In determining the amount to be assigned to the equity component of a compound financial instrument,you must:
A) Add the face value of the financial liability to the fair value of the compound financial instrument as a whole.
B) Deduct the face value of the financial liability from the fair value of the compound financial instrument as a whole.
C) Deduct the face value of the financial liability from the face value of the compound financial instrument as a whole.
D) Add the fair value of the financial liability to the fair value of the compound financial instrument as a whole.
E) Deduct the fair value of the financial liability from the fair value of the compound financial instrument as a whole.

Question

Quizplus · Accepted Answer

The equity component of a compound financial instrument is the residual portion after deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole. This is because the equity component represents the portion of the instrument that does not have a contractual obligation to pay cash flows to the holder and therefore represents the residual interest.

In Determining the Amount to Be Assigned to the Equity