Question 1

According to FASB ASC Topic 280 (Segment Reporting)how do firms identify reportable segments?

Accepted Answer

A

Question 2

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

Accepted Answer

Both the fair value and notional amount of derivative contracts should be disclosed in financial statements. The fair value provides information about the current value of the contract while the notional amount represents the underlying asset or liability being used in the contract. Both pieces of information are important for users to understand the company's exposure to risk and potential losses.

Question 3

A company enters into a futures contract with the intent of hedging an account payable of DM350,000 due on December 31.The contract requires that if the U.S.dollar value of DM350,000 is greater than $175,000 on December 31,the company will be required to pay the difference.Alternatively,if the U.S.dollar value is less than $175,000,the company will receive the difference.Which of the following statements is correct regarding this contract?

Accepted Answer

C

Question 4

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 is a contract traded on an exchange that involves the purchase of a specified quantity of a commodity or financial security at a specified price on a specified future date. This differs from a forward contract, which is a private agreement between two parties and not traded on an exchange. Interest rate swaps and options are financial instruments that serve different purposes.

Question 5

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 in contrast to a futures contract, which is similar but traded on an exchange and standardized in terms of contract size and expiry dates. Interest rate swaps and options are also financial contracts but do not involve an exchange of a specified asset at a future date.

Question 6

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 unique financial instruments that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date. This characteristic allows the owner of the option to benefit from favorable price movements while being protected against unfavorable movements, as they are not obligated to execute the contract if it would result in a loss.

Question 7

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 that a party to an agreement may default on their financial obligations or fail to abide by the terms of an agreement. Exchange rate risk refers to the uncertainty of future exchange rates affecting the value of payments or receipts in foreign currency. Interest rate risk refers to the uncertainty of changes in interest rates affecting the value of financial instruments. Price risk refers to the uncertainty of changes in prices affecting the value of commodities or securities.

Question 8

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 not recorded as a liability if the actual incurrence of a loss is reasonably possible. This is because the accounting standards require recognition of a liability when it is probable and the amount can be reasonably estimated. If a loss is only reasonably possible, not probable, it warrants disclosure but not recognition as a liability.

Question 9

On February 1,Rapido Corporation entered into a firm commitment to purchase specialized equipment from the Yamasake Trading Company for ¥65,000,000 on April 1.Rapido would like to reduce the exchange rate risk that could increase the cost of the equipment in U.S.dollars by April 1,but Rapido is not sure which direction the exchange rate may move.What type of contract would protect Rapido 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 on the foreign currency (¥) would allow Rapido to benefit from a favorable exchange rate movement (i.e., if the ¥ weakens, they could buy ¥ at the lower market rate) while protecting them from an unfavorable movement (i.e., if the ¥ strengthens, they could exercise the option and buy ¥ at the pre-agreed rate). Interest rate swaps and forward contracts lock in a rate, eliminating the ability to benefit from favorable movements. A put option would not be appropriate as it gives the right to sell a currency, not buy.

Question 10

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

This is the definition of an option contract, which gives the holder the right (but not the obligation) to buy or sell an asset at a specified price (strike price) during a specified period of time (expiration date). Interest rate swaps, futures contracts, and forward contracts have different contractual obligations and features.

Question 11

In considering interim financial reporting,how does FASB ASC Topic 270 conclude that such reporting should be viewed?

Accepted Answer

FASB ASC Topic 270 concludes that interim financial reporting should be viewed as reporting for an integral part of an annual period. This means that the interim financial statements should be viewed as a continuation of the annual financial statements with adjustments made for any changes in circumstances that have occurred since the end of the previous fiscal year. Therefore, the interim financial statements should be prepared in accordance with the same accounting principles used for the annual financial statements.

Question 12

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 cash flow hedge are deferred and recognized in other comprehensive income as an equity adjustment until they affect earnings. This is done to reduce income statement volatility from the changes in fair value of the hedged item. Fair value, operating, and notional value hedges do not have this deferred recognition.

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

According to the accounting standard ASC 815, gains or losses on fair value hedges that exceed the gains or losses on the item being hedged are recognized immediately in earnings, affecting reported net income.

Question 14

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 15

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 a buyer to lock in a price for a commodity at a future date, which would be ideal for a cannery looking to secure the price of peaches in advance. The other options are not relevant to this scenario.

Question 16

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

Accepted Answer

Price risk refers to uncertainty about the future market value of an asset. Credit risk refers to the risk of default by a borrower. Interest rate risk refers to the risk of changes in interest rates affecting the value of investments. Exchange rate risk refers to the risk of fluctuations in currency exchange rates affecting investments.

Question 17

An obligation that is contingent on the occurrence of a future event should be reported in the balance sheet as a liability if the

Accepted Answer

According to accounting standards, a contingent liability should be recognized as a liability in the balance sheet if the occurrence of the future event is probable and the amount can be reasonably estimated. This means that the likelihood of the event happening is high (more than 50%) and the amount of the obligation can be reasonably estimated. Therefore, only option D satisfies both of these criteria.

Question 18

A company enters into a futures contract with the intent of hedging an expected purchase of some equipment from a German company for DM350,000 on December 31.The contract requires that if the U.S.dollar value of DM700,000 is greater than $350,000 on December 31,the company will receive the difference.Alternatively,if the U.S.dollar value is less than $350,000,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 19

Which of the following tests may be used to determine if an industry segment of an enterprise is a reportable segment under FASB ASC Topic 280?

Accepted Answer

All three tests may be used to determine if an industry segment is a reportable segment under FASB ASC Topic 280. Companies must apply all three tests and if the segment meets any one of them, it must be reported separately in the financial statements.

Question 20

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

Accepted Answer

The payment for an option contract, known as the option price or premium, is typically paid at the time the option is received, regardless of whether the option is exercised or not. This is because the owner of the option has the right, but not the obligation, to exercise the option at any time during its validity period. Therefore, the option holder pays a price upfront to have the option available to them, even if they never end up exercising it.

Quiz 19: Derivatives, contingencies, business Segments, and Interim Reports

According to FASB ASC Topic 280 (Segment Reporting) how do firms identify reportable segments?