Question 1

Convertible bonds

Accepted Answer

A)  have priority over all other types of bonds. 
B)  are usually secured by a first or second mortgage. 
C)  pay interest only in the event earnings are sufficient to cover the interest. 
D)  may usually be exchanged for common shares. 
A)  have priority over all other types of bonds. 
B)  are usually secured by a first or second mortgage. 
C)  pay interest only in the event earnings are sufficient to cover the interest. 
D)  may usually be exchanged for common shares.

Question 2

Antigone Corp. issued bonds with detachable common stock warrants. Only the bonds had a known market value. Using the residual method, the value attributable to the warrants is reported as

Accepted Answer

A)  Stock Warrants Distributable. 
B)  Other Comprehensive Income. 
C)  Common Shares Subscribed. 
D)  Contributed Surplus-Stock Warrants. 
A)  Stock Warrants Distributable. 
B)  Other Comprehensive Income. 
C)  Common Shares Subscribed. 
D)  Contributed Surplus-Stock Warrants.

Question 3

A forward contract

Accepted Answer

A)  is generally exchange traded, therefore has a ready market value. 
B)  creates a right but not an obligation. 
C)  commits the contracting parties upfront to do something in the future. 
D)  has no locked in time period. 
A)  is generally exchange traded, therefore has a ready market value. 
B)  creates a right but not an obligation. 
C)  commits the contracting parties upfront to do something in the future. 
D)  has no locked in time period.

Question 4

Hedging is the use of

Accepted Answer

A)  derivatives or other instruments to increase returns. 
B)  derivatives or other instruments to offset risks. 
C)  debt to offset risks. 
D)  forward contracts. 
A)  derivatives or other instruments to increase returns. 
B)  derivatives or other instruments to offset risks. 
C)  debt to offset risks. 
D)  forward contracts.

Question 5

On March 1, 2020, Rabat Corp. sold $ 300,000 (par value), 20 year, 8% bonds at 104. Each $ 1,000 bond was issued with 25 detachable warrants, each of which entitled the bondholder to purchase for $ 50 one of Rabat's no par value common shares. The bonds without the warrants would normally sell at 95. At this time, the market value of Rabat's common shares was $ 40 per share and the market value of each warrant was $ 2.00. Using the relative fair value method, what amount should Rabat record on March 1, 2020 as Contributed Surplus-Stock Warrants?

Accepted Answer

A)  $ 10,800 
B)  $ 12,600 
C)  $ 15,000 
D)  $ 15,600 
A)  $ 10,800 
B)  $ 12,600 
C)  $ 15,000 
D)  $ 15,600

Question 6

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

Accepted Answer

A)  Common Shares. 
B)  Stock Option Payable. 
C)  Contributed Surplus - Stock Options. 
D)  Stock Option Revenue. 
A)  Common Shares. 
B)  Stock Option Payable. 
C)  Contributed Surplus - Stock Options. 
D)  Stock Option Revenue.

Question 7

The three types of market risk are

Accepted Answer

A)  currency, interest rate, and liquidity risks. 
B)  interest rate, other price, and credit risks. 
C)  currency, interest rate, and other price risks. 
D)  liquidity, currency, and other price risks. 
A)  currency, interest rate, and liquidity risks. 
B)  interest rate, other price, and credit risks. 
C)  currency, interest rate, and other price risks. 
D)  liquidity, currency, and other price risks.

Question 8

Convertible bonds
Miron Construction Ltd. offers five-year, 8% convertible bonds (par $ 1,000). Interest is paid annually on the bonds. Each $ 1,000 bond may be converted into 100 common shares, which are currently trading at $ 8 per share. Similar straight bonds carry an interest rate of 10%. One thousand bonds are issued at 101.
Instructions
a) Assume Miron Construction Ltd. follows IFRS and decides to use the residual method and measures the debt first. Calculate the amount to be allocated to the bond and to the option.
b) Prepare the journal entry at the date of issuance of the bonds under IFRS.
c) Assume that after three years, when the carrying amount of the bonds was $ 965,290, half of the holders of the convertible debt decided to convert their convertible bonds before the bond maturity date. Prepare the journal entry to record the conversion.
d) How many shares were issued at the conversion?
e) Assume now that Miron follows ASPE and has chosen as an accounting policy to value the equity component at zero. Prepare the journal entry at the date of issuance of the bonds.

Accepted Answer

a) Value of the bonds (PV annuity 5 year

Question 9

A fair value hedge protects the company against

Accepted Answer

A)  errors in valuation of derivative instruments. 
B)  a future transaction that has not yet been recognized. 
C)  an existing exposure related to an existing asset or liability. 
D)  fluctuations in exchange rates. 
A)  errors in valuation of derivative instruments. 
B)  a future transaction that has not yet been recognized. 
C)  an existing exposure related to an existing asset or liability. 
D)  fluctuations in exchange rates.

Question 10

The time value of an option is the

Accepted Answer

A)  difference between the price of the underlying security and the strike price. 
B)  value due to expectations that the price of the underlying security will rise above the strike price. 
C)  minimum value of the option. 
D)  option premium value. 
A)  difference between the price of the underlying security and the strike price. 
B)  value due to expectations that the price of the underlying security will rise above the strike price. 
C)  minimum value of the option. 
D)  option premium value.

Question 11

Fair value disclosure for financial instruments - IASB standards
What are the IASB rules regarding disclosure of financial instruments in the notes to the financial statements and why?

Accepted Answer

Both the cost and fair value of all fina

Question 12

Use the following information for questions 47-49.
On July 2, 2020, Martineau Ltd. issued $ 6,000,000 (par value), 9%, ten-year convertible bonds at 98. The bonds were dated April 1, 2020 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. The bond discount is amortized on a straight-line basis. On April 1, 2021, $ 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, 2021 relating to the bonds that were converted?

Accepted Answer

A)  $ 64,246 
B)  $ 46,800 
C)  $ 43,200 
D)  $ 44,400 
A)  $ 64,246 
B)  $ 46,800 
C)  $ 43,200 
D)  $ 44,400

Question 13

With regard to the measurement of hybrid/compound instruments,

Accepted Answer

A)  IFRS requires the use of the relative fair value method. 
B)  IFRS requires the use of the residual method. 
C)  ASPE does not allow the equity component to be valued at zero. 
D)  After the initial measurement, the debt portion is always measured at fair value. 
A)  IFRS requires the use of the relative fair value method. 
B)  IFRS requires the use of the residual method. 
C)  ASPE does not allow the equity component to be valued at zero. 
D)  After the initial measurement, the debt portion is always measured at fair value.

Question 14

Using IFRS, hedge accounting allows the gain or loss on the hedge transaction to

Accepted Answer

A)  be booked through net income. 
B)  be booked through other comprehensive income. 
C)  not be booked. 
D)  not be booked until the hedge closes. 
A)  be booked through net income. 
B)  be booked through other comprehensive income. 
C)  not be booked. 
D)  not be booked until the hedge closes.

Question 15

Stock options
Using a table format, compare and contrast employee stock option plans (ESOPs) and compensatory stock option plans (CSOPs).

Accepted Answer

The answer of Stock options
Using a table format, compare and...

Question 16

A speculator's objective is to

Accepted Answer

A)  reduce pre-existing risks. 
B)  take delivery of the underlying. 
C)  take advantage of information asymmetry. 
D)  maximize potential returns by being exposed to greater risks. 
A)  reduce pre-existing risks. 
B)  take delivery of the underlying. 
C)  take advantage of information asymmetry. 
D)  maximize potential returns by being exposed to greater risks.

Question 17

On July 1, 2020, 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

Accepted Answer

A)  an $ 174,500 increase in Common Shares. 
B)  an $ 172,800 increase in Common Shares. 
C)  an $ 171,100 increase in Common Shares. 
D)  no change to Contributed Surplus. 
A)  an $ 174,500 increase in Common Shares. 
B)  an $ 172,800 increase in Common Shares. 
C)  an $ 171,100 increase in Common Shares. 
D)  no change to Contributed Surplus.

Question 18

Use the following information for questions 47-49.
On July 2, 2020, Martineau Ltd. issued $ 6,000,000 (par value), 9%, ten-year convertible bonds at 98. The bonds were dated April 1, 2020 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. The bond discount is amortized on a straight-line basis. On April 1, 2021, $ 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 was the effective interest rate on the bonds when they were issued?

Accepted Answer

A)  9% 
B)  above 9% 
C)  below 9% 
D)  cannot determine from the information given 
A)  9% 
B)  above 9% 
C)  below 9% 
D)  cannot determine from the information given

Question 19

Use the following information for questions 20-23.
On April 1, 2020, 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, 2020. Delta Inc. shares are currently trading for $ 30. At June 30, 2020, the options are trading at $ 4,800 and the shares at $ 32 each. At December 1, 2020, the options expire with no value.
-The time value of the option at April 1, 2020 is

Accepted Answer

A)  $ 0. 
B)  $ 500. 
C)  $ 4,800. 
D)  $ 30,000. 
A)  $ 0. 
B)  $ 500. 
C)  $ 4,800. 
D)  $ 30,000.

Question 20

If a company writes an option, it

Accepted Answer

A)  pays a fee and gains a right. 
B)  charges a fee and gives the holder a right. 
C)  charges a fee for handling option transactions. 
D)  endorses an option over to another party. 
A)  pays a fee and gains a right. 
B)  charges a fee and gives the holder a right. 
C)  charges a fee for handling option transactions. 
D)  endorses an option over to another party.

Convertible bonds

Antigone Corp. issued bonds with detachable common stock warrants. Only the bonds had a known market value. Using the residual method, the value attributable to the warrants is reported as

A forward contract

Hedging is the use of

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

The three types of market risk are

A fair value hedge protects the company against

The time value of an option is the

Fair value disclosure for financial instruments - IASB standards What are the IASB rules regarding disclosure of financial instruments in the notes to the financial statements and why?

With regard to the measurement of hybrid/compound instruments,

Using IFRS, hedge accounting allows the gain or loss on the hedge transaction to

Stock options Using a table format, compare and contrast employee stock option plans (ESOPs) and compensatory stock option plans (CSOPs).

A speculator's objective is to

If a company writes an option, it

Non-Financial and Current Liabilities

Long-Term Financial Liabilities

Shareholders Equity

Earnings Per Share

Income Taxes

Pensions and Other Post-Employment Benefits

Leases

Accounting Changes and Error Analysis

Statement of Cash Flows

Other Measurement and Disclosure Issues

Filters

Exam 4: Complex Financial Instruments

Convertible bonds

Antigone Corp. issued bonds with detachable common stock warrants. Only the bonds had a known market value. Using the residual method, the value attributable to the warrants is reported as

A forward contract

Hedging is the use of

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

The three types of market risk are

A fair value hedge protects the company against

The time value of an option is the

Fair value disclosure for financial instruments - IASB standards What are the IASB rules regarding disclosure of financial instruments in the notes to the financial statements and why?

With regard to the measurement of hybrid/compound instruments,

Using IFRS, hedge accounting allows the gain or loss on the hedge transaction to

Stock options Using a table format, compare and contrast employee stock option plans (ESOPs) and compensatory stock option plans (CSOPs).

A speculator's objective is to

If a company writes an option, it

Non-Financial and Current Liabilities

Long-Term Financial Liabilities

Shareholders Equity

Earnings Per Share

Income Taxes

Pensions and Other Post-Employment Benefits

Leases

Accounting Changes and Error Analysis

Statement of Cash Flows

Other Measurement and Disclosure Issues

Filters