Question 1

Credit risk is an issue for financial instruments and must be disclosed because:

Accepted Answer

A) the company may default on its loan 
B) the company may not perform their obligations 
C) the company may not have enough cash flow to pay suppliers 
D) the other parties to financial instruments may not perform their obligations

Question 2

$10,000 (face value)of bonds was sold with a total of 200 detachable stock warrants attached.Each warrant conveys the right to purchase one common share at a specified price during a specified time period.The market immediately valued the warrants at $2 each.The issue sold for 102.The entry to record the bond issuance would include:

Accepted Answer

A) dr.bond premium $200 
B) cr.bonds payable $10,200 
C) dr.owners' equity account $400 
D) dr.bond discount $200

Question 3

One of the most common forms of hybrid security is convertible debt.

Accepted Answer

A) True 
 B)False

Question 4

On January 1, 2014, ABC Incorporated issued $10,000,000 face amount of 8%, 10 year, subordinate convertible debentures at face value in a private placement.The debentures pay interest annually, in cash, on 31 December.The bonds were issued for $12 million, and that the market rate was 6%:
Prepare Journal entry to record the interest payment on the first interest date of 31 December 2014.

Accepted Answer

The answer of On January 1, 2014, ABC Incorporated issued...

Question 5

If a financial instrument is an equity instrument in substance, but its legal form is debt, any periodic payments made to investors will be accrued on the company's financial statements as interest expense.

Accepted Answer

A) True 
 B)False

Question 6

In order to determine if, in substance, a complex financial instrument is debt, the answer should be yes to all of the following except:

Accepted Answer

A) Is the debtor legally obligated to repay the principal at the option of the creditor? 
B) Is the debtor legally obligated to repay the principal at a fixed rate? 
C) Is the amount convertible into common shares? 
D) Is the periodic return on capital obligatory?

Question 7

JMR Ltd.issued $300,000 of 7%, 8 year, non-convertible bond with detachable stock purchase warrants.KER Corp.purchased the entire issue.Each $1,000 bond carries 20 warrants.Each warrant entitles KER to purchase one common share for $20.The bond issue sells for 104 exclusive of accrued interest.Shortly after issuance, the warrants trade for $5 each and the bonds were quoted at 103 ex-warrants.The market value of the bonds and warrants using the proportional method was:

Accepted Answer

A) $605,000 
B) $321,000 
C) $350,000 
D) $339,000

Question 8

On January 1, 2014, ABC Incorporated issued $10,000,000 face amount of 8%, 10 year, subordinate convertible debentures at face value in a private placement.The debentures pay interest annually, in cash, on 31 December.The bonds were issued for $12 million, and that the market rate was 6%:
Prepare Journal entries to record the issuance of the bonds on January 1, 2014.

Accepted Answer

The answer of On January 1, 2014, ABC Incorporated issued...

Question 9

The conversion of preferred shares at a premium results in a debit directly to shareholder equity at the date of conversion.

Accepted Answer

A) True 
 B)False

Question 10

What is convertible debt? Why would a company issue convertible debt?

Accepted Answer

The answer of What is convertible debt? Why would a...

Question 11

If a company issues debt that is convertible at the corporation's option, in substance, the debt is:

Accepted Answer

A) Equity 
B) An Asset 
C) Debt 
D) Subordinated

Question 12

At the end of 2014, interest on a perpetual loan is paid to the holder.The perpetual debt is shown as an equity instrument.Based on the above the interest is:

Accepted Answer

A) Added for income tax purposes 
B) Deducted on the income statement 
C) Added to the income statement 
D) Deducted for income tax purposes

Question 13

All of the following are examples of derivative instruments except:

Accepted Answer

A) Currency swaps 
B) Retractable preferred shares 
C) Foreign exchange forward contracts 
D) Interest rate swaps

Question 14

Securities issued as debt, but intended by the issuing corporation to be exchanged for shares by the investors at some time prior to maturity, are known as "hybrid securities".

Accepted Answer

A) True 
 B)False

Question 15

Securities issued as debt but intended by the issuing company to be exchanged for shares by the investor prior to maturity are called:

Accepted Answer

A) convertible debt 
B) discount bonds 
C) hybrid securities 
D) options

Question 16

Why do companies issue retractable preferred shares?

Accepted Answer

The answer of Why do companies issue retractable preferred shares?...

Question 17

On January 1st, 2014 ABC Inc.had invoiced a client in New York for $10,000 US for services rendered that day.ABC did not hedge this receivable.The receivable is due in 60 days.On January 1st, 2014, the spot rate was $1US = $1.02CDN.On January 31st, 2014, the spot rate was $1US = $1.05CDN.What is the effect of the above information on ABC's January financial statements?

Accepted Answer

A) A $300 debit to OCI. 
B) A $300 foreign exchange loss. 
C) A $300 credit to OCI. 
D) A $300 foreign exchange gain.

Question 18

List the criteria determining whether an asset is a financial asset.Give an example of a financial asset and a non-financial asset.

Accepted Answer

The answer of List the criteria determining whether an asset...

Question 19

To be classified as retractable preferred shares, the cash repayment must either be contractually required or at the option of the investor.

Accepted Answer

A) True 
 B)False

Question 20

Retractable preferred shares are always classified as debt.

Accepted Answer

A) True 
 B)False

Exam 15: Financial Instruments: Complex Debt and Equity

Credit risk is an issue for financial instruments and must be disclosed because:

One of the most common forms of hybrid security is convertible debt.

If a financial instrument is an equity instrument in substance, but its legal form is debt, any periodic payments made to investors will be accrued on the company's financial statements as interest expense.

In order to determine if, in substance, a complex financial instrument is debt, the answer should be yes to all of the following except:

The conversion of preferred shares at a premium results in a debit directly to shareholder equity at the date of conversion.

What is convertible debt? Why would a company issue convertible debt?

If a company issues debt that is convertible at the corporation's option, in substance, the debt is:

At the end of 2014, interest on a perpetual loan is paid to the holder.The perpetual debt is shown as an equity instrument.Based on the above the interest is:

All of the following are examples of derivative instruments except:

Securities issued as debt, but intended by the issuing corporation to be exchanged for shares by the investors at some time prior to maturity, are known as "hybrid securities".

Securities issued as debt but intended by the issuing company to be exchanged for shares by the investor prior to maturity are called:

Why do companies issue retractable preferred shares?

List the criteria determining whether an asset is a financial asset.Give an example of a financial asset and a non-financial asset.

To be classified as retractable preferred shares, the cash repayment must either be contractually required or at the option of the investor.

Retractable preferred shares are always classified as debt.