Problem 7-1 Multiple Choice (PAS 32)

1. It is any contract that gives rise to both a financial asset of one entity and a
financial liability or equity instrument of another entity.

a. Financial instrument
b. Equity instrument
c. Debt instrument
d. Derivative instrument

2. A financial liability is a contractual obligation

I. To deliver cash or other financial asset to another entity

II. To exchange financial instruments with another entity under conditions that are
potentially unfavorable.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

3. It is any contract that evidences residual interest in the assets of an entity after
deducting all of its liabilities.

a. Equity instrument
b. Debt instrument
c. Loan receivable
d. Financial asset with indeterminable fair value.

4. Financial liabilities include all of the following, except

a. Trade accounts payable

b. Notes payable
c. Bonds payable
d. Income taxes payable

5. Equity instruments include all of the following, except

a. Ordinary shares
b. Preference shares
c. Warrants or options that allow the holder to purchase a fixed number of
ordinary shares of the issuing entity in exchange for a fixed amount of cash.
d. Corporate bonds and other debt instruments issued by the entity.
6. Which of the following is not classified as a financial instrument?

a. Convertible bond
b. Foreign currency contract
c. Warranty provision
d. Loan receivable

7. A bond or similar instrument convertible by the holder into a fixed number of

ordinary shares of the entity is

a. A compound financial instrument

b. A primary financial instrument
c. A derivative financial instrument
d. An equity instrument

8. Which of the following should be considered a financial liability?

a. Deferred revenue
b. A warranty obligation
c. A constructive obligation
d. Redeemable preference share

9. What is the principal accounting for a compound financial instrument?

a. The issuer shall classify a compound instrument as either 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 financial liability or equity instrument
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 components shall
be presented separately.
d. The issuer shall classify a compound instrument as a liability in its entirety,
until converted into equity.

10. 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 conponent
 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.

ANSWERS:
1. A 6. D
2. C 7. A
3. A 8. D
4. D 9. B
5. D 10. A