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SAINT COLUMBAN COLLEGE

COLLEGE OF BUSINESS EDUCATION


REFRESHER COURSE
2nd Semester 2017-2018

THEORY OF ACCOUNTS W. P. Mondido Jr., CPA


TOA.06 –Financial Instruments Quizzer 6

REVIEW QUESTIONS

1. Which is incorrect regarding financial instruments?


a. Financial instruments are contracts.
b. Financial instruments give rise to a financial asset of the holder.
c. Financial instruments encompass financial assets, financial liabilities, and equity instruments.
d. Financial instruments should be in writing.

2. Financial instruments include


a. option on silver c. futures on copper
b. forward on corn d. interest rate swap

3. Financial assets exclude


a. Investment in associate
b. Investment in Bonds
c. Call option that is “out of the money”
d. A non-derivative for which the entity is obliged to receive a variable number of the entity’s own
equity instruments

4. Financial assets include


a. Favorable Interest Rate Swap c. Property, plant, and equipment
b. Inventories d. Patent

5. Financial assets include


a. Favorable forward contract c. Deferred tax asset
b. Leased asset d. Prepaid rent

6. Examples of financial assets representing a contractual right to receive cash in the future exclude
a. Accounts receivable c. Investment in bonds
b. Loans receivable d. Derivative financial assets

7. The following are non-financial assets except


a. Derivative with potentially favorable exchange conditions
b. Inventories
c. Property, plant and equipment
d. Prepaid rent

8. Which of the following is not a category of financial assets defined in PAS 39?
a. Financial assets at fair value through profit or loss
b. Available for sale financial assets
c. Held for sale investments
d. Loans and receivables

9. At what amount is a financial asset measured on initial recognition?


a. The consideration paid for the financial asset.
b. The consideration paid plus any directly attributable transaction costs to the acquisition of the
financial asset,
c. Fair value. For items that are not measured at fair value through profit or loss, transaction costs are
also included in the initial measurement.
d. Zero

10. Transaction costs do not include


a. Fees and commissions paid to agents
b. Levies by regulatory agencies and securities exchanges
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c. Transfer taxes and duties
d. Internal administrative costs

11. Transaction costs include


a. Fees and commissions paid to employees acting as agents
b. Debt premiums or discounts
c. Financing costs
d. Internal administrative costs

12. In addition to financial assets at fair value through profit or loss, which of the following categories of
financial assets is measured at fair value in the statement of financial position?
a. Available for sale financial assets
b. Held to maturity investments
c. Loans and receivables
d. Investment in unquoted equity instruments.

13. What was the primary aim of the revision of IAS 39?
a. It was a response to the credit crisis.
b. IAS 39 was out of date.
c. To remove inconsistencies between US GAAP and to improve IFRS in accounting for financial
instruments.
d. To stop management of earnings.

14. Which of the following is correct regarding PFRS 9?


a. It establishes principles for presenting financial instruments as liabilities or equity.
b. It establishes principles for offsetting financial assets and financial liabilities.
c. It establishes principles for recognizing and measuring equity instruments.
d. It establishes principles for the financial reporting of financial assets and financial liabilities.

15. PFRS 9 uses a mixed-model approach to measurement. Which of the following measurement methods
are acceptable under PFRS 9?
a. Amortized cost, fair value, and replacement cost.
b. Amortized cost, fair value and net realizable value.
c. Amortized cost and fair value.
d. Amortized cost, fair value, and depreciated replacement cost.

16. How does PFRS 9 distinguish between the measurement methods to be used in the standard?
a. By reviewing the business model of each entity and the risks and rewards of the transaction.
b. By reviewing the business model of each entity and the contractual cash flow characteristics of the
instrument.
c. By reviewing the realizability and the contractual cash flow characteristics of the instrument.
d. By reviewing the realizability of the instrument and risks and reward of ownership.

17. Under PFRS 9, which category includes only equity securities?


a. Financial assets at amortized cost.
b. Financial assets at fair value through profit or loss
c. Financial assets at fair value through other comprehensive income
d. Financial assets at fair value through profit or loss - designated

18. Under what circumstances can the profit or loss on an equity instrument carried at fair value be dealt
with in other comprehensive income?
a. When the equity instrument is not held for trading.
b. When the profit or loss is capable of recycling.
c. When the equity investment is available for sale.
d. When the equity investment is held for trading.

19. Under what circumstances under PFRS 9 can an entity classify financial assets that meet the amortized
cost criteria as at FVTPL?
a. Where the instrument is held to maturity.
b. Where the business model approach is adopted.
c. Where the financial asset passes the contractual cash flow characteristics test.
d. If doing so eliminates or reduces an accounting mismatch.
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20. When can the classification of an instrument which has been determined on initial recognition be
changed?
a. Reclassifications are only permitted on the change of the contractual cash flows
b. Reclassification are only permitted on the change of an entity’s business model and are expected to
occur only infrequently.
c. Reclassifications are only permitted where a category becomes tainted.
d. Reclassifications are not permitted.

21. What is the principle for recognition of a financial asset in PFRS 9?


a. A financial asset is recognized when, and only when, it is probable that future economic benefits
will flow to the entity and the cost or value of the instrument can be measured reliably.
b. A financial asset is recognized when, and only when, the entity obtains control of the instrument
and has the ability to dispose of the financial asset independent of the actions of others.
c. A financial asset is recognized when, and only when, the entity obtains the risk and rewards of
ownership of the financial asset and has the ability to dispose of the financial asset.
d. A financial asset is recognized when, and only when, the entity becomes a party to the contractual
provisions of the instrument.

22. Financial liabilities exclude


a. Bank overdraft
b. Debenture issued by an entity requiring it to make annual interest payments in perpetuity.
c. Note payable in government bonds
d. Payments under operating lease that are not yet due.

23. Which of the following is most likely to be classified as financial liability?


a. Ordinary shares
b. Non-cumulative, non-redeemable preference shares
c. Cumulative, redeemable preference shares at the option of the holder
d. Cumulative, redeemable preference shares at the option of the issuer

24. Which of the following is incorrect regarding accounting for financial liabilities in accordance with IFRS
9?
a. An entity shall recognize a financial liability in its statement of financial position when, and only
when, the entity becomes party to the contractual provisions of the instrument.
b. An entity shall remove a financial liability from its statement of financial position when, and only
when, it is extinguished.
c. An entity shall classify all financial liabilities as subsequently measured at amortized cost using the
effective interest method, except as specified in PFRS 9.
d. An entity may reclassify financial liabilities when, and only when, it changes its business model for
managing the financial liabilities.

25. An entity shall classify all financial liabilities as subsequently measured at amortized cost using the
effective interest method except
a. Financial liabilities at fair value through profit or loss
b. Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition
or when the continuing involvement approach applies
c. Financial guarantee contracts
d. All of the above

26. A contract that requires the issuer to make specified payments to reimburse the holder for a loss it
incurs because a specified debtor fails to make payment when due in accordance with the original or
modified terms of a debt instrument is a (an)
a. Financial guarantee contract c. Derivative contract
b. Insurance contract d. Hybrid contract

27. PFRS 9 requires financial guarantee contract within its scope to be measured initially at fair value.
Subsequently, the issuer measures it at
a. The amount determined in accordance with PAS 37
b. The amount initially recognized less, when appropriate, cumulative amortization recognized
c. The higher of a and b
d. The lower of a and b.

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28. Guarantees that require payments in response to changes in specified credit rating or credit index are
considered
a. Financial guarantee contracts c. Derivative contracts
b. Insurance contracts d. Hybrid contracts

29. Financial liability at fair value through profit or loss is a financial liability that
a. meets the definition of held for trading
b. Upon initial recognition it is designated by the entity as at fair value through profit or loss in
accordance with IFRS 9 paragraph 4.4.4 or 4.3.5
c. Is designated either upon initial recognition or subsequently as at fair value through profit or loss
in accordance with IFRS 9 paragraph 6.7.1
d. Any of the above.

30. Held for trading is a financial liability that:


a. in incurred principally for the purpose repurchasing it in the near term.
b. on initial recognition is part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of short-term profit-taking.
c. Is a derivative, except for a derivative that is a financial guarantee contract or a designated and
effective hedging instrument.
d. Any of the above.

31. At what amount is financial liability measured on initial recognition?


a. The consideration received for the financial liability,
b. Acquisition cost. Acquisition cost is the consideration received plus any directly attributable costs
to the issuance of the financial liability.
c. Fair value. For items that are not measured through profit or loss, transaction costs are also
included in the initial measurement.
d. Zero

32. What is the relationship between present value and the concept of liability?
a. Present values are not used to measure liabilities.
b. Present values are used to measure all liabilities.
c. Present values are only used to measure non-current liabilities,
d. Present values are used to measure certain liabilities.

33. The most conceptually appropriate method of valuing a liability under the historical cost is to
a. Discount the amount of expected cash outflows that are necessary to liquidate the liability using the
market rate of interest at the date the liability was initially incurred.
b. Discount the amount of expected cash outflows that are necessary to liquidate the liability using the
market rate of interest at the date financial statements are prepared subsequent to issuance.
c. Record as a liability the amount of cash or cash equivalent value that the company would be
required to pay to eliminate the liability in the ordinary course of business on the date of the
financial statements.
d. Record as a liability the amount of cash or cash equivalent proceeds actually received when a
liability was incurred.

34. Current liabilities are normally recorded at the amount that the entity expects to pay rather than at
their present value. This practice can be supported to the concept of:
a. matching c. materiality
b. consistency d. conservatism.

35. When a note payable is issued for property, goods, or services, the present value of the note is measured by
a. The fair value of the property, goods, or services
b. The fair value of the note
c. Using an imputed interest rate to discount all future payments on the note
d. Any of these

36. When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed
to be fair unless
a. No interest rate is stated
b. The stated interest rate is unreasonable
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c. The stated face amount of the note is materially different from the current cash sales price for
similar items or from current fair value of the note
d. Any of these

37. Which of the following is not a relevant consideration when evaluating whether to derecognize a
financial liability?
a. Whether the obligation has been discharged
b. Whether the obligation has been cancelled
c. Whether the obligation has expired
d. Whether substantially all the risks and rewards of the obligation have been transferred

38. A debtor and creditor might renegotiate the terms of a financial liability with the result that the
debtor extinguishes the liability fully or partially by issuing equity instruments to the creditor. This
transaction is sometimes referred to as
a. Troubled debt restructuring c. Debt for equity swap
b. Shared-based payment d. Swaptions

39. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments does not apply to transactions
in situation where
a. The creditor is also a direct and indirect shareholder and is acting in its capacity as a direct and
indirect existing shareholder
b. The creditor and entity are controlled by the same party or parties before and after the
transaction and the substance of the transaction includes an equity distribution by, or contribution
to, the entity
c. Extinguishing the financial liability by issuing equity shares is in accordance with the original
terms of financial liability
d. All of the above

40. Which statement is incorrect regarding IFRIC 19 Extinguishing Financial Liabilities with Equity
Instruments?
a. The issue of an entity’s equity instruments to a creditor to extinguish all or part of a financial
liability is consideration paid in accordance with PFRS 9
b. When equity instruments issued to a creditor to extinguish all or part of a financial liability are
recognized initially, an entity shall measure them at the fair value of the equity instruments issued,
unless that fair value cannot be reliably measured
c. Even if the fair value of the equity instruments issued can be reliably measure, the equity
instruments shall be measured to reflect the fair value of the financial liability extinguished
d. If only part of the financial liability is extinguished, the entity shall assess whether some of the
consideration paid relates to a modification of the terms of the liability that remains outstanding

41. The difference between the carrying amount of the financial liability extinguished, and the
consideration paid, shall be recognized in
a. Profit or loss c. Equity
b. Other comprehensive income d. Either a and b

42. An entity shall disclose a gain or loss recognized in debt for equity swaps as a separate line item in
a. Profit or loss c. Other comprehensive income
b. The notes to financial statements d. Either a and b

43. In a debt extinguishment in which the debt is settled by a transfer of assets with a fair value less
than the carrying amount of the debt, the debtor would recognize
a. No gain or loss on the settlement c. A loss on the settlement
b. A gain on the settlement d. None of these

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44. In a debt settlement in which the debt is continued with modified terms, a gain should be recognized
at the date of settlement whenever the
a. Carrying amount of the debt is less than the total future cash flows
b. Carrying amount of the debt is greater than the present value of the future cash flows
c. Present value of the debt is less than the present value of the future cash flows
d. Present value of the debt is greater than the present value of the future cash flows

45. An extinguishment of bonds payable, which were originally issued at a premium, is made by
purchase of the bonds between interest dates. At the time of reacquisition,
a. Any costs of issuing the bonds must be amortized up to the purchase date
b. The premium must be amortized up to the purchase date
c. Interest must be accrued from the last interest date of the purchase date
d. All of these

46. The covenants and other terms of the agreement between the issuer of bonds and the lender are
set forth in the
a. Bond indenture c. Registered bond
b. Bond debenture d. Bond coupon

47. The interest rate written in the terms of the bond indenture is known as the
a. Coupon rate c. Stated rate
b. Nominal rate d. Coupon rate, nominal rate, or stated rate

48. The printing costs and legal fees associated with the issuance of bonds should
a. Be expensed when incurred
b. Be reported as a deduction from the face amount of bonds payable
c. Be recorded as a reduction of the bond issue amount and then amortized over the life of the bonds
d. Not be reported as an expense until the period the bonds mature or are retired

49. If bonds are issued between interest dates, the entry on the books of the issuing corporation could
include a
a. Debit to Interest Payable c. Credit to Interest Expense
b. Credit to Interest Receivable d. Credit to Unearned Interest

50. In theory (disregarding any other market place variables), the proceeds from the sale of a bond will
be equal to the
a. Face amount of the bond
b. Present value of the bond maturity value plus the present value of the interest payments to be
made during the life of the bond
c. Face amount of the bond plus the present value of the interest payments made during the life of
the bond
d. Sum of the face amount of the bond and the periodic interest payments

51. The issuance price of a bond does not depend on the


a. At face value c. Below face value
b. Above face value d. At maturity value

52. The effective interest rate on bonds is higher than the stated rate when bonds sell
a. at face value c. below face value
b. above face value d. at maturity value.

53. Bonds usually sell at a discount when


a. Investors are willing to invest in the bonds at the stated interest rate
b. Investors are willing to invest in the bonds at rates that are lower than the stated interest rate
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c. Investors are willing to invest in the bonds at rates that are higher than the stated interest
rate
d. A capital gain is expected

54. Which statement is correct regarding bonds payable?


a. Periodic interest expense is stated interest rate times the amount of debt outstanding during the
period
b. Bonds will sell for a premium when the market rate of interest exceeds their stated rate
c. The initial selling price of bonds represents the sum of all the future cash outflows required by
the obligation
d. The carrying value of zero-coupon bonds increases by the periodic amount of interest recognized

55. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument
b. The interest rate currently charged by the entity or by others for similar debt instruments (i.e.,
similar remaining maturity, cash flow pattern, currency, credit risks, collateral, and interest basis)
c. The basic, risk-free interest rate that is derived from observable government bond prices
d. The interest rate that exactly discounts estimated future cash payments or receipts through the
expected life of the debt instrument or, when appropriate, a shorter period to the net carrying
amount of the instrument

56. When the effective-interest method is used to amortize bond premium or discount, the periodic
amortization will
a. Increase if the bonds were issued at a discount
b. Decrease if the bonds were issued at a premium
c. Increase if the bonds were issued at a premium
d. Increase if the bonds were issued at either a discount or a premium

57. Which one of the following is true when the effective-interest method of amortizing bond discount
is used?
a. Interest expense as a percentage of the bonds’ book value varies from period to period
b. Interest expense remains constant for each period
c. Interest expense increases each period
d. The interest rate decreases each period

58. When interest expense is calculated using the effective-interest amortization method, interest
expense (assuming that interest is paid annually) always equals the
a. Actual amount of interest paid
b. Book value of the bonds multiplied by the stated interest rate
c. Book value of the bonds multiplied by the effective interest rate
d. Maturity value of the bonds multiplied by the effective interest rate

59. Straight-line amortization of bond discount or premium:


a. Can be used for amortization of discount or premium in all cases and circumstances
b. Provides the same amount of interest expense each period as does the effective interest method
c. Is appropriate for deep discount bonds
d. Provides the total amount of interest expense over the life of the bond issue as does the effective
interest method

60. The net amount of a bond liability that appears on the balance sheet is the
a. Call price of the bond plus blond discount or minus bond premium
b. Face value of the bond plus related premium or minus related discount
c. Face value of the bond plus related discount or minus related premium
d. Maturity value of the bond plus related discount or minus related premium
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61. What is the principle of accounting for a compound financial instrument? (e.g. an issued convertible
debt instrument?
a. The issuer shall classify a compound instrument as either a liability or equity based on an evaluation
of the predominant characteristics of the contractual arrangement.
b. The issuer shall classify the liability and equity components of a compound financial instrument
separately as financial liabilities, financial assets, or equity instruments
c. The issuer shall classify a compound instrument as a liability in its entirety, until converted into
equity, unless the equity component is detachable and separately transferable, in which case the
liability and equity component shall be presented separately.
d. The issuer shall classify a compound instrument as a liability in its entirety, until converted into
equity.

62. How are the proceeds from issuing a compound financial instrument allocated between the liability and
equity components?
a. 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 value of both equity and liability component are estimated. Then the proceeds are
allocated based on the relation between the estimated fair values.
d. The equity component is at its intrinsic value. The liability component is measured at the par
amount less the intrinsic value of the equity component.

DO IT YOURSELF (DIY) DRILL

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 of another entity
d. A financial asset of one entity and a financial liability or equity instrument of another entity

2. A financial asset is any of the following, except


a. Cash
b. An equity instrument of another entity
c. Contractual right to receive cash or another financial asset from another entity
d. Contractual right to exchange financial assets or financial liabilities with another entity under
conditions that are potentially unfavourable to the entity

3. Financial assets include all of the following, except


a. Cash in bank
b. Trade accounts and notes receivable
c. Loans receivable
d. Inventories, property, plant and equipment, intangible assets and prepaid expenses

4. 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 assets or financial liabilities 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

5. Financial liabilities include all of the following, except


a. Trade accounts and notes payable c. Loans payable
b. Bonds payable d. Income taxes payable and deferred revenue

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6. How should preference shares that are redeemable mandatorily be presented in the statement of
financial position?
a. Noncurrent financial liability
b. Current financial liability
c. Equity
d. Either current or noncurrent financial liability depending on redemption date

7. IFRS requires entities to measure financial assets based on all of the following, except
a. The entity’s business model for managing financial assets
b. Whether the financial asset is a debt or equity investment
c. The contractual cash flow characteristics of the financial asset
d. All of the choices are PFRS requirements

8. A financial asset is classified as held for trading if


a. It is acquired principally for the purpose of selling or repurchasing it in the near term
b. On initial recognition, it is part of a portfolio of identified financial assets that are managed
together and for which there is evidence of a recent actual pattern of short-term profit taking
c. It is a derivative except for a derivative that is a financial guarantee or a designated and an
effective hedging instrument
d. All of these are classified as held for trading

9. Transaction costs include


a. Fees and commission paid to agent, levies by regulatory authorities and transfer taxes
b. Debt premium or discount
c. Financing costs
d. Internal administrative costs

10. Which of the following is correct in regard to trading investments?


a. Trading investments are held with the intention of selling them in a short period of time
b. Unrealized holding gains and losses are reported as part of net income
c. Any discount or premium is not amortized
d. All of these are correct

11. An entity may make an irrevocable election to present in other comprehensive income changes in
fair value of
a. An investment in equity instrument that is held for trading
b. An investment in equity instrument that is not held for trading
c. A financial asset measured at amortized cost
d. A financial asset measured at fair value through profit or loss

12. A debt investment asset shall be measured subsequently at amortized cost


a. By irrevocable designation
b. When the debt investment is managed and evaluated on a document risk-management strategy
c. When the debt investment is held for trading
d. When the business model is to collect contractual cash flows that are solely payments of principal
and interest

13. A debt investment asset shall be measured at fair value through other comprehensive income
a. When the debt investment is held for trading
b. When the debt investment is not held for trading
c. By irrevocable designation
d. When the business model is to collect contractual cash flows that are solely payments of principal
and interest and also to sell the financial asset

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14. Amortized cost is the initial recognition amount of the investment minus
a. Repayments and net of any reduction for uncollectibility
b. Cumulative amortization and net of any reduction for uncollectibility
c. Repayments plus or minus cumulative amortization and net of any reduction for uncollectibility
d. Repayments plus or minus cumulative amortization

15. Which statement is correct about the effective interest method of amortization?
a. The effective-interest method applied to debt investments is different from that applied to bonds
payable
b. Amortization of discount decreases from period to period
c. Amortization of premium decreases from period to period
d. The effective interest method applies the effective interest rate to the beginning carrying amount
for each interest period

16. Under the fair value option, an entity may


a. Irrevocably designate a financial asset as measured at fair value through profit or loss even if the
amortized cost measurement is satisfied
b. Irrevocably designate a financial asset as measured at fair value through other comprehensive
income
c. Revocably designate a financial asset as measured at fair value through profit or loss even if the
amortized cost measurement is satisfied
d. Designate all instruments as measured at fair value through profit or loss

17. The fair value option allows an entity to


a. Record income when the fair value of investments increases
b. Measure debt investments at fair value in some years but not other years
c. Report most financial instruments at fair value by recording gains and losses as a component of
other comprehensive income
d. All of these are true regarding the fair value option

18. Equity investments acquired by an entity which are accounted for by recognizing unrealized
holding gains or losses as component of other comprehensive income are
a. Nontrading where an entity has holdings of less than 20%
b. Trading investments where an entity has holdings of less than 20%
c. Investments where an entity has holdings of between 20% and 50%
d. Investments where an entity has holdings of more than 50%

19. Entities account for transfers of investments between categories


a. Prospectively, at the end of the period after the change in the business model
b. Prospectively, at the beginning of the period after the change in the business model
c. Retroactively, at the end of the period after the change in the business model
d. Retroactively, at the beginning of the period after the change in the business model

20. Transfers between categories


a. Result in entities omitting recognition of fair value in the year of the transfer
b. Are accounted for at fair value for all transfers
c. Are considered unrecognized if transferred out of held for collection into fair value
d. Always result in an impact on net income

21. The characteristics of a derivative include all of the following, except


a. The value changes in response to the change in a specified underlying
b. It requires a large investment at the inception of the contract
c. It is settled at a future date
d. All of these are characteristics
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22. An option is
a. A contract giving the owner the right but not the obligation to buy or sell an asset at a specified
price anytime during a specified period in the future
b. A contract traded in an exchange that allows an entity to buy an asset at specified price on a
specified future date
c. A contract between two parties to exchange a specified commodity at a specified price on a
specified future date
d. All of these define an option

23. If the price of the underlying is greater than the strike or exercise price, the call option is
a. At the money
b. In the money
c. On the money
d. Out of the money

24. Which of the following terms best describes a component of a hybrid instrument?
a. Financial asset at fair value through other comprehensive income
b. An embedded derivative
c. A held for collection investment
d. A financial asset held for trading

25. An embedded derivative shall be “bifurcated” from the host contract when all of the following
conditions are satisfied, except
a. The economic characteristics and risks of the host contract and the embedded derivative are not
closely related
b. A separate instrument with the same terms as the embedded feature would meet the definition
of a derivative
c. The host contract is measured at fair value through other comprehensive income
d. The host contract is measured at fair value through profit or loss

26. All of the following statements regarding derivatives are correct, except
a. The derivatives should be recognized as assets and liabilities
b. The derivatives should be reported at fair value
c. Gains and losses resulting from speculation should be deferred
d. Gains and losses resulting from fair value hedge are reported immediately

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