Chapter 17 Derivatives Self-Assessment Quiz Flashcards
Derivatives should be recognized in the financial statements as assets and liabilities.
True
False
True
Derivatives should be reported at amortized cost.
True
False
False
Derivatives should be reported at fair value.
Which of the following statements regarding accounting for derivatives is false?
they should be reported at fair value.
gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
gains and losses resulting from speculation should be deferred.
they should be recognized in the financial statements as assets and liabilities.
gains and losses resulting from speculation should be deferred.
A fair value hedge may be used to offset the exposure to changes in the fair value of an unrecognized commitment.
True
False
True
In a fair value hedge , a company uses a derivative to hedge (offset) the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized commitment. In a perfectly hedged position, the gain or loss on the fair value of the derivative equals and offsets that of the hedged asset or liability.
Derivatives such as fair value hedges are recorded at amortized cost.
True
False
False
Derivatives such as fair value hedges are recorded at
fair value.
carrying value.
historical cost.
amortized cost.
fair value.
Gains and losses on cash flow hedges are recorded in equity as part of other comprehensive income.
True
False
True
Cash flow hedges are reported at fair value with gains and losses reported in equity as part of other comprehensive income.
Unrealized holding gains and losses on cash flow hedges are included in net income.
True
False
False
To qualify for special accounting for hedges treatment, the hedging transaction must be at least moderately effective.
True
False
True
To qualify for special accounting for hedges treatment, the hedging transaction must be highly effective.
An option to convert a convertible bond into shares of common stock is a(n)embedded derivative.
True
False
True
a convertible bond (discussed in Chapter 16) is a hybrid instrument. It consists of two parts: (1) a debt security, referred to as the host security , combined with (2) an option to convert the bond to shares of common stock, the embedded derivative .
In a variable-interest entity, stockholders may not absorb losses or receive the returns of a normal stockholder.
True
False
True
Stockholders in variable-interest entities may be shielded from losses or have their returns capped.
In a variable-interest entity all stockholders have decision-making rights.
True
False
False
In some cases, stockholders do not have the influence to control the company’s destiny.
A variable-interest entity (VIE) is an entity that has one of the following characteristics:
- Insufficient equity investment at risk.
Stockholders are assumed to have sufficient capital investment to support the entity’s operations. If thinly capitalized, the entity is considered a VIE and is subject to the risk-and-reward model.
- Stockholders lack decision-making rights.
In some cases, stockholders do not have the influence to control the company’s destiny.
- Stockholders do not absorb the losses or receive the benefits of a normal stockholder.
In some entities, stockholders are shielded from losses related to their primary risks, or their returns are capped or must be shared with other parties.
Which of the following is NOT a required disclosures related to financial instruments?
disclosing the fair value and related carrying value of the instruments.
combining or netting the fair value of separate financial instruments.
distinguishing between financial instruments held or issued for purposes other than trading.
displaying as a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges.
combining or netting the fair value of separate financial instruments.
Unrealized holding gains and losses from speculation in derivatives are recognized immediately in income.
True
False
False
Companies that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits by simultaneously entering into transactions in two or more markets are called
hedgers.
gamblers.
arbitrageurs.
speculators.
arbitrageurs
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All of the following statements regarding accounting for derivatives are correct except that
gains and losses resulting from speculation should be deferred.
they should be recognized in the financial statements as assets and liabilities.
they should be reported at fair value.
gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
gains and losses resulting from speculation should be deferred.
All of the following are characteristics of a derivative financial instrument except the instrument
has one or more underlyings and an identified payment provision.
requires or permits net settlement.
requires a large investment at the inception of the contract.
all of these are characteristics.
requires a large investment at the inception of the contract.
Which of the following are considered equity securities?
Convertible debt.
Redeemable preferred stock.
Call or put options.
Call or put options.
Separating the value of the host security from that of the embedded derivative is referred to as designation.
True
False
False
A convertible bond is a hybrid instrument. It consists of two parts: (1) a debt security, referred to as the host security, combined with (2) an option to convert the bond to shares of common stock, the embedded derivative .
To provide consistency in accounting for similar derivatives, a company must account for embedded derivatives similarly to other derivatives. Therefore, to account for an embedded derivative, a company should separate it from the host security and then account for it using the accounting for derivatives. This separation process is referred to as bifurcation .
An option to convert a convertible bond into shares of common stock is a(n)
fair value hedge.
host security.
embedded derivative.
hybrid security.
embedded derivative.
One required disclosure for financial instrument is that a separate classification of other comprehensive income the net gain/loss on derivative instruments designated in cash flow hedges must be presented.
True
False
True
The fair value and related carrying value of the instrument is a required disclosures related to financial instruments.
True
False
True
GAAP requires that both the cost and fair value of all financial instruments be reported in the notes to the financial statements.
True
False
True
Recovery of impairment
is not permitted by IFRS for held-for-collection securities.
is permitted by US GAAP for held-to-maturity securities.
is permitted by IFRS for held-for-collection securities but prohibited by US GAAP for held-to-maturity securities.
is prohibited by both IFRS and US GAAP for any debt security.
is permitted by IFRS for held-for-collection securities but prohibited by US GAAP for held-to-maturity securities.
Both IFRS and U.S. GAAP use the same test to determine whether the equity method of accounting should be used.
True
False
True
Both IFRS and U.S. GAAP use the same test of significant influence with a general guide of over 20 percent ownership to determine whether the equity method of accounting should be used.
Both the FASB and the IASB believe that reporting fair values for financial assets and liabilities provides more useful and relevant information relative to historical cost.
True
False
True
Rushia Company has an available-for-sale investment in the 10%, 10-year bonds of Pear Company The investment’s carrying value is $3,200,000 at December 31, 2014. On January 9, 2015, Rushia learns that Pear Company has lost its primary manufacturing facility in an uninsured fire. As a result, Rushia determines that the investment is impaired and now has a fair value of $2,300,000. In June, 2016, Pear Company has succeeded in rebuilding its manufacturing facility, and its prospects have improved as a result.
If Rushia Company determines that the fair value of the investment is now $3,900,000 and is using U.S. GAAP for its external financial reporting, which of the following is true?
Rushia may record a recovery of $900,000.
Rushia is prohibited from recording the recovery in value of the impaired investment.
Rushia may record a recovery of $700,000.
Rushia may record a recovery of $1,600,000.
Rushia is prohibited from recording the recovery in value of the impaired investment.
Which of the following statements regarding accounting for derivatives is false?
they should be reported at fair value.
gains and losses resulting from speculation should be deferred.
gains and losses resulting from hedge transactions are reported in different ways, depending upon the type of hedge.
they should be recognized in the financial statements as assets and liabilities.
gains and losses resulting from speculation should be deferred.
Derivatives such as fair value hedges are recorded at
carrying value.
fair value.
historical cost.
amortized cost.
fair value.
Unrealized holding gains and losses on cash flow hedges are
included in net income.
reported directly in retained earnings.
not recorded or reported.
reported as a component of other comprehensive income
reported as a component of other comprehensive income
A variable-interest entity has
All of the above are characteristics of a variable-interest entity.
insufficient equity investment at risk.
stockholders who have decision-making rights.
stockholders who absorb the losses or receive the benefits of a normal stockholder.
insufficient equity investment at risk.
