Chapter 19

Problem 19-1 Multiple choice (PAS 32)
1. A financial instrument is any contract that gives rise to

a. A financial asset
b. A financial liability
c. A financial asset of one entity and a financial liability of another entity
d. A financial asset of one entity and a financial liability or equity
instrument of another entity
2. Which is not classified as a financial instrument?

a. Convertible bond
b. Foreign currency contract
c. Warranty provision
d. Loan receivable
3. Which cannot be considered a financial asset?

a. Cash
b. A contractual right to receive cash or another financial asset from
another entity.
c. A contractual right to exchange financial instruments with another entity
under conditions that are potentially unfavorable
d. An equity instrument of another entity
4. Which should be classified as financial asset?

a. Patent
b. Trade accounts receivable
c. Inventory
d. Land
5. A financial liability
a. Must be classified as noncurrent liability.
b. Is a contractual obligation to deliver cash or another financial asset to
another entity.
c. Is a contractual obligation to exchange financial instrument with another
entity under conditions that are potentially favorable to the entity.
d. Is a contractual obligation to deliver cash or any asset to another entity.
6. Financial liabilities include all of the following, except

a. Trade accounts payable
b. Notes payable
c. Bonds payable
d. Income tax payable
7. It is any contract that evidences residual interest in the assets of an entity

after deducting all of the liabilities.
a. Equity instrument
b. Debt instrument
c. Loan receivable
d. Financial asset with indeterminable fair value
8. How should preference shares that are redeemable mandatorily be

presented in the statement of financial position?
a. Noncurrent liability
b. Current liability
c. Equity
d. Either current or noncurrent liability depending on redemption date
9. What is the presentation of preference dividend on mandatorily

redeemable preference shares?
a. Deducted from retained earnings
b. Deducted from share premium
c. Interest expense
d. Deducted from share capital
10. Which is not an equity instrument?

a. Ordinary share capital
b. Bond payable
c. Preference share capital
d. Share option or warrant
Problem 19-2 Multiple choice (IFRS)
1. What is the principal accounting for a compound instrument?

a. The issuer shall classify a compound instrument as either a liability or
equity based on evaluation of the predominant characteristics of the
contractual arrangement.
b. The issuer shall classify the liability and equity components of a
compound instrument separately as liability or equity.
c. The issuer shall classify a compound instrument as an equity in the
entirety.
d. The issuer shall classify a compound instrument as a liability in the
entirety, until converted equity.
2. How are the proceeds from issuing a compound instrument allocated

between the liability and equity components?
First, the liability component is measured at fair value, and then the
remainder of the proceeds is allocated to the equity component.
b. First, the equity component is measured at fair value, and then the
remainder of the proceeds is allocated to the liability component.
c. First, the fair values of both the equity component and the liability
component are estimated. Then the proceeds are allocated to the liability
and equity components based on the relation between the estimated fair
value.
d. The equity component is measured at its intrinsic value. The liability
component is measured at the face amount less the intrinsic value of the
equity component.
3. When bonds are issued with share warrants, the equity component is equal
to
a. Zero
b. The excess of the proceeds over the face amount of the bonds.
c. The market value of the share warrants.
d. The excess of the proceeds over the fair value of the bonds without the
share warrants.
4. When bonds are issued with share warrants, a portion of the proceeds
should be allocated to equity when the bonds are issued with
a. Detachable share warrants
b. Non detachable share warrants
c. Both detachable and non-detachable share warrants
d. Neither detachable nor non detachable share warrants
5. The proceeds from an issue of bonds payable with share warrants should
not be allocated between the liability and equity components when
a. The fair value of the warrants is not readily available.
b. The exercise of the warrants within the next reporting period seems
remote.
c. The warrants issued are non-detachable.
d. The proceeds should be allocated between liability and equity under all
of these circumstances.
Problem 19-3 Multiple choice (IAA)
1. We convertible by the holder into a fixed number of ordinary shares of the
issuer is
a. A compound financial instrument
b. A primary financial instrument
c. A derivative financial instrument
d. An equity instrument
2. Convertible bonds
a. Have priority over other indebtedness.
b. Are usually secured by a mortgage.
c. Pay interest only in the event net income is sufficient.
d. May be exchanged for shares of the issuer.
3. Convertible bonds
a. Are separated into liability and expense.
b. Allow an entity to issue debt financing at lower rate.
c. Are separated into liability and equity components based on fair value.
d. Are not accounted for as compound instrument.
4. What is the accounting for issued convertible bond?

a. The instrument should be recorded solely as bond.
b. The instrument should be recorded as either bond or equity but not
both.
c. The instrument should be recorded solely as equity.
d. The instrument should be recorded as part bond and part equity.
5. Issued convertible bonds are

a. Separated into liability and equity with the liability recorded at fair value
and the residual assigned to the equity.
b. Always recorded using fair value
c. Recorded at face amount for the liability
d. Recorded at par value of the shares

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Problem 19-1 Multiple choice (PAS 32)

1. A financial instrument is any contract that gives rise to

2. Which is not classified as a financial instrument?

3. Which cannot be considered a financial asset?

4. Which should be classified as financial asset?

6. Financial liabilities include all of the following, except

7. It is any contract that evidences residual interest in the assets of an entity

8. How should preference shares that are redeemable mandatorily be

9. What is the presentation of preference dividend on mandatorily

10. Which is not an equity instrument?

1. What is the principal accounting for a compound instrument?

2. How are the proceeds from issuing a compound instrument allocated

4. What is the accounting for issued convertible bond?

5. Issued convertible bonds are

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