Exam 4: Complex Financial Instruments

What is a "forward"?

What is a "warrant"?

Identify the type of hedge under each of the following transactions:

A company pays $5,000 to purchase futures contracts to buy 50 oz of silver at $40/oz. At the company's year-end,the price of silver rose and the value of the company's futures contracts increased to $6,000. Requirement: Record the journal entries related to these futures.

Nappy Lodge issued 15,000 at-the-money stock options to its management on January 1,2012. These options vest on January 1,2015. Nappy's share price was $20 on the grant date and $25 on the vesting date. Estimates of the fair value of the options showed that they were worth $3 on the grant date and $11 on the vesting date. On the vesting date,management exercised all 24,000 options. Nappy has a December 31 year-end. Requirement: Record all of the journal entries relating to the stock options.

Which of the following is an example of a "swap"?

A company had a debt-to-equity ratio of 1.55 before issuing convertible bonds. This ratio included $500,000 in equity. The company issued convertible bonds. The value reported for the bonds on the balance sheet is $180,000 and the conversion rights are valued at $22,000. Requirement: After the issuance of the convertible bonds,what is the value of the debt-to-equity ratio?

What is a "future"?

Princeton Inc. granted 290,000 stock options to its employees. The options expire 45 years after the grant date of January 1,2011,when the share price was $23. Employees still employed by the company four years after the grant date may exercise the option to purchase shares at $45 each; that is,the options vest to the employees after five years. A consultant estimated the value of each option at the date of grant to be $2.50 each. Requirement: Record the journal entries relating to the issuance of stock options.

Assume that Barun agrees to purchase US$500,000 for C$550,000 on January 15,2013. The exchange rate at year end is US$1 = C$0.95 and the January 15,2013 exchange rate is US$1 = C$0.97. What journal entry is required at Jan 15,2013?

On August 15,2011,Madison Company issued 10,000 options on the shares of MVC (Middefield Valley Corporation). Each option gives the option holder the right to buy one share of MVC at $70 per share until March 16,2012. Madison received $100,000 for issuing these options. At the company's year-end of December 31,2011,the options contracts traded on the Montreal Exchange at $9.50 per contract. On March 16,2012,MVC shares closed at $63 per share,so none of the options was exercised. Requirement: Record the journal entries related to these call options.

Which statement is correct about accounting for financial instruments?

How would exercise of the conversion option,that was part of the initial compound instrument,be recorded?

A company issued 100,000 preferred shares and received proceeds of $5,750,000. These shares have a par value of $50 per share and pay cumulative dividends of 6%. Buyers of the preferred shares also received a detachable warrant with each share purchased. Each warrant gives the holder the right to buy one common share at $35 per share within 10 years. The underwriter estimated that the market value of the preferred shares alone,excluding the conversion rights,is approximately $55 per share. Shortly after the issuance of the preferred shares,the detachable warrants traded at $5 each. Requirement: Record the journal entry for the issuance of these shares and warrants under IFRS.

A company issues convertible bonds with face value of $5,000,000 and receives proceeds of $6,500,000. Each $1,000 bond can be converted,at the option of the holder,into 80 common shares. The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $6,300,000. Requirement: Record the journal entry for the issuance of these bonds based on IFRS.

Which of the following is not a financial instrument?

Indicate whether the following statements are true or false with respect to characteristics of stock options.

On August 15,2011,Madison Company issued 80,000 options on the shares of MVC (Middefield Valley Corporation). Each option gives the option holder the right to buy one share of MVC at $70 per share until March 16,2012. Madison received $800,000 for issuing these options. At the company's year-end of December 31,2011,the options contracts traded on the Montreal Exchange at $9.50 per contract. On March 16,2012,MVC shares closed at $63 per share,so none of the options was exercised. Requirement: Record the journal entries related to these call options.

Which statement best describes the "incremental method"?

Which is a derivative on the company's own common shares?