An entity issued a noninterest bearing note payable due in 1 year in exchange for land. The fair value of the land is not reliably determinable. Which of the following statements is true concerning the accounting for the transaction?
Answer(s): D
When a financial liability is initially recognized, the entity should measure it at its cost a is the fair value of the consideration received. The fair value ordinarily is determined by reference to the transaction price or other market prices. If these prices are not reliably determinable, the fair value is estimated by discounting the future cash payments at an imputed rate equal to the prevailing market rate for a similar instrumente.g., similar as to currency. term, and type of rate) of an issuer with a similar credit rating.
Futures and option contracts are examples of what type of financial instruments?
Answer(s): C
A derivative is a financial instrument whose value changes with the change in the underlying. It requires little or no investment and is settled in the future. Examples are futures. forward, swap, or option contracts. The underlying is a specified interest rate, security price. foreign currency exchange rate. price index, commodity price, etc.
Nonderivative financial instruments that have1) fixed or determinable payments, 2) a fixed maturity, and3) are held by the investing entity with a positive intent and ability to hold until maturity are what category of financial instruments?
Answer(s): A
Financial instruments are classified in three categories. Held-to-maturity investments are nonderivatives that have fixed or determinable payments and a fixed maturity. The entity must have a positive intent and ability to hold such investments to maturity. The other categories are financial assets or liabilities held for trading and available-for-sale financial assets.
Which of the following is not a criterion for hedge accounting?
Answer(s): B
An entity can mitigate a possible loss by using hedges to offset risk. Thus, an entity is said to hedge its financial positions. One of the criteria for hedge accounting is that the hedge be continually assessed and determined to have been effective. Thus. it is not assessed only at its inception.
To mitigate a possible loss and offset risk, an entity can use derivatives or other hedging instruments. Which of the following?
A fair value hedge is a hedge of the exposure to changes in fair value of a recognized asset or liability or unrecognized firm commitment The exposure must be due to a given risk and be, able to affect profit or loss. A cash flow hedge is a hedge of the exposure to variability in cash flows that1) is due to a given risk associated with a recognized asset or liability or a highly probable forecast transaction and2) could affect profit or loss.
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