Exam 4: Complex Financial Instruments

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 entry to record the purchase of the call option is

Use the following information for questions 18-19. On August 25, 2020, Beta Inc. entered into a forward contract to buy 25,000 Krubles (KRB) for $ 3,800 Canadian (CAD) on September 5, 2020. On August 31, 2020, 25,000 KRB can be purchased for $ 3,500 CAD. On September 5, Beta settles the contract but does NOT take delivery of the KRB. -The entry to record the change in value of the contract on August 31, 2020 is

Convertible bonds Atlanta Ltd. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after the required interest was paid, all the bonds were converted into 3,000 no par value common shares, which were currently trading at $ 50 per share. Instructions How should Atlanta account for the conversion of the bonds under the book value method? Discuss the rationale for this method.

Definition of derivative instruments Define and explain derivative instruments.

Use the following information for questions 74-76. On January 1, 2019, 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, 2019. -What amount of compensation expense should Luanda recognize for calendar 2020?

The date on which to measure the compensation in a stock appreciation rights plan is the

Use the following information for questions 55-56. On May 1, 2020, Wong 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 Wong'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 Wong's common shares was $ 35, but the value of the warrants was NOT determinable. Wong is a private corporation that follows ASPE, but does NOT use the residual method. -On May 1, 2020, Wong should credit Bonds Payable for

On July 5, 2020, Alpha Corp. purchased a call option for $ 2,400, giving it the right to buy 2,000 shares of Omega Corp. for $ 20 per share. On August 18, 2020, when the option value is $ 12,000, Omega settles the option for cash. The entry on Alpha's books to record the settlement is

Put options On November 15, 2020, Marvel Inc. purchases a trading investment for $ 150,000. Marvel also enters into a put option to sell the shares for $ 150,000. At December 31, 2020, the investment is valued at $ 155,000. Instructions Record any adjusting entries required at December 31, 2020 in connection with the above transactions.

On January 2, 2020, for past services rendered, Zeus Corp. granted Joanna Wood, its president, 18,000 stock appreciation rights that are exercisable immediately and expire on January 2, 2021. On exercise, Wood is entitled to receive cash for the excess of the market price of the shares on the exercise date over the market price on the grant date. Wood did NOT exercise any of the rights during 2020. The market price of Zeus's shares was $ 35 on January 2, 2020, and $ 45 on December 31, 2020. As a result of the stock appreciation rights, Zeus should recognize compensation expense for 2020 of

On October 5, 2020, Kappa Cloth Ltd. enters into a forward contract to purchase 10,000 metres of cotton fabric at $ 1 per metre, good until February 1, 2021. At December 31, 2020, the forward price for February 2021 delivery of cotton fabric has increased to $ 1.06 per metre. The adjusting entry at December 31, 2020 would be

Hedge accounting is

*Hedging List the five steps used to analyze whether hedge accounting is necessary.

During 2020, Khartoum Corp. issued four hundred $ 1,000 bonds at 104. One detachable warrant, entitling the holder to purchase 15 of Khartoum' common shares, was attached to each bond. At the date of issuance, the market value of the bonds, without the warrants, was 96. The market value of each warrant was $ 40. Using the relative fair value method, what amount should Khartoum credit to Bonds Payable from the proceeds?

On January 1, 2018, Tunis Inc. granted stock options for 50,000 of its no par value common shares to key employees, at an option price of $ 25. On that date, the market price of the common shares was $ 23. The Black-Scholes option pricing model determined total compensation expense to be $ 375,000. The options are exercisable beginning January 1, 2021, provided the key employees are still employed by Tunis at the time the options are exercised. The options expire on January 1, 2022. On January 2, 2021, when the market price of the shares was $ 29 per share, all 50,000 options were exercised. The amount of compensation expense Tunis should have recorded for calendar 2020 is

Derivatives exist to help companies

Use the following information for questions 36-37. On January 2, 2020, Perseus Corp. issued 10-year convertible bonds at 105. During 2021, 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

Use the following information for questions 74-76. On January 1, 2019, 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, 2019. -On December 31, 2021, 8,000 SARs are exercised by executives. What amount of compensation expense should Luanda recognize for calendar 2021?

The date on which to measure the compensation element in a compensatory stock option plan (CSOP) is normally the date on which the employee

Under IFRS, a convertible debt security is recorded as a debt instrument