except:

Accepted Answer

A hedged item must be an anticipated (forecasted) transaction, an existing asset or liability on the company's books, or a firm commitment. A past transaction cannot be hedged as it has already occurred and cannot be changed or accounted for in future financial statements.

Question 16

A derivative instrument that gives the holder the right but not the obligation to do something is a/an

Accepted Answer

An options contract gives the holder the right but not the obligation to buy or sell an underlying asset at a specified price and time. This is different from a future contract, which obligates the holder to buy or sell the underlying asset, and a swap contract, which involves the exchange of cash flows between two parties. A performance contract is not a commonly used term in finance or derivatives.

Question 17

A bond with a $750,000 maturity value is immediately retired for $745,000 plus accrued interest.The discount on bonds payable (bond discount)at the retirement date is $25,500.Which of the following statements is correct?

Accepted Answer

The loss ($20,500)is the difference between the book value ($724,500)and the amount paid ($745,000)to retire the bonds;a loss results because the payment is greater than book value.

Question 18

Which one of the following contingencies must be accrued on the balance sheet?

Accepted Answer

Contingencies that are probable and estimable (in this case, a probable loss of $50,000 on a lawsuit) must be accrued on the balance sheet. The other options either have a lower likelihood of occurring or are not estimable.

Question 19

Which of the following statements is not accurate with respect to the reporting requirements regarding the fair value option?

Accepted Answer

This statement is inaccurate as the fair value option is not available for security investments that are accounted for using the fair value method. It is available for almost all other financial instruments, such as loans, receivables, and liabilities. The other options (A, B, and C) are accurate statements regarding the reporting requirements of the fair value option.

Question 20

Investors need to review transactions involving swaps carefully to ensure that there is an underlying

Accepted Answer

Swaps are financial instruments that involve the exchange of cash flows between two parties. The underlying rationale for entering into a swap is to achieve an economic benefit, such as reducing risk or improving returns.

Quiz 11: Financial Instruments As Liabilities