1
Q
44. 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? A. A $300 foreign exchange gain. B. A $300 foreign exchange loss. C. A $300 credit to OCI. D. A $300 debit to OCI.
A
a
2
Q
- S Corporation created a stock option plan for its two top executives. The plan provided that each executive would receive 1,000 options, which would enable him or her to purchase 100 shares at 75 percent of the market price on the date the options, became exercisable. The options were exercisable in two years. At the date of granting the options, the market price of the shares was $12 per share. The date of measurement for the stock option plan was the:
A. date of grant.
B. end of the first year.
C. end of the second year.
D. date the employees’ exercise their options.
A
c
3
Q
- JKC initiated a stock option plan for its three top executives. The plan provided that each executive would receive 6,000 options that would enable each one to purchase 600 shares at the option price. The option price was set at 10 percent below market price at the first exercise date. The options could be exercised after the executives remained as employees of the company for 3 more years. The market price of the shares on the date that the options were granted was $10 per share. The amount of compensation expense the company incurred for the three executives due to the option plan was:
A. $8,100
B. $3,000
C. $600
D. $0
E. Cannot be determined from the information provided
A
e
4
Q
see 47
A
see 47
5
Q
- Which of the following are requirements for hedge accounting?
A. An existing risk management strategy involving hedging.
B. Designation and documentation of the hedging relationship.
C. Reasonable expectation of hedge effectiveness.
D. All of these answers are correct.
A
d
6
Q
- A stock option plan is a compensatory plan if:
A. The employee must have worked for the company for one year.
B. The employee must report the option on the employee’s current tax return.
C. The employee must work for the company until retirement.
D. It involves a cost to the grantor.
A
d
7
Q
50. $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: A. dr. bond premium $200 B. dr. owners' equity account $400 C. cr. bonds payable $10,200 D. dr. bond discount $200
A
d
8
Q
51. All of the following are examples of derivative instruments except: A. Foreign exchange forward contracts B. Interest rate swaps C. Currency swaps D. Retractable preferred shares
A
d
9
Q
52. Which of the following is an example of a financial asset? A. Inventory B. accounts receivable C. Capital assets D. Prepaid expenses
A
b
10
Q
- In order to determine if, in substance, a complex financial instrument is debt, the answer should be yes to all of the following except:
A. Is the periodic return on capital obligatory?
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 debtor legally obligated to repay the principal at the option of the creditor?
A
c
11
Q
- In order to determine if, in substance, a complex financial instrument is equity, the answer should be no to all of the following except:
A. Is the periodic return on capital obligatory?
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 debtor legally obligated to repay the principal at the option of the creditor?
A
c
12
Q
- All of the following are common reasons for a company to issue convertible bonds except:
A. The company prefers to issue shares, but is unsure of the present stock market and the timing.
B. The bonds are issued to controlling shareholders so that they can receive interest payments in preference to other shareholders.
C. A bond that has a favourable component such as a conversion privilege, can carry a lower interest rate than a “straight” bond.
D. All of these answers are correct
A
d
13
Q
- General characteristics of convertible bonds that will be converted include all of the following except:
A. management fully intends that the conversion privilege will eventually be attractive to the investors.
B. the investors will convert at or before maturity date.
C. the company will no longer have to repay the principal amount of the bonds.
D. the market price of the shares will drop below the conversion price.
A
d
14
Q
- Why would a corporation issue retractable preferred share in a private placement rather than a normal debt arrangement?
A. Cash flow
B. Income minimization
C. The tax treatment of intercorporate dividends
D. None of these answers are correct.
A
c
15
Q
58. Silo Corp. granted to Donna, its superstar accountant, the option to purchase Silo common shares for $10, on Jan. 1, 20x1. The market price of the shares on that date was $20. The options can be exercised during the period Jan. 1, 20x4 through Jan. 1, 20x6. The number of shares under option is determined by a formula based on Silo earnings each year. The number of shares actually under option will be the formula value on Dec. 31, 20x3. That formula estimated the following number of shares under option at the end of years: 20x1, 200; 20x2, 300. The formula determined the number of shares at Dec. 31, 20x3 to be 400. The market prices for Silo shares at the end of years: 20x1, $25; 20x2, $40, 20x3, $50. What is the recorded compensation expense for 20x2, for Donna? A. $7,250 B. $3,000 C. $4,000 D. $4,500 E. $5,000
A
c
16
Q
- A non-compensatory stock option plan means that:
A. Any employee can purchase shares at a discount from the prevailing market price.
B. Top executives are given shares in the company.
C. No shares are given but shareholders are allowed to be purchased on the open market.
D. None of these answers are correct.
A
a
17
Q
- All of the following are characteristics of stock rights except:
A. The warrants are usually detachable
B. Stock warrants never expire
C. Stock warrants can be exercised without having to trade in the bond
D. Stock warrants can be exercised without having to redeem the bond
A
b
18
Q
61. 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: A. $339,000 B. $321,000 C. $605,000 D. $350,000
A
a
19
Q
62. JMR Ltd. issued $100,000 of 8%, 8 year, non-convertible bond with detachable stock purchase warrants. KER Corp. purchased the entire issue. Each $1,000 bond carries 10 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: A. $107,000 B. $321,000 C. $605,000 D. $108,000
A
d
20
Q
63. JMR Ltd. issued $100,000 of 8%, 8 year, non-convertible bond with detachable stock purchase warrants. KER Corp. purchased the entire issue. Each $1,000 bond carries 10 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 allocation of the proceeds to bonds using the proportional method was: A. $107,000 B. $99,185 C. $100,000 D. $108,000
A
b
21
Q
64. 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 there was no market value for the bond. In the journal entry, the amount of the payable for the bond is: A. $339,000 B. $321,000 C. $300,000 D. $350,000
A
c
22
Q
- An option is:
A. An obligation to buy something in the future.
B. An obligation to sell something in the future.
C. A debt instrument.
D. The right to buy or sell something in the future
A
d
23
Q
- A forward contract is:
A. A debt instrument.
B. The right to sell something in the future.
C. An obligation to buy or sell something in the future.
D. The right to buy something in the future.
A
c
24
Q
- For each type of financial instrument, the reporting enterprise should disclose:
A. The extent and nature of the financial instruments.
B. Significant terms.
C. Significant conditions.
D. All of these answers are correct.
A
d
25
```
68. Stock Appreciation Rights (SARS) earned by employees may be settled by issuing (choose the best answer):
A. Cash
B. Shares
C. Promissory notes
D. Cash or Shares
```
d
26
```
69. Securities issued as debt but intended by the issuing company to be exchanged for shares by the investor prior to maturity are called:
A. hybrid securities
B. discount bonds
C. options
D. convertible debt
```
d
27
```
70. Primary securities that have both debt and equity characteristics are called:
A. hybrid securities
B. discount bonds
C. options
D. convertible debt
```
a
28
71. VB Ltd. raises $150,000 by issuing a financial instrument that pays interest at a rate of 8% per year to the investor. At the end of the fourth year, the financial instrument is retired for $155,000. If the financial instrument is treated as debt then:
A. The repayment will decrease owners' equity
B. The interest payment decreases retained earnings
C. Retained Earnings is reduced as the interest payment is treated as a dividend distribution
D. Shareholders' equity is increased at issuance
b
29
72. VB Ltd. raises $150,000 by issuing a financial instrument that pays interest at a rate of 8% per year to the investor. At the end of the fourth year, the financial instrument is retired for $155,000. If the financial instrument is treated as equity then:
A. The repayment will decrease owners' equity
B. The interest payment decreases retained earnings
C. If premium on repayment was not known, it is recorded as a loss on the income statement
D. Long-term liabilities is increased at issuance
a
30
73. On the statement of cash flows, a hybrid financial instrument should be:
A. Reported as an operating activity
B. Reported as a financial activity
C. Reported as an investing activity
D. Reported according to its individual components
d
31
74. The crucial aspect of debt on the financial statements is:
A. the legal agreement.
B. the interest payments.
C. that the creditors can demand payment.
D. the maturity date.
d
32
75. A company issues a convertible bond. Management can essentially force conversion as long as:
A. The share price is higher than the conversion price
B. The share price is lower than the conversion price
C. The share price is equal to the conversion price
D. None of these answers are correct
a
33
76. The incremental method to accounting for convertible bonds means that:
A. The proceeds of the bond are allocated on the basis of the relative market values of the straight bond and imbedded stock option
B. The stock option is valued at the difference between the total proceeds of the bond issue and the market value of an equivalent straight bond issue
C. The proceeds of the bond are allocated on the basis of the book values of the straight bond and imbedded stock option
D. None of these answers are correct
b
34
```
77. If a company issues debt that is convertible at the shareholder's option, in substance, the debt is:
A. Debt
B. Equity
C. Debt or Equity
D. Subordinated
```
b
35
78. When convertible bonds are submitted for conversion, all of the following must be updated except:
A. Bond premium or discount
B. Accrued interest
C. Cash
D. Foreign exchange gains and losses on foreign currency denominated debt
c
36
```
79. If a company issues debt that is convertible at the corporation's option, in substance, the debt is:
A. Debt
B. Equity
C. An Asset
D. Subordinated
```
b
37
80. Credit risk is an issue for financial instruments and must be disclosed because:
A. the company may default on its loan
B. the company may not have enough cash flow to pay suppliers
C. the other parties to financial instruments may not perform their obligations
D. the company may not perform their obligations
c
38
```
81. Derivatives may be described as:
A. Executed contracts
B. Promissory notes
C. Common shares
D. Executory contracts
```
d
39
82. 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:
A. Deducted on the statement of retained earnings
B. Added to the statement of retained earnings
C. Deducted on the income statement
D. Added for income tax purposes
a
40
```
83. 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:
A. Deducted on the income statement
B. Added to the income statement
C. Deducted for income tax purposes
D. Added for income tax purposes
```
c
41
84. Which of the following forms part of the definition of a financial liability?
A. Cash
B. An equity instrument of another entity
C. To deliver cash or another financial asset to another party
D. A contractual right to receive cash or another financial asset from another party
c
42
85. A financial asset has any of the following characteristics except:
A. An equity instrument of another entity
B. A debt instrument of another entity
C. Cash
D. A contractual right to exchange financial instruments with another party under conditions that are potentially favourable
b
FA3 Liabilities Intermediate
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