IA2 - Compound Financial (CHAP 7) Flashcards
What is the principal accounting for a compound financial instrument?
a. The issuer shall classify a compound instrument as either liability or equity.
b. The issuer shall classify the liability and equity components of a compound instrument separately as liability or equity instrument.
c. The issuer shall classify a compound instrument as a liability in its entirety, until converted into equity.
d. The issuer shall classify a compound instrument liability in its entirety.
b. The issuer shall classify the liability and equity components of a compound instrument separately as liability or equity instrument.
How are the proceeds from issuing a compound instrument allocated between the liability and equity?
a. The liability component is measured at fair value and the remainder of the proceeds is allocated to the equity component.
b. The proceeds are allocated to the liability and equity based on fair value.
c. The proceeds are allocated to the liability and equity based on carrying amount.
d. The proceeds are not allocated because the compound instrument is accounted for either as liability or equity.
a. The liability component is measured at fair value and the remainder of the proceeds is allocated to the equity component.
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 nondetachable.
d. The proceeds should be allocated between liability and equity under all of these circumstances.
d. The proceeds should be allocated between liability and equity under all of these circumstances.
When the cash proceeds from bonds payable issued with share warrants exceed the fair value of the bonds payable without the warrants, the excess should be credited to
a. Share premium -ordinary
b. Retained earnings
c. Liability account
d. Share premium - share warrants
d. Share premium - share warrants
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.
d. The excess of the proceeds over the fair value of the bonds without the share warrants.
A bond 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
a. A compound financial instrument
Convertible bonds
a. Have priority over other indebtedness.
b. Are usualy secured by a mortgage.
c. Pay interest only in the event net income is sufficient to cover the interest.
d. May be exchanged for equity shares
d. May be exchanged for equity shares
What is the main reason for issuing convertible bond?
a. The ease with which convertible bond is sold even if the entity has a poor credit rating.
b. The fact that equity capital has issue cost and convertible bond has none.
c. Entities can obtain financing at lower rate.
d. Convertible bond will always sell at a premium.
c. Entities can obtain financing at lower rate.
The major difference between convertible bonds payable and bonds payable issued with share warrants is that upon exercise of the share warrants
a. The shares are held by the issuer for a certain period before they are issued to the warrant holder.
b. The holder has to pay a certain amount to obtain the shares.
c. The shares involved are restricted.
d. No share premium can be part of the transaction.
b. The holder has to pay a certain amount to obtain the shares.
Convertible bonds
a. Are separated into the liability component and the expense component.
b. Allow an entity to issue debt financing at lower rate.
c. Are separated into liabil.ty and equity components based on fair value.
d. All of the choices are correct.
b. Allow an entity to issue debt financing at lower rate.
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.
d. The instrument should be recorded as part bond and part equity.
Issued convertible bonds are
a. Separated into liability and equity components with the liability component recorded at fair value and the residual assigned to the equity component
b. Always recorded using the fair value option
c. Recorded at face amount for the liability
d. Recorded at the par value of the shares
a. Separated into liability and equity components with the liability component recorded at fair value and the residual assigned to the equity component
The carrying amount of bonds converted was greater than the par value of the ordinary shares issued. Which correctly states an effect of the conversion?
a. Shareholders’ equity is increased
b. Share premium is decreased
c. Retained earnings account increased
d. A loss is recognized
a. Shareholders’ equity is increased
The conversion of bonds payable into ordinary shares in commonly recorded by
a. Incremental method
b. Proportional method
c. Fair value method
d. Book value or carrying amount method
d. Book value or carrying amount method
When convertible bond is not converted but paid at maturity
a. A gain or loss is recorded for the difference between the carrying amount of the bond and the present value.
b. The amount allocated to equity is recorded as a gain.
c. The amount allocated to equity is recorded as a loss.
d. The carrying amount of the bond equal to face amount is derecognized.
d. The carrying amount of the bond equal to face amount is derecognized.
