Question 1

An agreement between two parties to exchange a specified amount of a commodity, security, or foreign currency at a specified date in the future with the price or exchange rate being set now is referred to as a(n)

Accepted Answer

A forward contract is an agreement between two parties to exchange a specified amount of a commodity, security, or foreign currency at a specified date in the future with the price or exchange rate being set now. This is different from a futures contract or an option, which are both standardized contracts traded on an exchange. An interest rate swap involves the exchange of interest payment streams, not a physical commodity or security.

Question 2

For which type of derivative are changes in the fair value deferred and recognized as an equity adjustment?

Accepted Answer

Changes in the fair value of a derivative used in a cash flow hedge are deferred and recognized as an equity adjustment until the underlying hedged item affects earnings. The purpose of the cash flow hedge is to mitigate the risk of changes in cash flows due to fluctuations in the fair value of the hedged item. Therefore, changes in fair value of the derivative used in the cash flow hedge are not immediately recognized in earnings but are recognized in equity until the hedged item is realized.

Question 3

Which choice best describes the information that should be disclosed related to derivative contracts?

Accepted Answer

Both the fair value and notional amount should be disclosed for derivative contracts according to accounting standards. Fair value represents the current market value of the contract while notional amount represents the underlying amount being hedged or speculated upon.

Question 4

A company enters into an interest rate swap in order to hedge a $5,000,000 variable-rate loan. The loan is expected to be fully repaid this year on June 10. The contract requires that if the interest rate on April 30 of next year is greater than 11%, the company receives the difference on a principal amount of $5,000,000. Alternatively, if the interest rate is less than 11%, the company must pay the difference. Which of the following statements is correct regarding this contract?

Accepted Answer

The swap payment is based on the interest rate on April 30 of the next year, which does not align with the loan's expected full repayment by June 10 of this year. Therefore, the timing mismatch means the swap does not effectively hedge the variable interest payments.

Question 5

In exchange for the rights inherent in an option contract, the owner of the option will typically pay a price

Accepted Answer

The owner of an option pays a price at the time the option is received regardless of whether the option is exercised or not. This price is known as the premium, and it represents the cost of buying the option contract. The premium is the only payment the owner of an option will make, regardless of whether it is a call option or a put option, and regardless of whether it is exercised or not.

Question 6

A company enters into a futures contract with the intent of hedging an expected purchase of some equipment from a German company for DM400,000 on December 31. The contract requires that if the U.S. dollar value of DM800,000 is greater than $400,000 on December 31, the company will receive the difference. Alternatively, if the U.S. dollar value is less than $400,000, the company will pay the difference. Which of the following statements is correct regarding this contract?

Accepted Answer

The answer of A company enters into a futures contract...

Question 7

In considering interim financial reporting, how does APB Opinion No. 28 conclude that such reporting should be viewed?

Accepted Answer

APB Opinion No. 28 concludes that interim financial reporting should be viewed as reporting for an integral part of an annual period. This means that the interim reports should be prepared in conformity with generally accepted accounting principles and should provide relevant and reliable information about the financial position, results of operations, and cash flows for the period covered. Interim reports should be viewed as an essential component of a company's overall financial reporting and analysis, providing investors and other users of financial information with timely insight into a company's performance and prospects.

Question 8

Which of the following tests may be used to determine if an industry segment of an enterprise is a reportable segment under FASB Statement No. 131?

Accepted Answer

All three tests (revenue, operating profit, and assets) are used to determine if an industry segment is a reportable segment under FASB Statement No. 131. Therefore, option D, All of these, is the correct answer.

Question 9

On February 1, Shoemaker Corporation entered into a firm commitment to purchase specialized equipment from the Okazaki Trading Company for ¥80,000,000 on April 1. Shoemaker would like to reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars by April 1, but Shoemaker is not sure which direction the exchange rate may move. What type of contract would protect Shoemaker from an unfavorable movement in the exchange rate while allowing them to benefit from a favorable movement in the exchange rate?

Accepted Answer

A call option would allow Shoemaker to lock in a maximum exchange rate, protecting against unfavorable movements, while still allowing them to benefit if the exchange rate moves favorably.

Question 10

Uncertainty that the party on the other side of an agreement will abide by the terms of the agreement is referred to as

Accepted Answer

Credit risk refers to the uncertainty of whether the other party in an agreement will be able to fulfill their obligation to pay, which is often assessed through credit ratings and financial statements. Price risk refers to the uncertainty of the future price of an asset, interest rate risk refers to the uncertainty of changes in interest rates, and exchange rate risk refers to the uncertainties of changes in exchange rates.

Question 11

A contingent loss should be disclosed in a note to the financial statements but should not be recorded as a liability if the

Accepted Answer

A contingent loss should be disclosed in a note to the financial statements but should not be recorded as a liability if the actual incurrence of a loss is reasonably possible.

Question 12

If a cannery wanted to lock in the price they would pay for peaches in August four months before harvest (in April of the same year), they would be most likely to enter into which kind of agreement?

Accepted Answer

A futures contract allows the cannery to lock in the price they would pay for peaches in the future, in this case, four months before harvest in August. This would provide price certainty and reduce the risk of price fluctuations in the peach market.

Question 13

When gains or losses on derivatives designated as fair value hedges exceed the gains or losses on the item being hedged, the excess

Accepted Answer

The excess gains or losses on fair value hedges are recognized in net income.

Question 14

A contract, traded on an exchange, that allows a company to buy a specified quantity of a commodity or a financial security at a specified price on a specified future date is referred to as a(n)

Accepted Answer

A futures contract allows a company to buy or sell a commodity or financial security at a specified price on a specified future date. The contract is traded on an exchange, providing standardized terms and making it easy to buy or sell. Interest rate swaps and options are different types of financial contracts, and a forward contract is similar to a futures contract but is customized between two parties rather than traded on an exchange.

Question 15

A contract giving the owner the right, but not the obligation, to buy or sell an asset at a specified price any time during a specified period in the future is referred to as a(n)

Accepted Answer

A contract that gives the owner the right, but not the obligation, to buy or sell an asset at a specified price any time during a specified period in the future is an option. Interest rate swaps involve the exchange of cash flows based on different interest rates, forward contracts and futures contracts are agreements to buy or sell an asset at a specific time in the future at a specified price.

Question 16

According to Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," how do firms identify reportable segments?

Accepted Answer

Firms identify reportable segments based on the internal organization and management's approach to operating decisions, which often aligns with the designations used inside the firm.

Question 17

Uncertainty about the future market value of an asset is referred to as

Accepted Answer

Price risk refers to the uncertainty about the future market value of an asset. Credit risk relates to the possibility of a borrower defaulting on a loan. Interest rate risk refers to the impact of changes in interest rates on an investment. Exchange rate risk relates to the impact of fluctuations in exchange rates on international transactions.

Question 18

Which type of contract is unique in that it protects the owner against unfavorable movements in the prices or rates while allowing the owner to benefit from favorable movements?

Accepted Answer

Options are the only type of contract that allow the owner to benefit from favorable movements while protecting against unfavorable movements. With a call option, the owner has the right to buy an asset at a predetermined price, so if the price of the asset increases, the owner can exercise the option and buy the asset at the lower predetermined price. With a put option, the owner has the right to sell an asset at a predetermined price, so if the price of the asset decreases, the owner can exercise the option and sell the asset at the higher predetermined price.

Question 19

A company enters into a futures contract with the intent of hedging an account payable of DM400,000 due on December 31. The contract requires that if the U.S. dollar value of DM400,000 is greater than $200,000 on December 31, the company will be required to pay the difference. Alternatively, if the U.S. dollar value is less than $200,000, the company will receive the difference. Which of the following statements is correct regarding this contract?

Accepted Answer