Exam 16: Complex Financial Instruments

An advantage of issuing debt instead of equity is that

Use the following information for questions. On May 1, 2017, Durban Ltd.issued $500,000, 10 year, 7% bonds at 103.Twenty detachable warrants were attached to each $1,000 bond, which entitled the holder to purchase one of Durban's no par value common shares for $40.At this time, similar bonds without warrants were selling at 96.It was determined that the fair value of Durban's common shares was $35, but the value of the warrants was NOT determinable.Durban is a private corporation that follows ASPE, but does NOT use the residual method. -On May 1, 2017, Durban should credit Bonds Payable for

Use the following information for questions. On January 2, 2017, Perseus Corp.issued 10-year convertible bonds at 105.During 2018, all the bonds were converted into common shares having a total value equal to the total face amount of the bonds.At conversion, the market price of Perseus's common shares was 50% above its average carrying value.Perseus adheres to IFRS. -At issuance, the cash proceeds from the issuance of these bonds should be reported as

On April 7, 2017, Soweto Corp.sold a $1,000,000 (par value), 20 year, 8% bond issue for $1,060,000.Each $1,000 bond has two detachable warrants.Each warrant permits the purchase one of Soweto's no par value common shares for $30.At the time of the sale, Soweto's securities had the following market values:

On October 5, 2017, Kappa Cloth Ltd.enters into a forward contract to purchase 10,000 metres of cotton fabric at $1 per metre, good until February 1, 2018.At December 31, 2017, the forward price for February 2018 delivery of cotton fabric has increased to $1.04 per metre.The adjusting entry at December 31, 2017 would be

Convertible bonds

Use the following information for questions. On July 1, 2017, Casablanca Ltd.issued $6,000,000 (par value), 9%, ten-year convertible bonds at 98 plus accrued interest.The bonds were dated April 1, 2017 with interest payable quarterly on July 1, October 1, January 1 and April 1.If the bonds had NOT been convertible, they would have sold for 96.1 plus accrued interest.The bond discount is amortized on a straight-line basis.On April 1, 2018, $1,200,000 of these bonds were converted into 500 no par common shares.Accrued interest was paid in cash at the time of conversion. -What is the amount of the unamortized bond discount on April 1, 2018 relating to the bonds that were converted?

On January 1, 2017, Orion Corp.granted an employee an option to purchase 5,000 of Orion's no par value common shares at $50 per share.The Black-Scholes option pricing model determined total compensation expense to be $220,000.The option became exercisable on December 31, 2018, after the employee completed two years of service.The market prices of Orion's shares were as follows: For calendar 2018, Orion should recognize compensation expense of

Use the following information for questions. On April 1, 2017, Gamma Corp.purchases a call option for $500, which gives Gamma the right to buy 1,000 shares of Delta Inc.for $30 each until December 1, 2017.Delta Inc.shares are currently trading for $30.At June 30, 2017, the options are trading at $4,800 and the shares at $32 each.At December 1, 2017, the options expire with no value. -At June 30, 2017, Gamma's quarter end, the adjusting entry would be

The time value of an option is the

Under a (non-compensatory)employee stock option plan (ESOP), when an option is sold to an employee, the employer debits Cash and credits

Use the following information for questions. On April 1, 2017, Gamma Corp.purchases a call option for $500, which gives Gamma the right to buy 1,000 shares of Delta Inc.for $30 each until December 1, 2017.Delta Inc.shares are currently trading for $30.At June 30, 2017, the options are trading at $4,800 and the shares at $32 each.At December 1, 2017, the options expire with no value. -The intrinsic value of the option at April 1, 2017 is

Use the following information for questions. On January 1, 2016, Luanda Ltd.established a stock appreciation rights plan for its executives.This plan entitles them to receive cash at any time during the next four years for the difference between the market price of its common shares and a pre-established price of $20, on 50,000 SARs.Market prices of the shares are as follows: Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2016. -What amount of compensation expense should Luanda recognize for calendar 2017?

A put option is a right to

With regard to the measurement of hybrid/compound instruments,

In 2016, Algiers Inc.issued 10,000 no par value convertible preferred shares for $103 each.One preferred share can be converted into three shares of Algiers' no par value common shares at the option of the shareholder.In August 2017, all of the preferred shares were converted into common shares.The market value of the common shares at the date of the conversion was $30 per share.What amount should be credited to Common Shares as a result of this conversion?

On July 1, 2017, an interest payment date, $180,000 (par value)of Lusaka Corp.bonds were converted into 3,600 of their no par common shares.At this time, the unamortized discount on the bonds was $7,200.When the bonds were originally issued, the equity portion of the bond was valued at $1,700.Using the book value method, Lusaka would record

Dakar Inc.has $3,000,000 (par value), 8% convertible bonds outstanding.Each $1,000 bond is convertible into thirty no par value common shares.The bonds pay interest on January 31 and July 31.On July 31, 2017, the holders of $900,000 worth of bonds exercised the conversion privilege.On that date the market price of the bonds was 105, the market price of the common shares was $36, the carrying value of the common shares was $18 and the Contributed Surplus-Conversion Rights account balance was $450,000.The total unamortized bond premium at the date of conversion was $210,000.Using the book value method, Dakar should record, as a result of this conversion,

Use the following information for questions. On August 25, 2017, Beta Inc.entered into a forward contract to buy 50,000 Krubles (KRB)for $8,300 Canadian (CAD)on September 5, 2017.On August 31, 2017, 50,000 KRB can be purchased for $8,000 CAD.On September 5, Beta settles the contract but does NOT take delivery of the KRB. -On September 5, 2017, the KRB is trading at $0.17 CAD.The entry to record the settlement of the contract is

Use the following information for questions. On January 2, 2017, Perseus Corp.issued 10-year convertible bonds at 105.During 2018, all the bonds were converted into common shares having a total value equal to the total face amount of the bonds.At conversion, the market price of Perseus's common shares was 50% above its average carrying value.Perseus adheres to IFRS. -On conversion, Perseus would credit the Common Shares account with