Deck 11: Financial Instruments

Question 1

A contract that requires delivery of a financial asset within a time frame generally established by regulation or convention in the marketplace is what type of purchase?

A) normal purchase.
B) regular way purchase.
C) abnormal purchase.
D) irregular way purchase.

Answer 1

B

Question 2

Company A issued convertible notes 3 years ago and accounted for them as a compound financial instrument. Complete the following sentence. 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 and loss.
D) liability, is transferred to profit or loss.

Answer 2

B

Question 3

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

A) promissory notes
B) accounts receivable
C) inventory
D) forward exchange contracts

Answer 3

B

Question 4

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

Question 5

Which of the following is an example of an adverse effect of financial liabilities?

A) Periodic payments on the financial instruments, such as dividends, may be recognised as a borrowing cost and therefore reduce the entity's profits.
B) A financial institution breaching regulations imposed on it to maintain a minimum level of capital.
C) An entity breaching their obligations under a debt covenant relating to its solvency.
D) All of the above options.

Question 6

A contract with a residual interest in the assets of an entity after deducting all of its liabilities is referred to as a (an):

A) equity instrument.
B) derivative instrument.
C) primary instrument.
D) secondary instrument.

Question 7

Which of the following would not be regarded as a financial instrument?

A) cash.
B) bank overdraft.
C) notes payable.
D) equipment.

Question 8

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

A) Ordinary shares held in another entity.
B) A contractual right to exchange under potentially favourable conditions, an option to purchase shares below the market price.
C) The right of a depositor to obtain cash from a financial institution with which it has deposited cash.
D) A contract that is a non-derivative for which the entity is obliged to deliver a variable number of its own equity instruments.

Question 9

The AASB 132 Financial Instruments: Presentation definition of a financial asset does not include any asset that is:

A) an equity instrument of another entity.
B) a contractual right to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity.
C) a contract that will be settled in the entity's own equity instruments.
D) a contractual obligation to deliver cash or another financial asset to another entity.

Question 10

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

A) legal form.
B) forfeiture.
C) net present value.
D) substance over form.

Question 11

Financial instruments are separated into two categories. They are:

A) financial and non-financial
B) derivative and non-derivative
C) primary and secondary
D) primary and derivative

Question 12

The definition of a derivative requires which of the following characteristics to be met?
I. Its value must change in response to a change in an underlying variable such as a specified interest rate, foreign exchange rate, credit rating or commodity price.
II. It must require no initial net investment or an additional net investment that is smaller than would be required for other types of contracts with similar responses to changes in market factors.
III. It is to be settled at a future date.
IV. It must be settled on a net basis.

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

Question 13

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

A) A forward exchange contract.
B) A futures contract.
C) An option contract.
D) A commercial bill contract.

Question 14

Which of the following statements relating to financial instruments is not correct?

A) They may relate to singular instruments or a combination of instruments.
B) A convertible note with the conversion option to issue shares is a financial liability.
C) Primary instruments include receivables and payables.
D) Derivative instruments include forward exchange contracts.

Question 15

Which of the following statements is incorrect?

A) Trade debtors and trade creditors are treated as unconditional financial assets and financial liabilities.
B) Forward contracts covered by AASB 9 are recognised as financial assets or financial liabilities at the commitment date.
C) Option contracts covered by AASB 9 are recognised as financial assets or financial liabilities when the holder or writer becomes a party to the contract.
D) Planned future transactions are to be recognised as asset or liabilities at the date the plan is finalised.

Question 16

Examples of financial liabilities include:

A) bank overdraft
B) unsecured convertible notes
C) debentures issued
D) all of these are examples of financial liabilities.

Question 17

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

A) a financial liability.
B) an equity instrument.
C) a compound financial instrument.

Question 18

Dickson Corporation Limited buys an option that entitles it to purchase 4000 shares in Moody Limited at $8 per share at any time in the next 6 months. The derivative financial instrument in this transaction is the:

A) option priced at $8.
B) shares in Moody Limited.
C) shares in Dickson Corporation Limited.
D) price of the shares in Moody Limited after 6 months have elapsed.

Question 19

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

A) deduct from equity, net of tax.
B) add to equity, net of tax.
C) expense in the period incurred.
D) defer as a contingent asset.

Question 20

Company A has convertible notes on issue. These notes are convertible to ordinary shares of the Company after 3 years. The distributions made to the note holders by Company A are classified by Company A as follows:

A) interest expense.
B) dividends distributed.
C) indeterminable based on the information provided.
D) a portion representing interest expense and a portion representing dividends distributed.

Question 21

AASB 9 requires financial assets to be initially measured at:

A) fair value
B) fair value plus directly attributable costs
C) historical cost
D) historical cost plus directly attributable costs

Question 22

When an entity has a legally enforceable right to set off the recognised amounts of a financial asset and financial liability and it intends to settle on a net basis, it:

A) can write off both the asset and the liability.
B) is not entitled to offset the asset and liability.
C) may offset the financial asset and liability.
D) need not present the asset, the liability or the net amount in its financial statements.

Question 23

Which of the following are examples where the conditions for offsetting a financial asset and a financial liability are generally not satisfied?
I. Financial assets pledged as collateral for non-recourse financial liabilities.
II. The combination of a number of different financial instruments to emulate the features of a single financial instrument.
III. Financial liabilities for obligations expected to be recovered from a third party such as an insurance company.

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

Question 24

The risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss is referred to as:

A) market risk.
B) credit risk.
C) liquidity risk.
D) interest rate risk.

Question 25

An example of the derecognition of a financial asset is:

A) the entity no longer has control of the asset.
B) the expiration of the contractual rights to cash flows.
C) the asset no longer qualifies for recognition in the statement of financial position.
D) All of the above.

Question 26

Derecognition of a financial liability occurs when:

A) the contractual obligation has been settled due to the transfer of a cash consideration.
B) there is an extension to the terms of the contractual obligation.
C) the contractual rights to cash flows has expired.
D) the entity obtains control of the financial instrument.

Question 27

The disclosure requirements for financial assets that have been reclassified at amortised cost include: $$\begin{array} { | l | c | c | c | c | } \hline & \mathrm { I } & \mathrm { II } & \mathrm { III } & \mathrm { IV } \\\hline \text { The interest incorne or experise recopraised } & \text { No } & \text { No } & \text { Yes } & \text { Yes } \\\hline \begin{array} { l } \text { The effective interest rate or the reclassification } \\\text { date }\end{array} & \text { No } & \text { Yes } & \text { Yes } & \text { No } \\\hline \begin{array} { l } \text { The fair value of the firarncial assets at the end of } \\\text { the reportirip period after reclassification }\end{array} & \text { No } & \text { Yes } & \text { Yes } & \text { Yes } \\\hline \begin{array} { l } \text { The fair value gair or loss that would have beent } \\\text { recogrised in the firmaricial year if ro } \\\text { reclassification had occured. }\end{array} & \text { Yes } & \text { No } & \text { Yes } & \text { No } \\\hline\end{array}$$

A) I.
B) II.
C) III.
D) IV.

Question 28

AASB 9 provides examples of financial liabilities which are not required to be subsequently measured at amortised costs. These examples include:

A) financial guarantees contracts.
B) commitments to provide loans below market interest rates.
C) holdings of derivatives.
D) all of the above

Question 29

AASB 9 requires subsequent measurement of a financial asset at amortised cost when two tests have been satisfied. Those two tests are:

A) fair value test; impairment test
B) fair value test; business model test
C) fair value test; cash flows characteristics test
D) business model test; cash flows characteristics test

Question 30

Which of the following events provide objective evidence that a financial asset has been impaired:
I. A default in interest payments.
II. The borrower enters into bankruptcy.
III. The downgrade of an entity's credit rating.
IV. Significant financial difficulty of the issuer.

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

Question 31

Company A and Company B regularly trade between each other. They have agreed to offset their accounts receivable and accounts payable and settle them on a net basis. At 30 June Company A has accounts receivable of $40 000 owing from Company B but also has accounts payable of $10 000 owing to Company B. Which of the following statements is correct?

A) The net payable from Company A is $30 000.
B) The net receivable from Company B is $40 000.
C) Company A offsets the account payable of $10 000 against the account receivable and presents the net amount of $30 000 in their financial statements as accounts receivable.
D) Company B offsets the account payable of $10 000 against the account receivable and presents the net amount of $30 000 in their financial statements as accounts receivable.

Question 32

The default subsequent measurement base for financial liabilities is:

A) fair value using the effective interest rate.
B) amortised cost using the effective interest rate.
C) fair value through profit or loss.
D) amortised cost through profit or loss.