Exam 4: Complex Financial Instruments

How would the liability portion of the compound instrument be recorded?

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2013. The exchange rate at year end is US$1 = C$0.98 and the January 15,2013 exchange rate is US$1 = C$0.97. What journal entry is required at Jan 15,2013?

Windy Lake Lodge issued 24,000 at-the-money stock options to its management on January 1,2012. These options vest on January 1,2015. Windy Lake's share price was $19 on the grant date and $22 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. Windy Lake has a December 31 year-end. Requirement: Record all of the journal entries relating to the stock options.

How is the subsequent conversion of bonds into common shares recorded under IFRS?

On January 1,2013,Wayward Co. issued a $22 million,8%,6-year convertible bond with annual coupon payments. Each $1,000 bond was convertible into 35 shares of Wayward's common shares. Moonbeam Investments purchased the entire bond issue for $22.7 million on January 1,2013. Moonbeam estimated that without the conversion feature,the bonds would have sold for $21,013,098 (to yield 9%). On January 1,2015,Moonbeam converted bonds with a par value of $8.8 million. At the time of conversion,the shares were selling at $30 each. Requirements: a. Prepare the journal entry to record the issuance of convertible bonds. b. Prepare the journal entry to record the conversion according to IFRS (book value method). c. Prepare the journal entry to record the conversion according ASPE (market value method).

Which of the following is not an underlying?

On January 1,2011,Gilmore Inc. granted stock options to officers and key employees for the purchase of 100,000 of the company's no par value common shares at $28 each. The options were exercisable within a five-year period beginning January 1,2013 by grantees still in the employ of the company,and they expire December 31,2017. The market price of Gilmore's common share was $20 per share at the date of grant. Using the Black-Scholes option pricing model,the company estimated the value of each option on January 1,2011 to be $4.00. On March 31,2013,60,000 options were exercised when the market value of common stock was $44 per share. The remainder of the options expired unexercised. The company has a December 31 year-end. Requirement: Record the journal entries for Gilmore's stock options.

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

How are derivative contracts generally accounted for?

Which method is used under IFRS to account for compound instruments?

Explain how convertible bonds alleviate moral hazard.

Which statement is correct about hedge accounting?

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2013. The exchange rate at year end is US$1 = C$0.98 and the January 15,2013 exchange rate is US$1 = C$0.97. What journal entry is required at year end?

Which method is used under ASPE to account for compound instruments?

A company issues convertible bonds with face value of $7,000,000 and receives proceeds of $8,500,000. Each $1,000 bond can be converted,at the option of the holder,into 100 common shares. The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $7,300,000. Requirement: Record the journal entry for the issuance of these bonds based on IFRS.

Assume that Ariel 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 when the contract is initiated?

A company issued 105,000 preferred shares and received proceeds of $6,100,000. 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.

How should employee stock options be accounted for?

On December 15,a company enters into a foreign currency forward to buy €100,000 at C$I.60 per euro in 30 days. The exchange rate on the day of the company's year-end of December 31 was C$1.55: €l. Requirement: Record the journal entries related to this forward contract.

LMN Company reported the following amounts on its balance sheet at July 31,2013: Liabilities Equity Preferred shares,no par,3,000,000 shares authorized,10,000 Common shares,no par,1,000,000 shares authorized,180,000 Additional information 1. The bonds pay interest each July 31. Each $1,000 bond is convertible into 10 common shares. The bonds were originally issued to yield 10%. On July 31,2014,all the bonds were converted after the final interest payment was made. LMN uses the book value method to record bond conversions as recommended under IFRS. 2. No other share or bond transactions occurred during the year. Requirement: a. Prepare the journal entry to record the bond interest payment on July 31,2014. b. Calculate the total number of common shares outstanding after the bonds' conversion on July 31,2014. c. Prepare the journal entry to record the bond conversion.