DIHA Flashcards Preview

Financial Accounting > DIHA > Flashcards

Flashcards in DIHA Deck (59):
1

Which of the following financial instruments or other contracts is not specifically excluded from the definition of derivative instruments in ASC Topic 815?
a. Call (put) option.
b. Adjustable rate loans.
c. Equity securities.
d. Leases.

Call (put) option.

2

Regarding concentrations of credit risk, an entity must disclose all of the following except:
a. Information about the shared activity, region, or economic characteristic of the group.
b. Amount of accounting loss that the entity would incur as a result of the concentrated party’s failure to perform according to the terms of the contracts.
c. Information regarding entity’s policy of requiring collateral.
d. Identity of all parties.

Identity of all parties.

3

Which of the following is not an underlying, according to ASC Topic 815?
a. An interest rate index.
b. A security price.
c. An average daily temperature.
d. The other three choices could each be an underlying.

The other three choices could each be an underlying.

4

A derivative financial instrument is best described as

A contract that has its settlement value tied to an underlying notional amount.

5

Which of the following is not a derivative financial instrument?
a. Interest rate and foreign currency swaps
b. Trade accounts receivable.
c. Option contract.
d. Outstanding loan commitments written.

Trade accounts receivable.

6

For an unrecognized firm commitment to qualify as a hedged item all of the following conditions must be met except
a. The item being hedged must trade on an organized exchange.
b. Be binding on both parties.
c. Contain a nonperformance clause that makes performance probable.
d. Be specific with respect to all significant terms.

The item being hedged must trade on an organized exchange.

7

Under IFRS, all of the following are types of hedges except for:
a. Cash flow hedge.
b. Fair value hedge.
c. Foreign currency hedge.
d. Hedge of net investment.

Foreign currency hedge.

8

Dale, Inc., a US corporation, bought machine parts from Kluger Company of Germany on March 1, year 2, for 30,000 euros, when the spot rate for euros was $1.10. Dale’s year-end was March 31, year 2, when the spot rate for euros was $1.07. Dale bought 30,000 euros and paid the invoice on April 20, year 2, when the spot rate was $1.12. How much should be shown in Dale’s income statements as foreign exchange transaction gain or loss for the years ended March 31, year 2 and year
3?
Year 2 Year 3
a. $0 $0
b. $0 $900 loss
c. $900 loss $0
d. $900 gain $1,500 loss

$900 gain $1,500 loss

9

Which of the following qualifies as a hybrid instrument that would require bifurcation under ASC Topic 815, Derivatives and Hedging?
I. A bond payable with an interest rate based on the S & P 500 Index.
II. An equity instrument with a call option, allowing the issuing company to buy back the stock.

Both I and II.

10

On July 1, year 2, Stone Company lent $120,000 to a foreign supplier, evidenced by an interest-bearing note due on July 1, year 3. The note is denominated in the currency of the borrower and was equivalent to 840,000 local currency units (LCU) on the loan date. The note principal was appropriately included at $140,000 in the receivables section of Stone’s December 31, year 2 balance sheet. The note principal was repaid to Stone on the July 1, year 3 due date when the exchange rate was 8 LCU to $1. In its income statement for the year ended December 31, year 3, what amount should Stone include as a foreign currency transaction gain or loss?

$35,000 loss.

11

An example of a notional amount is

Number of barrels of oil.

12

On September 22, year 2, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company’s local currency. On that date, the spot rate was $.55. Yumi paid the bill in full on March 20, year 3, when the spot rate was $.65. The spot rate was $.70 on December 31, year 2. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, year 2?

$1,500

13

Disclosures related to financial instruments, both derivative and nonderivative, that are used as hedging instruments must
I. Include information on risk management policies.
II. Be separated by type of hedge.

Both I and II

14

Which hedge of the following foreign currency items is not accounted for as either a fair value hedge or a cash flow hedge?
a. Foreign currency denominated forecasted transactions.
b. Net investments in foreign operations.
c. Unrecognized firm commitments.
d. Available-for-sale securities.

Net investments in foreign operations.

15

Disclosure of credit risk of financial instruments with off-balance-sheet risk does not have to include
a. The specific names of the parties associated with the financial instrument.
b. The loss of financial instruments held.
c. The amount of accounting loss the entity would incur should any party to the financial instrument fail to perform.
d. The entity’s policy of requiring collateral or security.

The specific names of the parties associated with the financial instrument.

16

When a company elects not to bifurcate a hybrid instrument and accounts for the hybrid instrument at fair value, which method(s) of disclosure are permissable?
I. As a separate line item for fair value and non—fair value instruments on the balance sheet.
II. As an aggregate amount of all hybrid instruments on the balance sheet.
III. As an aggregate amount of all hybrid instruments with the amount of the hybrid instruments at fair value shown in parentheses on the balance sheet.
IV. As a footnote disclosure with elected amounts.

I and III.

17

Financial instruments may be recognized as

Either assets or liabilities until settlement.

18

Which of the following is not a type of foreign currency hedge?
a. A recognized asset or liability.
b. An unrecognized firm commitment.
c. A forecasted transaction.
d. An available-for-sale security.

A recognized asset or liability.

19

Which of the following is not required to be accounted for under ASC Topic 815, Derivatives and Hedging?
a. Interest rate caps.
b. Futures contracts.
c. Employee stock options.
d. Options to purchase or sell exchange-traded securities.

Employee stock options.

20

On October 1 of the current year, a US company sold merchandise on account to a British company for 2,000 pounds (exchange rate, 1 pound = $1.43). At the company’s December 31 fiscal year-end, the exchange rate was 1 pound = $1.45. The exchange rate was 1 pound = $1.50 on collection in January of the subsequent year. What amount would the company recognize as a gain (loss) from foreign currency translation when the receivable is collected?

$ 100

21

When in its financial statements should a company disclose information about its concentration of credit risk?

The notes to the financial statements.

21

When in its financial statements should a company disclose information about its concentration of credit risk?

The notes to the financial statements.

22

When practicable to estimate, an entity must disclose the value of financial instruments at

Fair value.

22

When practicable to estimate, an entity must disclose the value of financial instruments at

Fair value.

23

On September 1, year 1, Nelson Corp. received an order for equipment from a foreign customer for 300,000 local currency units (LCU) when the US dollar equivalent was $192,000. Nelson shipped the equipment on October 15, year 1, and billed the customer for 300,000 LCU when the US dollar equivalent was $200,000. Nelson received the customer’s remittance in full on November 16, year 1, and sold the 300,000 LCU for $210,000. In its income statement for the year ended December 31, year 1, Nelson should report as part of net income a foreign exchange transaction gain of

$10,000

23

On September 1, year 1, Nelson Corp. received an order for equipment from a foreign customer for 300,000 local currency units (LCU) when the US dollar equivalent was $192,000. Nelson shipped the equipment on October 15, year 1, and billed the customer for 300,000 LCU when the US dollar equivalent was $200,000. Nelson received the customer’s remittance in full on November 16, year 1, and sold the 300,000 LCU for $210,000. In its income statement for the year ended December 31, year 1, Nelson should report as part of net income a foreign exchange transaction gain of

$10,000

24

Which of the following is not a distinguishing characteristic of a derivative instrument?
a. Terms that require or permit net settlement.
b. One or more underlyings and notional amounts.
c. No initial net investment.
d. Must be ‘highly effective’ throughout its life.

Must be ‘highly effective’ throughout its life.

24

Which of the following is not a distinguishing characteristic of a derivative instrument?
a. Terms that require or permit net settlement.
b. One or more underlyings and notional amounts.
c. No initial net investment.
d. Must be ‘highly effective’ throughout its life.

Must be ‘highly effective’ throughout its life.

25

Gains and losses on the hedged asset/liability and the hedged instrument for a fair value hedge will be recognized

In current earnings.

25

Gains and losses on the hedged asset/liability and the hedged instrument for a fair value hedge will be recognized

In current earnings.

26

On November 15, year 2, Cdt, Inc., a US company, ordered merchandise FOB shipping point from a foreign company for 200,000 LCUs. The merchandise was shipped and invoiced to Cdt on December 10, year 2. Cdt paid the invoice on January 10, year 3. The spot rates for LCUs on the respective dates are as follows:
November 15, year 2 $ .4955
December 10, year 2 .4875
December 31, year 2 .4675
January 10, year 3 .4475
In Celt’s December 31, year 2 income statement, the foreign exchange transaction gain is

$4,000

26

On November 15, year 2, Cdt, Inc., a US company, ordered merchandise FOB shipping point from a foreign company for 200,000 LCUs. The merchandise was shipped and invoiced to Cdt on December 10, year 2. Cdt paid the invoice on January 10, year 3. The spot rates for LCUs on the respective dates are as follows:
November 15, year 2 $ .4955
December 10, year 2 .4875
December 31, year 2 .4675
January 10, year 3 .4475
In Celt’s December 31, year 2 income statement, the foreign exchange transaction gain is

$4,000

27

Whether recognized or unrecognized in an entity’s financial statements, disclosure of the fair values of the entity’s financial instruments is required when
It is practicable to Aggregated fair values
estimate those values are material to the entity
a. No No
b. No Yes
c. Yes No
c. Yes Yes

Yes Yes

27

Whether recognized or unrecognized in an entity’s financial statements, disclosure of the fair values of the entity’s financial instruments is required when
It is practicable to Aggregated fair values
estimate those values are material to the entity
a. No No
b. No Yes
c. Yes No
c. Yes Yes

Yes Yes

28

Gains and losses of the effective portion of a hedging instrument will be recognized in current earnings in each reporting period for which of the following?
a. Fair value hedge
b. Fair value hedge and Cash flow hedge
c. Neither
d. Cash flow hedge

Fair value hedger

28

Gains and losses of the effective portion of a hedging instrument will be recognized in current earnings in each reporting period for which of the following?
a. Fair value hedge
b. Fair value hedge and Cash flow hedge
c. Neither
d. Cash flow hedge

Fair value hedger

29

Derivative instruments are characterized by having which of the following?
Notional amounts Underlyings
a. None One or more
b. None None
c. One or more None
d. One or more One or more

One or more One or more

29

Derivative instruments are characterized by having which of the following?
Notional amounts Underlyings
a. None One or more
b. None None
c. One or more None
d. One or more One or more

One or more One or more

30

Which of the following risks are inherent in an interest rate swap agreement?
I. The risk of exchanging a lower interest rate for a higher interest rate.
II. The risk of nonperformance by the counter party to the agreement.

Both I and II.

30

LaValley Corp. issues monthly financial statements to its creditors. LaValley should perform assessments of hedge effectiveness on a

Monthly basis.

31

Which of the following financial instruments is not considered a derivative financial instrument?
a. Bank certificates of deposit.
b. Currency futures.
c. Stock-index options.
d. Interest-rate swaps.

Bank certificates of deposit.

32

According to ASC Topics 815 and 825, the most relevant measure for reporting financial instruments is

Fair value.

33

According to ASC Topic 815, any financial or physical variable that has either observable changes or objectively verifiable changes qualifies as an

Underlying

34

When a firm elects not to bifurcate a hybrid financial instrument, how should changes in fair value be recognized?

On a prospective basis in the current year earnings and future year’s earnings.

35

In order for a derivative instrument to qualify as a hedging instrument, which of the following must be sufficiently documented?
The objective The hedging
and strategy of instrument and
the hedge hedged item
a. The objective and strategy of the hedge
b. The objective and strategy of the hedger and The hedging instrument and hedged item.
c. Neither
d. The hedging instrument and hedged item.

The objective and strategy of the hedger and The hedging instrument and hedged item.

36

Which of the following is not a type of foreign currency hedge?
a. A held-to-maturity security.
b. A net investment in foreign operations.
c. A forecasted transaction.
d. An unrecognized firm commitment.

A held-to-maturity security.

37

Which of the following does not qualify as an underlying?
a. Stock shares.
b. Exchange rate.
c. Insurance index.
d. Commodity price.

Stock shares.

38

Which of the following is a general criterion for a hedging instrument?
a. Must contain one or more underlyings.
b. Must be “highly effective” only in the first year of the hedge’s life.
c. Must contain a nonperformance clause that makes performance probable.
d. Sufficient documentation must be provided at the beginning of the process.

Sufficient documentation must be provided at the beginning of the process.

39

A December 15, year 2 purchase of goods was denominated in a currency other than the entity’s functional currency. The transaction resulted in a payable that was fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 20, year 3. The exchange rates between the functional currency and
the currency in which the transaction was denominated changed between the transaction date and December 31, 2010, and again between December 31, year 2, and
January 20, year 3. Both exchange rate changes resulted in gains. The amount of the gain that should be included in the year 3 financial statements would be

The gain from December 31, year 2, to January 20, year 3.

40

LaValley Corp. issues monthly financial statements to its creditors. LaValley should perform assessments of hedge effectiveness on a

Monthly basis.

41

On September 1, year 1, Span & Co., a US corporation, sold merchandise to a foreign firm for 250,000 Botswana pula. Terms of the sale require payment in pula on
February 1, year 2. On September 1, year 1, the spot exchange rate was $.20 per pula. At December 31, year 1, Span’s year-end, the spot rate was $.19, but the rate increased to $.21 by February 1, year 2, when payment was received. How much should Span report as foreign exchange transaction gain or loss as part of year 2 income?

$5,000 gain.

42

On December 1 of the current year, Bann Co. entered into an option contract to purchase 2,000 shares of Norta Co. stock for $40 per share (the same as the current market price) by the end of the next two months. The time value of the option contract is $600. At the end of December, Norta’s stock was selling for $43, and the time value of the option is now $400. If Bann does not exercise its option until January of the subsequent year, which of the following changes would reflect the proper accounting treatment for this transaction on Bann’s December 31 year-end financial statements?

Net income will increase by $5,800.

43

On January 2 of the current year, LTTI Co. entered into a three-year, noncancellable contract to buy up to 1 million units of a product each year at $.10 per unit with a minimum annual guarantee purchase of 200,000 units. At year-end, LTTI had only purchased 80,000 units and decided to cancel sales of the product. What amount should LTTI report as a loss related to the purchase commitment as of December 31 of the current year?

$52,000

44

Which of the following provides the holder the right to sell the underlying at an exercise or strike price, anytime during a specified period of time a gain accrues to the holder as the market price of the underlying falls below the strike price?
a. Forward contract.
b. Swaption.
c. Call option.
d. Put option.

Put Option

45

Which of the following meets the definition of a derivative instrument and must be accounted for using ASC Topic 815, Derivatives and Hedging?
a. Mortgage-backed securities.
b. Variable annuity contracts.
c. Adjustable rate loans.
d. Credit indexed contracts.

Credit indexed contracts.

46

According to ASC Topic 815, hybrid instruments must be accounted for

At fair value if an election is made not to bifurcate the hybrid instrument.

47

Rachel Co. entered into a forward exchange contract on October 3, year 2, to purchase 100,000 Swiss francs in 90 days. The forward contract was entered into to
hedge a purchase of inventory in September year 2, payable in January year 3. The relevant exchange rates are as follows:
Forward rate
Spot rate (for January 3, year 3)
September 30, year 2 $ .77 $ .79
October 3, year 2 .85 .87
December 31, year 2 .92 .93
At December 31, year 2, what amount of foreign currency transaction gain from this forward contract should Rachel include in net income?

$6,000

48

Which of the following is the characteristic of a perfect hedge?
a. No possibility of future loss only.
b. No possibility of future gain or loss.
c. No possibility of future gain only.
d. The possibility of future gain and no future loss.

No possibility of future gain or loss.

49

The Marvin Company has a receivable from a foreign customer which is payable in the local currency of the foreign customer. The amount receivable for 900,000
local currency units (LCU), has been translated into $315,000 on Marvin’s December 31, year 2 balance sheet. On January 15, year 3, the receivable was collected in
full when the exchange rate was 3 LCU to $1. What journal entry should Marvin make to record the collection of this receivable?
Debit Credit
a. Cash $300,000
Accounts receivable $300,000
b. Cash 300,000
Exchange loss 15,000
Accounts receivable 315,000
c. Cash 300,000
Deferred exchange loss 15,000
Accounts receivable 315,000
d. Cash 315,000
Accounts receivable 315,000

Cash 300,000
Exchange loss 15,000
Accounts receivable 315,000