Questions and Answers of Accounting For Investments

Enumerate the various events in the trade life cycle of an equity index futures trade and name the journal entries to be passed at each and every event.
The responsibility of ensuring the completeness of both legs of the futures contract vests witha. Buyer and sellerb. Brokerc. Stock exchanged. All of the above
Margin money adjustment calculation is based ona. Position opening valueb. Position closing valuec. Marked-to-market valuationd. None of the above
An entry for futures contract bought will be recorded and posteda. In the income statementb. On the balance sheetc. Off the balance sheetd. None of the above
Brokerage/commission paid to the broker for futures contract will be paid ona. Trade dateb. Settlement datec. T + 2d. None of the above
Portfolio valuation process meansa. Only ascertaining the fair value of the product dealt withb. Only marked-to-market processc. Both a and bd. None of the above
Margin call will be initiated by thea. Brokerb. Sellerc. Stock exchanged. None of the above
Entry for brokerage on sale of shares will be posteda. To the income statementb. To the profit and loss accountc. Off the balance sheetd. None of the above
Margin money will be reversed ona. Expiry dateb. Date of liquidationc. End of accounting periodd. None of the above
Physical delivery of underlying asset will not happen on the expiry date fora. Stock futuresb. Commodity futuresc. Index futuresd. All of the above
The futures contract will automatically expire ona. Settlement dateb. Expiry date of the contractc. End-of-day every day, facilitating the marked-to-market processd. None of the above
Gregory Williams buys 500 shares of futures contract of ACC for INR950 per share on November
Brokerage is 0.3 percent for purchase as well as sales. He then sells the shares on November 21 for INR975 per share. The brokerage settlement is T = 2; the margin requirement is 20 percent.
Assume the shares were not sold and physical settlement was effected on November 28, which is the expiry date. On the expiry the price is quoted at INR945 per share. Pass necessary journal entries
What if no physical settlement was effected on November 28? Also pass journal entries to that effect.
Prepare the Investments—ACC—Futures Account, treating the shares as physically settled.
When an investor buys stock futures, and if it results in physical settlement, thena. The investor has to pay the margin amount and take delivery of the stockb. The investor takes the delivery and
When the stock futures are sold and it results in physical settlement, then the physical shares should be delivered by the investor toa. The brokerb. The exchangec. The buyerd. The custodian of the
When the futures contract results in physical settlement, then the brokerage originally expenseda. Should be capitalized and taken to the concerned shares accountb. Should be discountedc. Should be
Which among the following is a correct accounting entry on payment of margin? a. Date 1-Jan-X1 Particulars Futures Margin Account To Bank Account (Being the margin amount on purchase of futures paid)
Assuming a sale of stock futures being liquidation of long stock futures, which among the following is true?a. Receivable from broker amount will be shown as investments on the asset side of balance
For the following scenario, prepare journal entries, general ledgers, trial balance, income statement, and balance sheet.XYZ Fund had the following trades in ABB in the futures market. The stock
For the following scenario, prepare journal entries, general ledgers, trial balance, income statement, and balance sheet.AA Fund had the following trades in ABC in the futures market. The stock
For the following scenario, prepare journal entries, general ledgers, trial balance, income statement, and balance sheet:AA Fund had the following trades in ABC in the futures market. The stock
For the following scenario, prepare journal entries, general ledgers, trial balance, income statement, and balance sheet:ABC Fund had the following trades in IBM in the futures market. The stock
Explain the trade life cycle for call options.
Is accounting for call options any different if the options were to be held as hedge and not as investment?
Premium paid towards purchase of call options purchased for speculative trade should be treated asa. Expenseb. Revenuec. Lossd. Gain
For an options contract, the commission/brokerage paid is treated as follows:a. Part of the cost of options contractb. Debited to commission/brokerage accountc. Adjusted later in the broker account
For ascertaining fair value at the end of the reporting period, the value of the entire position will be written back to thea. Profit and loss accountb. Expense accountc. Income accountd. None of the
Reversal of marked-to-market entry will happen ona. Next business dayb. Next valuation dayc. Same day itselfd. None of the above
For call options (bought), if the market value of the underlying asset is over the strike price of the contact, then the excess amount denotesa. Profitb. Lossc. Breakevend. None of the above
When the options contract is expired, then the option premium paid denotesa. Expenseb. Incomec. Gaind. None of the above
Exercising of an options contract meansa. Creation of underlying assetb. Breaking the options contractc. Paying the margin amountd. None of the above
Buyback of the call options results ina. Creating a fresh contractb. Squaring up of the existing short positionc. Creating a long positiond. None of the above
Account treatment for a call options contract is decided based ona. Position of the contractb. Intention of the purchasec. Size of the contractd. None of the above
Assume that a call option with a quantity of 10,000 shares and a premium of $6,000 has a value of $9 at the end of the reporting period.Which of the following amounts is recognized as income which
The accounting entry for mark-to-market reversal of a call option is not required if the valuation is done using thea. Reversal method at the end of reporting periodb. Black-Scholes modelc.
When the call options are exercised, the investor has to pay for the underlying ata. The current market price of the stockb. The rate at which the exchange decidesc. The contracted strike priced. The
If an investor writes a call option, then the investor ______________ on such writing of the call option.a. Would pay the premium on the exercise dateb. Would collect the premium on the exercise
When a call margin is initiated the investor would be required to pay an amount equal to ______ of the value of the position in addition to the potential loss as of that date.a. 8 percentb. 15
Mr. Berkowitz buys 1,000 equity call options of Normal Electricals for $4 per share for a strike price of $25 on June 12, expiry date being July 16.Brokerage is 0.25 percent and is settled on T + 2
Prepare journal entries, general ledgers, trial balance, income statement, and balance sheet for the following scenario.Freedom Fund had the following trades in GE in the options market through ADC
Prepare journal entries, general ledgers, trial balance, income statement, and balance sheet for the following scenario:AA Fund had the following trades in Metadata in the options market through DDT
Prepare journal entries, general ledgers, trial balance, income statement, and balance sheet for the following scenario:Stone Fund had the following trades in Gamut in the options market through MML
If the put option is purchased for speculative trade, then the premium paid towards purchase is treated asa. Incomeb. Expensec. Gaind. None of the above
For put options, the premium received towards sale is treated asa. Incomeb. Expensec. Gaind. None of the above
If a put option is purchased purely as a speculative trade, then the premium paid towards purchase of the put option isa. Treated as revenueb. Treated as marginc. Treated as an assetd. Treated as an
For exchange-traded options, since the stock exchange has the responsibility of ensuring that both the legs of the transaction are complete, the exchange would insist that the writer of the optiona.
Assuming an investor writes a put option, he need not pay the brokerage because he is actually selling an option. Which of the following statements justifies that the above context is true or
For each of the following scenarios, prepare journal entries, general ledger, trial balance, income statement, and balance sheet.
Cloud Fund had the following trades in Sun in the options market through David Brother Brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value of the
Cerebros Fund had the following trades in ABB in the options market through James Brothers Brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value of the
ABC Fund had the following trades in Andhra Bank in the options market through Silver Man brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value of the
Billionaire Fund had the following trades in SingTel shares in the options market through ASC Man brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value
Define a derivative instrument as per U.S. GAAP and as per IFRS.
What combination of underlying shares and options is permissible in hedge accounting?
Can options that are written qualify for hedge accounting?
Accounting standards do not permit hedge accounting for covered calls.What are the reasons for this prohibition?
What is the rationale behind the symmetry of risk-reward requirements for hedge accounting?
What is the exception to the single fair value measure rule?
Is hedge accounting permitted for a delta-neutral hedging strategy?
Enumerate the trade life cycle for ETOs that are used as a hedge for an underlying position—both long calls and long puts.
FAS 133 prescribes accounting requirements fora. Derivative instruments for hedging activitiesb. Debt and equity securitiesc. Fair value measurementd. All of the above
Characteristics of a financial derivative instrument include which of the following?a. Value of the instrument changes in response to underlyingb. It requires no or comparatively little initial
A financial asset definition does not includea. Cashb. Cash equivalentc. Equity instrumentd. All of the above
On comparing the definition of derivative financial instrument as per U.S. GAAP and IFRS, the only exception highlighted in IFRS isa. Initial net investment requirementb. Future date settlementc.
Which of the standards allows for a shortcut method that assumes perfect effectiveness for certain hedging relationships?a. IFRSb. U.S. GAAPc. FASd. None of the above
In FAS 133, which items will not be reported?a. Reserves and provisionsb. Income and expensec. Partner’s equityd. All of the above
Which of the following contracts is not exempted from FAS 133?a. Derivative instrumentsb. Regular-way security tradesc. Certain insurance contractsd. None of the above
Changes in fair value do not includea. Changes due to passage of timeb. Difference in the fair value at the beginning and end of the periodc. Changes in the accounting periodd. None of the above
Hedge accounting can be discontinued ifa. The instrument qualifies for speculationb. Management wants to change the accounting principlesc. The derivatives expired. All of the above
If the investor writes a call on the basis of a long position in an underlying asset, it is referred to as aa. Preferred callb. Covered callc. Long position calld. None of the above
A written option cannot be designated as a hedging instrument unless it is combined with a purchase option and a net premium is paid, according toa. IFRSb. U.S. GAAPc. Canadian GAAPd. IASe. Not
__________ is a number of currency units, shares, bushels, pounds, or other units specified in a contract.a. Premiumb. Marginc. Notional amountd. Collateral amounte. Settlement amount
Certain insurance contracts like traditional life insurance contracts and traditional property and casualty contracts are not considered as derivatives, according toa. FAS 136b. FAS 133c. IAS 39d.
A covered call is a situation in which the equity investor writes a call to cover hisa. Long position in an underlying assetb. Short position in an underlying assetc. Short position in a different
Hedging a long position in an underlying is possible bya. Selling putsb. Buying callsc. Selling callsd. Squaring of short positione. Buying puts
Konark Fund had the following trades of Lever shares in the options market through Silver Man brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value of
Orange Fund had the following trades of Tomco shares in the options market through SMK brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value of the
KKR Fund had the following trades in Zenith shares in the options market through Khan Brokers. The stock exchange requires that the writer of the options maintain 10 percent of the value of the
Konrad Fund had the following trades in Home Depot in the options market through MMT brokers. On January 1 Konrad Fund introduced $100,000 as capital. Date Product Strike Price 25-Jan-X1 Call $50
Define a CFD contract and explain how it is different from a futures contract.
What are the salient product features of CFD?
Is short-selling possible with CFDs, and if so are there any advantages?
How is the funding cost computed for a CFD contract?
What are the margin requirements for a CFD contract?
Discuss briefly the advantages and disadvantages of a CFD contract.
“CFD is highly risky.” Do you agree? Give reasons for your answer.
How is a CFD contract terminated?
Explain the trade life cycle for a CFD contract and what journal entries are passed for each event in the cycle.
The striking difference between CFD and futures isa. CFDs have no expiry dateb. CFDs are derivative contractsc. CFDs are of a speculative natured. All of the above
With CFDs, the investor can takea. A long positionb. A short positionc. Either a long or a short positiond. None of the above
The commission on a CFD is calculated as a percentage based ona. Performance of the underlying assetb. Performance of the marketc. Value of the contractd. All of the above
Interest on clear margin is paid to the investor based ona. A percentage of the value of tradeb. A preagreed rate of interestc. A percentage against marked-to-market calculated on daily basisd. None
The initial margin requirement varies upona. The contract between the buyer and sellerb. The stock market concernedc. The underlying assetd. All of the above
Settlement for CFDs happens througha. Physical settlement of securitiesb. Cashc. Both cash and physical settlement of securitiesd. None of the above
CFDs are tradeda. Over the counterb. On exchangesc. Both over the counter and on exchangesd. None of the above
Funding costs are calculated based ona. Average market price of the underlying assetb. Agreed percentage on the closing market valuec. Agreed percentage on the opening market valued. None of the above
For short positions in CFD contracts, the funding cost will be received by thea. Investorb. Stock exchangec. Sellerd. None of the above

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