Question 1

On initial recognition, financial assets or liabilities are measured at cost.

Accepted Answer

A) True 
 B)False  False

Question 2

München Microchips manufactures silicon microchips in a sterile plant. Wittenburg Industrial Cleaning provided expensive cleaning and sterilization for München Microchips. As the two companies contracted, München Microchips offered Wittenburg 250,000 common equity shares at €5 each in return. Wittenburg bought the shares and subsequently sold them at the prevailing market price of €20 per common equity share. Which derivative instrument does this scenario best represent?

Accepted Answer

A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative 
A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative E

Question 3

On January 1, 20X4, Sirrochi Entity (SE) purchases bonds issued by Gateway Entity (SE) for $6,500,000. SE will receive an annual coupon payment of $500,000 for 5 years and an additional $5,000,000 when the bond expires on December 31, 20X9. One year after the bonds were purchased, SE loses a law suit and is short on cash. SE enters into a contractual agreement with Cash Entity to sell its rights to all future payments from the bond in exchange for $5,500,000. On the date the agreement is made, SE has an asset on its statement of financial position for the bond in the amount of $6,700,000. How will SE account for this outcome (include journal entries)?

Accepted Answer

SE has transferred the financial asset because it has transferred the contractual rights to future cash flows from the financial asset; therefore, SE must derecognize the bond receivable. The journal entries for these transactions are provided below.
 $\text {January 1, 20X4-Recognition of the investment in bonds}$
$\begin{array}{cr}
\text { Dr. Financial asset-Investment in bonds } & 6,500,000 \
\text { Cr. Cash } & 6,500,000
\end{array}$

$\text {January 1, 20X5 - Derecognition of the investment in bonds}$
$\begin{array} { l l } \text { Dr. Cash } & 5,500,000 \ \text { Dr. Loss on financial asset } & 1,200,000\
 \text { Cr. Financial asset - Investment in bonds receivable}&  6,700,000 \end{array}$

Question 4

Motor Town Tunes decided to hedge its risk in several high-value variable rate mortgages. It decided to do this by agreeing with an unrelated party to pay 8 percent on the mortgages at the end of the next two years. For both years, the market rate was 9 percent. Consequently, the unrelated party had to pay Motor Town Tunes the value of the excess interest for each year. Which derivative instrument does this scenario best represent?

Accepted Answer

A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative 
A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative

Question 5

During World War II, polyethylene vinyl was in high demand while supply was in flux due to the constant air raids on manufacturing plants. Valli's Vinyl, a company that presses vinyl records, wanted to hedge its risk against the then unpredictable vinyl market. It decided to enter into a contract with its best vinyl supplier, Presley's Polyethylene Plastics to pay ?100 per metric ton of vinyl for 500 metric tons in six months. Shortly thereafter, a German air raid destroyed a large supply dump storing raw materials used in vinyl production. Consequently, the price per metric ton of vinyl shot up to ?250. At the end of the six months, Valli's Vinyl purchased the agreed-upon 500 metric tons at ?100 per ton. Presley's Polyethylene Plastics recorded a substantial loss as a result of the agreement. Which derivative instrument does this scenario best represent?

Accepted Answer

A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative 
A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative

Question 6

On July 1, 20X7, Cheese Entity (CE) purchases an existing futures contract to buy milk class III. The futures contract obligates Dairy Entity (DE) to sell 1,000 cwt of milk to CE in exchange for $14.25 per cwt of milk class III on January 1, 20X8. What is CE's obligation on July, 1, 20X7?

Accepted Answer

The answer of On July 1, 20X7, Cheese Entity (CE)...

Question 7

Gains and losses relating to the effective portion of the hedging instrument are recognized

Accepted Answer

A)  in other comprehensive income 
B)  in profit and loss 
C)  by increasing or decreasing the valuation reserve 
D)  by increasing or decreasing the asset 
A)  in other comprehensive income 
B)  in profit and loss 
C)  by increasing or decreasing the valuation reserve 
D)  by increasing or decreasing the asset

Question 8

Hedges are classified into one of three categories. Which is not one of the categories?

Accepted Answer

A)  fair value hedges 
B)  cash flow hedges 
C)  hedges of a net investment in a foreign operation 
D)  fair value through profit and loss hedges 
A)  fair value hedges 
B)  cash flow hedges 
C)  hedges of a net investment in a foreign operation 
D)  fair value through profit and loss hedges

Question 9

Johnny B. Goode & Company signed a written call option agreement with Golden Oldies Entity. The contract stipulates that in exchange for providing services, Johnny B. Goode can call 2 million of Golden Oldies' common equity shares at a strike price of €2 each. The call option expires in two years. However the price of Golden Oldies' stock never rises above €1.50 over the two year period. Thus, Johnny B. Goode never exercises the call option. This agreement between Johnny B. Goode and Golden Oldies does not qualify as a financial instrument.

Accepted Answer

A) True 
 B)False

Question 10

Costa Rica Entity (CRE) enters for trading purposes into a contract to exchange 50,000
pounds of coffee for USD 1.53 per pound three months from today. What is the nature of this contract and why?

Accepted Answer

The answer of Costa Rica Entity (CRE) enters for trading...

Question 11

Any difference between the carrying amount and the consideration paid/received upon derecognition of a financial instrument is recognized in other comprehensive income.

Accepted Answer

A) True 
 B)False

Question 12

Christiansfeld Akustik, a Danish acoustics entity, licensed its technologies to Nykøbing Hovedtelefoner, a headphones manufacturer. The licensing agreement isn't based on market terms because the fair value of the agreement can't be readily determined. However, the agreement calls for royalty payments of Kr2.5 million at the beginning of each year for five years. The prevailing market rate is 5.6 percent. A local consulting firm brokered the deal and wrote the contracts. They charged Christiansfeld Akustik Kr1.3 million for their services. What is the fair value of the agreement to Christiansfeld Akustik?

Accepted Answer

A)  Kr12,542,703 
B)  Kr11,946,499 
C)  Kr11,242,703 
D)  Kr10,646,499 
E)  None of the above 
A)  Kr12,542,703 
B)  Kr11,946,499 
C)  Kr11,242,703 
D)  Kr10,646,499 
E)  None of the above

Question 13

Antwerp Entity (AE) holds raw diamonds as an investment. Diamonds are readily convertible into cash. Are diamonds considered financial assets? Explain your answer.

Accepted Answer

The answer of Antwerp Entity (AE) holds raw diamonds as...

Question 14

A cash flow hedge is a hedge of exposure to variability in cash flows of a recognized asset, liability, or forecasted transaction that could affect earnings.

Accepted Answer

A) True 
 B)False

Question 15

Ocassionally, the winter weather at Schweizer Alpen Skiing doesn't produce enough snow for good skiing. Schweizer doesn't like to depend solely on the weather for cash flow. Schweizer has decided to hedge against the risk of a snowless winter by entering a contract with an insurance company that Schweizer will gross $150 million every winter. Thus, if Schweizer experiences a lousy winter, and doesn't reach $150 million, the insurance company will make up the difference. On the other hand, Schweizer will have to pay the insurance company any gross earnings above $150 million. Which derivative instrument does this scenario best represent?

Accepted Answer

A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative 
A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative

Question 16

Common types of derivatives used as hedging instruments include all of the following except

Accepted Answer

A)  options 
B)  swaps 
C)  convertible bonds 
D)  forwards and futures 
A)  options 
B)  swaps 
C)  convertible bonds 
D)  forwards and futures

Question 17

Four Seasons Music decided to license the music of one of its artists, Jonnie Valley, to radio stations throughout Europe. For each song played, the radio stations contracted to give Four Seasons a royalty of €0.50. This licensing agreement qualifies as a financial instrument.

Accepted Answer

A) True 
 B)False

Question 18

A financial asset is derecognized when the entity's rights to the cash flows from the financial asset expire or the entity transfers the financial asset.

Accepted Answer

A) True 
 B)False

Question 19

If an entity changes its business model and subsequently the way it manages its financial assets, it must evaluate whether the change would require a change in classification and measurement.

Accepted Answer

A) True 
 B)False

Question 20

Kleinsteigel Electricity contracted with Schwarzwald Coal to purchase 5 million metric tons of coal per month for the next five years at €2 million per metric ton. During that time, the price of coal rose to €2.2 million per metric ton due to a major mine collapse. Kleinsteigel was shielded by this price increase by their contract with Schwarzwald. Which derivative instrument does this scenario best represent?

Accepted Answer

A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative 
A)  Forward 
B)  Future 
C)  Swap 
D)  Option 
E)  Not a derivative

Exam 12: Financial Instrumentsrecognition and Measurement

On initial recognition, financial assets or liabilities are measured at cost.

On July 1, 20X7, Cheese Entity (CE) purchases an existing futures contract to buy milk class III. The futures contract obligates Dairy Entity (DE) to sell 1,000 cwt of milk to CE in exchange for $14.25 per cwt of milk class III on January 1, 20X8. What is CE's obligation on July, 1, 20X7?

Gains and losses relating to the effective portion of the hedging instrument are recognized

Hedges are classified into one of three categories. Which is not one of the categories?

Costa Rica Entity (CRE) enters for trading purposes into a contract to exchange 50,000 pounds of coffee for USD 1.53 per pound three months from today. What is the nature of this contract and why?

Any difference between the carrying amount and the consideration paid/received upon derecognition of a financial instrument is recognized in other comprehensive income.

Antwerp Entity (AE) holds raw diamonds as an investment. Diamonds are readily convertible into cash. Are diamonds considered financial assets? Explain your answer.

A cash flow hedge is a hedge of exposure to variability in cash flows of a recognized asset, liability, or forecasted transaction that could affect earnings.

Common types of derivatives used as hedging instruments include all of the following except

Four Seasons Music decided to license the music of one of its artists, Jonnie Valley, to radio stations throughout Europe. For each song played, the radio stations contracted to give Four Seasons a royalty of €0.50. This licensing agreement qualifies as a financial instrument.

A financial asset is derecognized when the entity's rights to the cash flows from the financial asset expire or the entity transfers the financial asset.

If an entity changes its business model and subsequently the way it manages its financial assets, it must evaluate whether the change would require a change in classification and measurement.

Introduction to International Financial Reporting Standards Ifrs

Conceptual Framework for Financial Reporting

Fair Value Measurement

Presentation of Financial Statements

Statement of Cash Flows

Accounting Policies, Estimates, and Errors

Events After the Reporting Period

Related Party Disclosures

Earnings Per Share

Operating Segments

Inventories

Financial Instrumentspresentation

Financial Instrumentsdisclosures

Property, Plant, and Equipment

Intangible Assets

Investment Property

Impairment of Assets

Leases

Revenue From Contracts With Customers

Income Taxes

Employee Benefits

Share-Based Payments

Provisions, Contingent Liabilities, and Contingent Assets

The Effects of Changes in Foreign Exchange Rates

Hyperinflation

Business Combinations

Consolidated Financial Statements

Investments in Associates and Joint Ventures

Joint Arrangements

Disclosure of Interests in Other Entities

Separate Financial Statements

Interim Financial Reporting

Non-Current Assets Held for Sale and Discontinued Operations

Regulatory Deferral Accounts

Borrowing Costs

Accounting and Reporting by Retirement Benefit Plans

Accounting for Government Grants and Disclosure of Government Assistance

Insurance Contracts

Exploration for and Evaluation of Mineral Resources

Agriculture

First-Time Adoption of International Financial Reporting Standard

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