Question 1

Which of the following is an example where derecognition of a financial instrument is NOT justified?
A)The contractual rights to cash flows from the financial asset have expired.
B)The entity has transferred the financial asset so that it no longer has control of the asset.
C)Sale of short-term receivables by an entity accompanied by a guarantee to compensate the purchaser for any credit losses that are likely to occur.
D)The entity has transferred the financial asset in such a way that it is no longer subject to the risks and rewards of ownership.

Accepted Answer

In the case of short-term receivables sold with a guarantee, derecognition is not justified as the entity still carries a significant amount of risk related to the financial asset. The guarantee given by the entity can result in a liability that may be much greater than the transferred asset, and therefore, the entity cannot fully transfer the risks and rewards of ownership. Choices A, B, and D are all situations where derecognition is justified.

Question 2

Which of the following is NOT an example of a derivative financial instrument?
A)A futures contract.
B)An option contract.
C)A commercial bill contract.
D)A forward exchange contract.

Accepted Answer

Futures contracts, option contracts, and forward exchange contracts are all examples of derivative financial instruments because their value is derived from an underlying asset such as a commodity or foreign currency. Commercial bill contracts, however, are typically considered a form of short-term financing for businesses and do not involve derivative pricing.

Question 3

All of the following would be regarded as financial instruments except:
A)cash on hand.
B)bank overdraft.
C)forward exchange contracts.
D)property,plant and equipment.

Accepted Answer

Financial instruments are defined as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Property, plant, and equipment do not fit this definition as they are tangible assets used in the production of goods or services and are not contracts or agreements. Therefore, D is the only option that is not regarded as a financial instrument.

Question 4

Which of the following categories of financial instruments is NOT subsequently measured at amortised cost?
A)Purchased bonds.
B)Purchased secured loans.
C)Purchased unsecured loans.
D)Financial assets held for trading.

Accepted Answer

Financial assets held for trading are not subsequently measured at amortised cost. They are measured at fair value with changes in fair value recognised in profit or loss. Purchased bonds, secured and unsecured loans can all be subsequently measured at amortised cost if they meet the criteria outlined in the relevant accounting standards.

Question 5

An entity must recognise a financial asset or a financial liability when it becomes subject to the contractual provisions of the instrument.Which of the following are NOT recognised?
A)Trade debtors.
B)Forward contracts at commitment date.
C)Planned future transactions.
D)Option contracts when the holder becomes a party to the contract.

Accepted Answer

Planned future transactions are not recognised until they become binding contracts. The others are recognised as financial assets or liabilities.

Question 6

Financial liabilities classified as subsequently measured at fair value through profit and loss (FVTPL)are:

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

Accepted Answer

The answer of Financial liabilities classified as subsequently measured at...

Question 7

Which of the following are regarded as financial instruments?
I Ordinary shares
II Raw materials inventories
III Property,plant and equipment
IV Deposits held by a financial institution
V Accounts receivable and accounts payable
A)I,II,IV and V only
B)II,III and IV only
C)I,II and V only
D)I,IV and V only

Accepted Answer

Ordinary shares, deposits held by a financial institution, and accounts receivable and accounts payable are considered financial instruments as they represent financial assets or liabilities. Raw materials inventories and property, plant, and equipment are not financial instruments as they are tangible assets.

Question 8

Company A issues preference shares to Company B,the terms of which entitle Company B to redeem the preference shares for cash if Company A's revenues fall below a specified level.From Company A's perspective the preference shares are:
A)a financial asset.
B)a financial liability.
C)an equity instrument.
D)a compound financial instrument.

Accepted Answer

The preference shares issued by Company A to Company B contain a redemption feature based on a specific condition, which makes them a financial liability for Company A.

Question 9

Dividends or gains and losses on redemption of equity instruments are recognised:
A)as an asset.
B)as an expense in the profit or loss.
C)as income in the profit or loss.
D)directly in equity.

Accepted Answer

Dividends or gains and losses on redemption of equity instruments are recognized directly in equity, as they relate to transactions with owners in their capacity as owners.

Question 10

According to AASB 132 Financial Instruments: Presentation and Disclosure,which of the following items would be regarded as a financial liability?
A)Debentures issued.
B)Promissory notes held.
C)Ordinary shares held in another entity.
D)An option to purchase shares below the market price.

Accepted Answer

Debentures issued are considered a financial liability because they represent an obligation to pay cash or another financial asset to another entity.

Question 11

Which of the following items is classified as a financial asset?
A)Buildings.
B)Loans payable.
C)Trade receivables.
D)Ordinary shares held in a subsidiary.

Accepted Answer

Trade receivables are financial assets because they represent a right to receive cash from the debtor in the future. Buildings are non-financial assets, loans payable are liabilities, and ordinary shares held in a subsidiary are equity investments.

Question 12

AASB 132 requires an entity to offset a financial asset and a financial liability and present the net amount in the statement of financial position when two conditions are satisfied.Conditions for offsetting are generally NOT satisfied when:
A)financial assets and liabilities have the same primary risk exposure that involve different counterparties.
B)financial assets are pledged as collateral for non-recourse financial liabilities.
C)obligations are expected to be recovered from a third party because of claims under insurance contracts.
D)all of the above situations.

Accepted Answer

AASB 132 specifies that two conditions must be met in order to offset a financial asset and a financial liability and present the net amount in the statement of financial position. The first condition is that the entity must currently have a legally enforceable right to offset the financial asset and the financial liability, and the second condition is that the entity must intend either to settle on a net basis or to realize the asset and settle the liability simultaneously. None of the given situations satisfy these conditions, which means none of them can be offset. Therefore, the correct answer is D, which includes all three scenarios.

Question 13

The definition of a derivative requires which of the following characteristics to be met?
I Its value changes in response to a change in an underlying variable such as a specified interest rate,price or foreign exchange rate.
II It must be settled on a net basis.
III It requires no initial net investment or it is smaller than for other types of contracts expected to have a similar response to changes in market factors.
IV It is to be settled at a future date.
A)I,II and III
B)I,II and IV
C)I,III and IV
D)II,III and IV

Accepted Answer

A derivative's definition includes that its value changes in response to an underlying variable (I), it requires no or minimal initial investment (III), and it is settled at a future date (IV). Settlement on a net basis (II) is not a requirement for all derivatives.

Question 14

AASB 9 requires that on initial recognition,financial assets and liabilities be measured at:
A)fair value.
B)historical cost.
C)net present value.
D)lower of cost or market value.

Accepted Answer

AASB 9 requires that financial assets and liabilities be measured at fair value on initial recognition, except for certain cases where the entity has elected to use the amortised cost or the fair value through other comprehensive income (FVOCI) measurement method. The fair value measurement provides more relevant and reliable information about the value of the asset or liability at the time of initial recognition.

Question 15

Financial assets classified as subsequently measured at fair value through profit and loss (FVTPL)are:

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

Accepted Answer

The answer of Financial assets classified as subsequently measured at...

Question 16

Company A issued convertible notes 3 years ago and accounted for them as a compound financial instrument.Complete the following: at the end of the three year period the portion of the ______ component that relates to the notes which have been converted ______.
A)liability; remains as a liability
B)liability; is transferred to equity
C)equity; is transferred to profit or loss
D)liability; is transferred to profit or loss

Accepted Answer

When convertible notes are converted into equity, the liability component of the compound financial instrument is transferred to equity. Therefore, at the end of the three-year period, the portion of the liability component that relates to the notes which have been converted should be transferred to equity.

Question 17

Cathy Limited buys an option that entitles it to purchase 3000 shares in Colin Limited at $6 per share at any time in the next 6 months.The derivative financial instrument in this transaction is the:
A)shares in Cathy Limited.
B)shares in Colin Limited.
C)option priced at $6 per share.
D)market price of the shares in Colin Limited after 6 months have elapsed.

Accepted Answer

The derivative financial instrument in this transaction is the option priced at $6 per share. An option is a type of derivative financial instrument that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and within a set time period. In this case, the option purchased by Cathy Limited gives them the right to purchase shares in Colin Limited at a predetermined price of $6 per share within the next 6 months.

Question 18

The appropriate accounting treatment for incremental costs directly attributable to an equity transaction that would otherwise have been avoided is to recognise it as:
A)a deduction in equity.
B)an addition in equity.
C)an expense in profit or loss.
D)a liability.

Accepted Answer

Incremental costs directly attributable to an equity transaction should be recognized as a deduction in equity, as they are costs that would not have been incurred if the equity transaction had not taken place.

Question 19

All of the following are equity instruments except:
A)forward rate agreements.
B)non-puttable ordinary shares.
C)preference shares that do not carry an unconditional right to cash.
D)call options that allow the holder to purchase a fixed number of non-puttable ordinary shares for a fixed amount of cash.

Accepted Answer

Forward rate agreements are a type of derivative instrument used for managing interest rate risk, and are not considered equity instruments. The other options mentioned (non-puttable ordinary shares, preference shares that do not carry an unconditional right to cash, and call options on non-puttable ordinary shares) are all examples of equity instruments.

Question 20

The classification of a financial instrument on the statement of financial position of an entity is governed by the principle of:
A)fair value.
B)legal form.
C)net present value.
D)substance over form.

Accepted Answer

The classification of a financial instrument is based on the principle of "substance over form," which means that the economic reality and underlying substance of the transaction take precedence over its legal form.

Quiz 7: Financial Instruments

Which of the following is an example where derecognition of a financial instrument is NOT justified?

Which of the following is NOT an example of a derivative financial instrument?

All of the following would be regarded as financial instruments except:

Which of the following categories of financial instruments is NOT subsequently measured at amortised cost?

An entity must recognise a financial asset or a financial liability when it becomes subject to the contractual provisions of the instrument.Which of the following are NOT recognised?

Financial liabilities classified as subsequently measured at fair value through profit and loss (FVTPL) are:

Which of the following are regarded as financial instruments? I Ordinary shares II Raw materials inventories III Property,plant and equipment IV Deposits held by a financial institution V Accounts receivable and accounts payable

Company A issues preference shares to Company B,the terms of which entitle Company B to redeem the preference shares for cash if Company A's revenues fall below a specified level.From Company A's perspective the preference shares are:

Dividends or gains and losses on redemption of equity instruments are recognised:

According to AASB 132 Financial Instruments: Presentation and Disclosure,which of the following items would be regarded as a financial liability?

Which of the following items is classified as a financial asset?

AASB 132 requires an entity to offset a financial asset and a financial liability and present the net amount in the statement of financial position when two conditions are satisfied.Conditions for offsetting are generally NOT satisfied when:

AASB 9 requires that on initial recognition,financial assets and liabilities be measured at:

Financial assets classified as subsequently measured at fair value through profit and loss (FVTPL) are:

Company A issued convertible notes 3 years ago and accounted for them as a compound financial instrument.Complete the following: at the end of the three year period the portion of the component that relates to the notes which have been converted .

Cathy Limited buys an option that entitles it to purchase 3000 shares in Colin Limited at $6 per share at any time in the next 6 months.The derivative financial instrument in this transaction is the:

The appropriate accounting treatment for incremental costs directly attributable to an equity transaction that would otherwise have been avoided is to recognise it as:

All of the following are equity instruments except:

The classification of a financial instrument on the statement of financial position of an entity is governed by the principle of: