Complete Test Bank Ch17 Accounting for financial instruments

Chapter 17 Testbank

1. If share appreciation rights vest immediately, the entity shall presume that the services rendered by the employees in exchange for the share appreciation rights have been received.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Equity-settled share-based payment transactions
Topic: Equity-settled share-based payment transactions

2. In share-based payment transactions with cash alternatives, the entity shall measure the equity component of the compound financial instrument as the difference between the fair value of the goods or services received and the fair value of the debt component, measured at vesting date.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-05 Understand how to account for a share-based payment transaction with cash alternatives.
Section: Share-based payment transactions with cash alternatives
Topic: Share-based payment transactions with cash alternatives

3. In a cash-settled share-based payment transaction, the entity shall remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognised in profit or loss for the period.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Cash-settled share-based payment transactions
Topic: Cash-settled share-based payment transactions

4. Issue of shares in exchange for shares of another entity in a purchase transaction of the net assets of an entity in a business combination is within the scope of AASB 2 Share-based Payment.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-02 Know which share-based payments are covered by AASB 2 Share-based Payment.
Section: Introduction to accounting for share-based payments
Topic: Introduction to accounting for share-based payments

5. Equity instruments granted to employees of the acquiree, in their capacity as employees in a business combination, is within the scope of AASB 2.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-02 Know which share-based payments are covered by AASB 2 Share-based Payment.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

6. AASB 2 requires all share-based payment transactions to be expensed on grant date and the credit is equity.

7. When a good or service is acquired in a share-based payment transaction and it does qualify as an asset, the transaction must be expensed.

8. AASB 2 requires all equity-settled share-based payment transactions be measured at fair value of goods and services received.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

9. AASB 2 does not require expensing of cash-settled share-based payment transactions until settlement date.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Cash-settled share-based payment transactions
Topic: Cash-settled share-based payment transactions

10. If the fair value of the equity instruments granted in a share-based payment transaction cannot be estimated, the entity shall measure the fair value of the goods received.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Equity-settled share-based payment transactions
Topic: Equity-settled share-based payment transactions

11. AASB 2 requires all share-based payment transactions to be measured at grant date.

12. If a grant of equity instruments is conditional upon satisfying specified vesting conditions, the vesting conditions shall be taken into account in estimating the fair value of the instruments at measurement date.

13. AASB 2 requires that goods and services received in an equity-settled share-based transaction be measured in reference to fair value of equity instruments granted.

14. AASB 2 requires the remeasurement of equity-settled transactions at fair value at reporting date.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Cash-settled share-based payment transactions
Topic: Cash-settled share-based payment transactions

15. AASB 2 requires the remeasurement of cash-settled transactions at fair value at reporting date.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Cash-settled share-based payment transactions
Topic: Cash-settled share-based payment transactions

16. A share-based payment is a transaction that entitles another party to receive a cash payment with the amount paid dependent on the price of the entity's shares or other equity instruments.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-01 Understand what a share-based payment represents.
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Equity-settled share-based payment transactions
Topic: Equity-settled share-based payment transactions

17. AASB 2 requires some share-based payments to be recognised in an entity's financial statements.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-09 Describe the disclosure requirements of AASB 2.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

18. AASB 2 also applies to transactions where an entity issues equity instruments to purchase the net assets of another entity in a business combination.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-02 Know which share-based payments are covered by AASB 2 Share-based Payment.
Section: Introduction to accounting for share-based payments
Topic: Introduction to accounting for share-based payments

19. Where equity instruments are issued with a vesting period, the transactions must be recognised over the vesting period.

20. If an entity alters the conditions of the options after issue, AASB 2 requires the effects of such modifications to be recognised.

21. To assist users of financial statements an entity must provide the effect of expenses arising from share-based transactions on the entity's profit or loss for the period.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-09 Describe the disclosure requirements of AASB 2.
Section: Disclosure requirements
Topic: Disclosure requirements

22. AASB 2 has reduced the discretion that reporting entities have when accounting for options and other share-based payments.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-09 Describe the disclosure requirements of AASB 2.
Section: Background to the release of AASB 2
Topic: Background to the release of AASB 2

23. There was a great deal of criticism expressed in submissions made to the AASB about the requirements of AASB 2 in the lead-up to its implementation in 2005.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-08 Explain some of the possible economic implications of AASB 2.
Section: Possible economic implications of AASB 2
Topic: Possible economic implications of AASB 2

24. In the lead-up to the implementation of AASB 2, there were suggestions that businesses may offer larger salaries in lieu of options.

25. One of the criticisms of the Black–Scholes and Binomial methods is that they were not intended to be applied to the valuation of options where the underlying securities are not traded on the open market.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-08 Explain some of the possible economic implications of AASB 2.
Section: Possible economic implications of AASB 2
Topic: Possible economic implications of AASB 2

26. It was argued that the expensing of options was effectively preventing which type of companies offering competitive remuneration to executives?

A. Start-up companies.
B. Established companies.
C. Declining companies.
D. Liquidating companies.

27. Which of the following is about the Black–Scholes (or Binomial) models?

A. It was suggested the models were not intended for use where the underlying securities are not traded on the open market.
B. They must be applied only to securities options that are highly liquid.
C. They must be used only by entities with a market capitalisation greater than $4 million.
D. They must be used for all employee share option valuations but not for any other form of employee equity.

28. Which of the following items are considered share-based payment transactions within the scope of AASB 2?

A. Share dividends to employees who are shareholders of the entity.
B. Goods acquired from a supplier on credit to be settled in cash.
C. Services provided by an employee to be settled in equity instruments.
D. Purchase of non-current assets on credit to be settled in cash.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-02 Know which share-based payments are covered by AASB 2 Share-based Payment.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

29. Which of the following items are considered cash-settled share-based payment transactions within the scope of AASB 2?

A. An entity grants 200 share options to all employees.
B. An entity grants 200 share options to all employees but requires employees to work at least 3 years.
C. An entity acquires a piece of equipment from another entity in exchange for shares of the entity.
D. An entity issues share appreciation rights to its employees.

AACSB: Reflective thinking
Difficulty: Easy
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

30. Which of the following share-based payment transactions are considered equity-settled transactions within the scope of AASB 2?

A. Company A grants 5000 options each to its directors in return for services to be received over two years.
B. Company B purchases machinery in exchange for shares.
C. Company C incurs a liability based on the price of the entity's share options to pay for the services of its sales executives.
D. Company A grants 5000 options each to its directors in return for services to be received over two years; Company B purchases machinery in exchange for shares.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

31. Which of the following share-based payment transactions are considered cash-settled transactions within the scope of AASB 2?

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

32. Which of the following items are not considered share-based payment transactions within the scope of AASB 2?

A. Options issued to employees in exchange for services rendered.
B. Shares issued to employees for services rendered.
C. Shares issued to consultants for services rendered.
D. Bonus shares issued to employees as a shareholder of the entity.

33. AASB 2 requires all share-based payment transactions to be recognised at:

A. grant date.
B. balance date.
C. exercise date.
D. settlement date.

34. In a share-based payment transaction like an option, vesting date is:

A. grant date.
B. expiry date of option.
C. date when all vesting conditions are satisfied.
D. balance date.

35. In a share-based payment transaction like an option, which of the following accounting treatments is incorrect?

A. An entity shall recognise the goods or services received or acquired in a share-based payment transaction when it obtains the goods or as the services are received.
B. The entity shall recognise a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction.
C. The entity shall recognise a corresponding increase in liability if the goods or services were acquired in a cash-settled share-based payment transaction.
D. Goods or services received or acquired in a share-based payment transaction shall be recognised as expenses.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

36. Which of the following statements is incorrect of equity-settled share-based payment transactions?

A. These are transactions in which the entity receives goods and services as consideration for shares or share options issued by the entity.
B. There is a presumption that the fair value of the transactions with other parties (other than employees) can be measured reliably.
C. The fair value of equity-settled instruments is required to be re-estimated at balance date.
D. The entity shall recognise a corresponding increase in equity if the goods or services were received in an equity-settled share-based payment transaction.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Overview of the requirements of AASB 2
Topic: Overview of the requirements of AASB 2

37. Which of the following statements is incorrect of cash-settled share-based payment transactions?

A. The entity acquires goods and services by incurring a liability to transfer cash or other assets that are based on the price or value of the entity's shares or other equity instruments of the entity.
B. Share appreciation rights (SARs) is one example of a cash-settled share-based payment transaction.
C. Cash-settled share-based payment transactions are required to be re-measured at fair value at each reporting date until settlement date.
D. The equity shall be measured, initially and at each reporting date until settled, at the fair value of the share appreciation rights, by applying an option pricing model, taking into account the terms and conditions on which the share appreciation rights were granted, and the extent to which the employees have rendered service to date.

AACSB: Reflective thinking
Difficulty: Medium
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Cash-settled share-based payment transactions
Topic: Cash-settled share-based payment transactions

38. Market prices for share options granted to employees are typically not available because:

A. options granted to employees are subject to terms and conditions that do not apply to traded options.
B. it is difficult to obtain the fair value of these options using option pricing models.
C. employee options have long lives and are usually exercised early.
D. options granted to employees are subject to terms and conditions that do not apply to traded options and it is difficult to obtain the fair value of these options using option pricing models.

39. On 1 July 2012 Lancaster Ltd grants 100 share options to each of its 50 employees conditional upon the employee working for the entity for the next 3 years. The entity estimates the fair value of each share option at $13. Based on probability estimates, 25 employees are expected to leave the entity before the options vest. In accordance with AASB 2, how much remuneration expense related to the share option issue should Lancaster Ltd recognise for the year ended 30 June 2013?

A. zero
B. $10 833
C. $32 500
D. $65 000

40. On 1 July 2012 Lancashire Ltd grants 100 share options to each of its 50 employees conditional upon the employee working for the entity for the next 3 years. On the same date, the entity estimates the fair value of each share option at $15. Based on probability estimates, 15 employees are expected to leave the entity in one year and another 5 employees in two years. Actual resignation for the year ending 2013 was 12 employees and the fair value of the option is $12 on 30 June 2014. In accordance with AASB 2, what is the cumulative remuneration expense (related to the share option issue) as at 30 June 2011?

A. $24 000
B. $26 400
C. $33 000
D. $45 000

41. Blackburn Ltd grants 50 share options to each of its 150 employees on 1 July 2009. Each grant is conditional upon the employee working for the company for 3 years following the grant date. On grant date, the fair value of each option is estimated to be $12.

Estimated value of the option for the year ending 2010, 2011 and 2012 is $10, $13, $14 respectively. Information on employee departures at the end of each year follows:

In accordance with AASB 2, how much remuneration expense related to the share option issue should Blackburn Ltd recognise for the year ended 30 June 2010, 30 June 2011 and 30 June 2012 respectively?

A. $19 500; $33 800; $39 800
B. $23 400; $25 800; $30 600
C. $23 400; $29 900; $39 800
D. $23 833; $35 534; $33 733

AACSB: Reflective thinking
Difficulty: Hard
Learning Objective: 17-04 Understand what is meant by 'equity-settled share-based payments' and 'cash-settled share-based payments' and be able to provide the necessary accounting entries for such transactions.
Section: Equity-settled share-based payment transactions
Topic: Equity-settled share-based payment transactions

42. Blackburn Ltd grants 50 share options to each of its 150 employees on 1 July 2009. Each grant is conditional upon the employee working for the company for 3 years following the grant date. On grant date, the fair value of each option is estimated to be $12.

Estimated value of the option for the year ending 2010, 2011 and 2012 is $10, $13, $14 respectively. Information on employee departures at the end of each year follows:

What would be the appropriate journal entry to account for the share-based payment transaction for the year ending 30 June 2010?

43. Blackburn Ltd grants 50 share options to each of its 150 employees on 1 July 2009. Each grant is conditional upon the employee working for the company for 3 years following the grant date. On grant date, the fair value of each option is estimated to be $12.

Estimated value of the option for the year ending 2010, 2011 and 2012 is $10, $13, $14 respectively. Information on employee departures at the end of each year follows:

What would be the appropriate journal entry to account for the share-based payment transaction for the year ending 30 June 2011?

44. Blackburn Ltd grants 50 share options to each of its 150 employees on 1 July 2009. Each grant is conditional upon the employee working for the company for 3 years following the grant date. On grant date, the fair value of each option is estimated to be $12.

Estimated value of the option for the year ending 2010, 2011 and 2012 is $10, $13, $14 respectively. Information on employee departures at the end of each year follows:

What would be the appropriate journal entry to account for the share-based payment transaction for the year ending 30 June 2012?

45. On 1 July 2012, Manchester Ltd granted 50 000 share options to its Chief Executive Officer with an exercise price of $40 per share, conditional upon the entity achieving the following non-market vesting conditions:

Earnings information available follows:

In accordance with AASB 2, when will this share option vest?

A. 1 July 2012
B. 30 June 2013
C. 30 June 2014
D. 30 June 2015

46. On 1 July 2009, Windermere Ltd grants 200 share options to each of its 100 employees. The share option is conditional upon the employee working for the entity when the share option vests and the entity achieving the following non-market vesting conditions:

If the employee resigns before the share option vests, the share option is forfeited.

On 30 June 2010, based on probability estimates how many employees are expected to be employed by Windermere Ltd when the share option vests?

A. 75
B. 78
C. 85
D. 88

47. On 1 July 2009, Windermere Ltd grants 200 share options to each of its 100 employees. The share option is conditional upon the employee working for the entity when the share option vests and the entity achieving the following non-market vesting conditions:

If the employee resigns before the share option vests, the share option is forfeited.

On 30 June 2011, based on probability estimates how many employees are expected to be employed by Windermere Ltd when the share option vests?

A. 72
B. 75
C. 78
D. 82

48. On 1 July 2009, Windermere Ltd grants 200 share options to each of its 100 employees. The share option is conditional upon the employee working for the entity when the share option vests and the entity achieving the following non-market vesting conditions:

If the employee resigns before the share option vests, the share option is forfeited.

On 30 June 2012, based on probability estimates how many employees are expected to be employed by Windermere Ltd when the share vests?

A. 78
B. 82
C. 88
D. 90

49. Wigan Ltd grants 100 options to each of its 80 employees on 1 July 2009. The fair value of each option at grant date is $20. The vesting conditions allow shares to vest if the following performance targets are achieved:

The following information is available:

In accordance with AASB 2, how much employee benefits expense related to the share option issue should Wigan Ltd recognise for the year ended 30 June 2010?

A. $48 000
B. $49 333
C. $72 000
D. $74 000

50. Wigan Ltd grants 100 options to each of its 80 employees on 1 July 2009. The fair value of each option at grant date is $20. The vesting conditions allow shares to vest if the following performance targets are achieved:

The following information is available:

In accordance with AASB 2, how much employee benefits expense related to the share option issue should Wigan Ltd recognise for the year ended 30 June 2011?

A. $22 000
B. $23 333
C. $76 000
D. $97 333

51. Wigan Ltd grants 100 options to each of its 80 employees on 1 July 2009. The fair value of each option at grant date is $20. The vesting conditions allow shares to vest if the following performance targets are achieved:

The following information is available:

In accordance with AASB 2, how much employee benefits expense related to the share option issue should Wigan Ltd recognise for the year ended 30 June 2012?

A. $36 667
B. $44 667
C. $46 667
D. $48 000

52. Wigan Ltd grants 100 options to each of its 80 employees on 1 July 2009. The fair value of each option at grant date is $20. The vesting conditions allow shares to vest if the following performance targets are achieved:

The following information is available:

What action must Wigan Ltd take that is in compliance with AASB 2, if the option does not vest on 30 June 2012?

A. No action is necessary.
B. It must modify the terms and conditions of the option to allow the employees to benefit from the share-based payment transaction in future.
C. The equity account arising from the share-based payment transaction shall be reversed and credited to revenue.
D. The equity account arising from the share-based payment transaction shall be reversed and credited to liability.

53. Liverpool Ltd grants 100 options to each of its 50 employees on 1 July 2009. Each grant is conditional on the employee working for the company for the next 3 years. The fair value of each option at grant date is $15. Liverpool Ltd estimates that 15% of its employees will leave during the vesting period. The following table summarises the actual employee departures and revised estimates of employee departures across the vesting period.

By the end of year 2011 the company's share price had fallen and it decides to re-price the options. At this time the fair value of the original options is estimated to be $5 and the fair value of the re-priced options is estimated to be $8.

What is the employee benefits expense of Liverpool Ltd related to this share option for the year ended 30 June 2010?

A. $19 500
B. $25 000
C. $58 500
D. $75 000

54. Liverpool Ltd grants 100 options to each of its 50 employees on 1 July 2009. Each grant is conditional on the employee working for the company for the next 3 years. The fair value of each option at grant date is $15. Liverpool Ltd estimates that 15% of its employees will leave during the vesting period. The following table summarises the actual employee departures and revised estimates of employee departures across the vesting period.

What is the employee benefits expense of Liverpool Ltd related to this share option for the year ended 30 June 2011?

A. $19 500
B. $24 200
C. $43 700
D. $57 000

55. Liverpool limited grants 100 options to each of its 50 employees on 1 July 2009. Each grant is conditional on the employee working for the company for the next 3 years. The fair value of each option at grant date is $15. Liverpool Ltd estimates that 15% of its employees will leave during the vesting period. The following table summarises the actual employee departures and revised estimates of employee departures across the vesting period.

What is the employee benefits expense of Liverpool Ltd related to this share option for the year ended 30 June 2012?

A. $19 500
B. $22 750
C. $26 500
D. $70 200

56. Southport Ltd grants 100 share appreciation rights (SARs) to each of its 50 employees on 1 July 2009. Each grant is conditional on the employee working for the company for the next 3 years. All SARs held by employees will vest at the end of 3 years. The intrinsic value (equals cash actually paid out) and estimates of the fair value of the SARs at the end of each year are as follows: