CHAPTER 18 MULTIPLE CHOICES

PROB. 18-1 The basic purpose of derivative financial instrument is to manage some kind of risk
such as all of the following EXCEPT

a. Stock price movements

b. Interest rate variations
c. Currency fluctuations
d. Uncollectibility of accounts receivable

PROB. 18-2 Derivatives are financial instruments that derive their value from changes in a
benchmark based on any of the following EXCEPT

a. Stock prices
b. Mortgage and currency rates
c. Commodity prices
d. Discounts on account receivable

PROB. 18-3 Derivative instruments are financial instruments or other contacts that must
contain

a. One or more underlings, or one or more notional amounts.

b. No initial net investment or smaller net investment than required for similar response
contracts
c. Terms that do not require or permit net settlement or delivery of an asset
d. All of the above

PROB. 18-4 which of the following is not a distinguishing characteristic of a derivative

instrument?

a. Terms that require or permit net settlement

b. Must be “highly effective” throughout its life
c. No initial investment
d. One or more underlyings and notional amounts

PROB. 18-5 which of the following is an underlying?

 a. A credit rating
b. A security price
c. An average daily temperature
d. All of the above could be underlyings

PROB. 18-6 an example of a notional amount is

a. Number of barrels of oil

b. Interest rates
c. Currency swaps
d. Stock price

PROB. 18-7 which of the following is not a derivative instrument?

a. Future contracts
b. Credit indexed contacts
c. Interest rate swaps
d. Variable annuity contacts

PROB. 18-8 in accordance with IAS 39 financial instrument: recognition and measurement,
which of the following terms best describes a compound financial instrument component of a
hybrid instrument that also includes a non-derivative host contract?

a. An available for sale financial assets

b. An embedded derivative
c. A held to maturity investment
d. A financial asset held for trading

PROB. 18-9 in accordance with IFRS 7 financial instrument: disclosure, which of the following
best describes the risk that an entity will encounter if it has difficulty is meeting obligations
associated with its financial liabilities?

a. Liquidity risk
b. Credit risk
c. Financial risk
 d. Payment risk

PROB. 18-10 in accordance with IFRS 7. Financial instrument: disclosure, which of the following
best describes credit risk?

a. The risk that one party to a financial instrument will cause a financial loss for the other
party by failing to discharge an obligation
b. The risk that an entity will encounter difficulty in meeting obligations associated with
financial liabilities
c. The risk that the fair value associated with an instrument will vary due to changes in the
counterparty’s credit rating
d. The risk that an entity’s credit facilities will be withdrawn due to cash flow sensitivities

PROB. 18-11 Financial instruments sometimes contain features that separately meet the
definition of a derivative instrument. These features are classified as

a. Swaptions
b. Notional amounts
c. Embedded derivative instrument
d. Underlyings

PROB. 18-12 which of the following is a general criterion for a hedging instrument?

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

b. Must be highly effective only in the first year of the hedge’s life
c. Must contain one or more underlyings
d. The embedded derivative meets the definition of a derivative instrument

PROB. 18-13 the process of bifurcation

a. Protects an entity form loss by entering into a transaction

b. Includes entering into agreement between two counterparties to exchange cash flows
over specified period of time in the future
 c. Is the interaction of the price or rate with an associated asset or liability
d. Separates an embedded derivative from its host contract

PROB. 18-14 hedge accounting is permitted for all of the following types of hedges EXCEPT

a. Trading securities
b. Unrecognized firm commitments
c. Available for sale securities
d. Net investments in foreign operations

PROB. 18-15 which of the following is a general criterion for a hedging instrument?

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

b. Must be highly effective only in the first year of the hedge’s life
c. Must contain a non-performance clause that makes performance probable
d. Must contain one or more underlyings

PROB. 18-16 a hedge of the exposure to changes in the fair value of a recognized asset or
liability, or an unrecognized firm commitment, is classified as a

a. Fair value hedge

b. Cash flow hedge
c. Foreign currency hedge
d. Underlying

PROB. 18-17 gains and losses on the hedged asset or liability and the hedged instrument for a
fair value hedge will be recognized

a. In current earnings
b. In other comprehensive income
c. On a cumulative basis from the change in expected cash flows from the hedged
instrument
d. On the balance sheet either as an asset or a liability
PROB. 18-18 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?

Fair value hedge cash flow hedge

a. Yes No
b. Yes Yes
c. No No
d. No Yes

PROB. 18-19 which of the following is not a type of foreign currency hedge?

a. A forecasted transaction
b. An available for sale security
c. A recognized asset or liability
d. An unrecognized firm commitment

PROB. 18-20 on December 12, 2009, Imp Co. entered into forward exchange contract to
purchase 100,000 local currency units (LCU) in ninety days to hedge a purchase of inventory in
November 2009 payable in March 2010. The relevant exchange rates are as follows:

Spot rate forward rate (for March 12, 2010)

November 30, 2009 P 0.87 P 0.89
December 12, 2009 0.88 0.90
December 31, 2009 0.92 0.93

At December 31, 2009, what amount of foreign currency transaction gain from this forward
contract should Imp include in net income?
a. 0
b. 3,000
c. 5,000
d. 10,000

PROB. 18-21 on December 12, 2009, Imp Co. entered into forward exchange contract to
purchase 100,000 local currency units (LCU) in ninety days to hedge a commitment to purchase
equipment to purchase equipment being manufactured to Imp’s specifications. The expected
delivery date is March 2010 at which time settlement is due to the manufacturer. The hedge
qualifies as a fair value hedge. The relevant exchange rates are as follows:

Spot rate forward rate (for march 12, 2010)

November 30, 2009 P 0.87 P 0.89
December 12, 2009 0.88 0.90
December 31, 2009 0.92 0.93

At December 31, 2009, what amount of foreign currency transaction gain from this forward
contract should Imp include in net income?
a. 0
b. 3,000
c. 5,000
d. 10,000

PROB. 18-22 Happy Corp. agreed to purchase merchandise from a foreign vendor on November
30, 2009. The goods will arrive on January 31, 2010 and payment of 100,000 foreign currency is
due on February 28, 2010. On November 30, 2009, Happy signed an agreement with a foreign
exchange broker to buy 100,000 foreign on February 28, 2010. Exchange rates to purchase
foreign currency are as follows:

11/30/09 12/31/09 1/31/10 2/28/10

Spot P 1.65 P 1.62 P 1.59 P 1.57
30 day 1.64 1.59 1.60 1.59
60 day 1.63 1.56 1.58 1.58

Because of this commitment hedge, Happy Corp. will record the merchandise at what value
when it arrives in January?
a. 165,000
b. 164,000
c. 160,000
d. 159,000

PROB. 18-23 on September 1, 2009, Brady Corp. entered into a foreign exchange contract for
speculative purpose by purchasing 50,000 deutsche marks for delivery in 60 days. The rates to
exchange P 1 for one deutsche mark follow:
 Sept. 1, 2009 Sept. 30, 2009
Spot rate 22.75 22.70
30-day forward rate 22.73 22.72
60-day forward rate 22.74 22.73

In its September 30, 2009 income statement, what amount should Brady report as foreign
exchange transaction loss?
a. 2,500
b. 1,50
c. 1,000
d. 500

PROB. 18-24 on June 1, 2009, Benguet Manufacturing Corp. received raw materials from a
foreign vendor when the spot rate is P 40.00. Payment of 100,000 foreign currency is due in 90
days. On the same date, the company acquired a forward contract to buy 120,000 foreign
currency in 90 days. The following forward rates per foreign currency were available:

June 1, 90-day rate 40.30

June 30, 60-day rate 40.40
July 31, 30-day rate 40.10

a. What is the contract gain (loss) on hedge on an exposed position?

a. (40,000)
b. (30,000)
c. (20,000)
d. (10,000)
b. What is the exchange gain (loss) on a speculative contract in June 2009?

a. 0
b. 2,000
c. 10,000
d. 12,000

PROB. 18-25 on November 1, 2009 Manila Bay Corp. purchased inventory from a foreign
vendor payable on February 1, 2010 in the amount of 100,000 foreign currency, on the same
date, Manila Bay purchases a 90-day forward contract to buy 100,000 foreign currency at a
forward rate of one foreign currency = P40.60. The following spot rates are made available:

Spot rate 1 FC
Nov. 1, 2009 P 40.00
Dec. 31, 2009 40.20
Feb. 1, 2010 40.50

What is the total exchange gain (loss) on foreign currency transaction?

a. (50,000)
b. 50,000
c. (20,000)
d. 20,000

PROB. 18-26 the risk of an loss from a financial instrument due to possible failure of another
party to perform according to terms of the contract is known as

a. Off-balance-sheet risk
b. Market risk
c. Credit risk
d. Investment risk

PROB. 18-27 Disclosure of credit risk of financial instruments with off-balance-sheet risk does
not have to include

a. The amount of accounting loss the entity would incur should any party to the financial
instruments fail to perform
b. The entity’s policy of requiring collateral or security
c. The class of financial instrument held
d. The specific names of the parties associated with the financial instrument

PROB. 18-28 Disclosure of information about significant concentrations of credit risk is required
for
 a. all financial instruments
b. financial instruments with off-balance-sheet credit risk only
c. financial instruments with-off-balance-sheet market risk only
d. financial instruments with off-balance-sheet risk of accounting loss only

PROB. 18-29 examples of financial instruments with off-balance-sheet risk include all of the
following EXCEPT

a. outstanding loan commitments

b. recourse obligations on receivables
c. warranty obligations
d. future contracts

PROB. 18-30 whether recognized or unrecognized in an entity’s financial statements, disclosure

of the fair values of the entity’s financial instruments is required when

a. it is practicable to estimate those values

b. the entity maintains accurate cost records
c. aggregated fair values are material to the entity
d. individual fair values are material to the entity

PROB. 18-31 on January 2, 2009, Hershey Co. enters into a cal option contract with an
investment company. This contract gives Hershey the option to purchase 10,000 shares of
Petrol Co. at P100 per share; the option expires on May 31, 2009. The option expires on May
31, 2009. Petrol Co. stock at P100 per share on January 2, 2009 at which time Hershey pays
P10,000 for the call option. The price per share of Petrol stock is P120 on May 31, 2009, and the
time value of the option has not changed.

In the settlement of the option contract, Hershey will

a. receive P200,000 from the investment company

b. receive P190,000 from the investment company
c. pay the investment company P200,000
 d. purchase the shares of Petrol at P 100 per share and sell the shares at P120 per share to
the investment company

PROB. 18-32 on January 2, 2009, souvenir Co. a manufacturing company in Manila sold goods
to an American company in California, USA for $ 10,000 when the foreign currency exchange
rate is P 50.00 and the premium is P 5.00. On March 31, 2009, souvenir receives $ 10,000 from
American Company in settlement of the goods sold, when the foreign exchange rate is P48.00
per US dollar. What is the amount that souvenir would report in the statement of
comprehensive income as a result of this transaction?

a. 200,000
b. 450,000
c. 480,000
d. 500,000

PROB. 18-33 On January 2, 2009, Canary Co. received a two-year P 5,000,000 loan, which calls
for payments to be made at the end of each year based on the prevailing market rate at
January 1 of each year. The interest rate at January 2, 2009 was 10%. Another company, Crown
Co. believes that rates may decrease and it would prefer to have variable debt. Through an
intermediary, the two companies enter into an interest rate swap whereby Crown agrees to
make Canary’s interest payment in 2010 and Canary agrees to make Crown’s interest payment
in 2010.

If the interest rate on January 1, 2010 is 8%, what amount would Canary receive (pay) from (to)
Crown?

a. (100,000)
b. 100,000
c. (50,000)
d. 50,000

PROB. 18-34 which of the following is not a derivative?

a. Interest rate swap agreement

b. Future and forward contract
c. Regular way purchase or sale
d. Option
PROB. 18-35 it is an asset, liability, firm commitment, highly probable forecast transaction or
net investment in a foreign operation that exposes the entity to risk changes in fair value or
future cash flows and is designated as being hedged

a. Hedged item
b. Hedging instrument
c. Hedge accounting
d. Hedge effectiveness