Short Questions: Accounting Theory

ch.14 see readings tab on L@G: Financial instruments

***You may not need to write 100 words for all of these questions to answer them comprehensively**

QUESTION 1: Categorize each of the following financial instruments as financial assets, financial liabilities, or equity instruments: (a) Loan receivable (b) Loan payable (c) Ordinary shares (d) Investment in the ordinary shares in part (c); (e) Cumulative, redeemable preference shares in the books of the issuer. Shares are redeemable at the option of the holder. (f) The holder’s investment in the preference shares in part (e)

QUESTION 2: What factors influence the value of a derivative financial instrument, and how are changes in the value of derivatives treated from an accounting perspective?

QUESTION 3: Is there a consequence for reported profit or loss of the issuer if a preference share classifies the instrument as debt rather than equity? Explain the consequence.

QUESTION 4: What is the definition of Fair Value in ASSB 13? And what is the meaning of ‘orderly’ transaction’?

QUESTION 5: Explain what is a right of set-off, and when does a right of set off exist?

QUESTION 6: Arthur Ltd has the following statement of financial position before any right of set-off is considered:

Loans Payable 1,000, 000 Loans receivable 1,200,000 Shareholder’s equity 1,000, 000 Non-current assets 800,000 2,000,000 2,000,000

Assume Arthur Ltd has a loan owing to Blayney Ltd of $300,000 and a loan receivable from Blayney Ltd of $400,000. Assuming a right of set-off exists, why would Arthur want to perform a set-off? Hint: calculate the debt to assets ratio before and after netting.

 

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