Exam 4: Complex Financial Instruments

Assume that on January 15, 2021 Aero's agrees to purchase US$50,000 for C$52,000 for delivery on January 15, 2022. The exchange rate at Aero's December 31 year-end is US$1 = C$.98 and the January 15, 2022 exchange rate is US$1 = C$.97. What is the foreign exchange gain or loss recognized at December 31, 2021?

On August 15, 2021, 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, 2022. Madison received $100,000 for issuing these options. At the company's year-end of December 31, 2021, the options contracts traded on the Montreal Exchange at $9.50 per contract. On March 16, 2022, MVC shares closed at $63 per share, so none of the options was exercised. Required: Record the journal entries related to these call options.

Naples Corporation issued call options on 20,000 shares of VESPUS Inc. on October 21, 2019. These options give the holder the right to buy VESPUS shares at $35 per share until May 17, 2020. For issuing these options, Naples received $60,000. On December 31, 2020 (Naples's fiscal year-end), the options traded on the Montreal Exchange for $3.50 per option. On May 17, 2020, VESPUS's share price increased to $40 and the option holders exercised their options. Naples had no holdings of VESPUS shares. Required: For Naples Corporation, record the journal entries related to these call options.

What is speculation?

A company issues convertible bonds with face value of $10,000,000 and receives proceeds of $10,500,000. Each $1,000 bond can be converted, at the option of the holder, into 800 common shares. The underwriter estimated the market value of the bonds alone, excluding the conversion rights, to be approximately $8,300,000. Required: Record the journal entry for the issuance of these bonds based on IFRS.

Describe the underlying quantity that the derivative instrument derives its value from?

Sorrentino Corporation issued call options on 20,000 shares of BWC Inc. on October 21, 2019. These options give the holder the right to buy BWC shares at $35 per share until May 17, 2020. For issuing these options, Sorrentino received $20,000. On December 31, 2019 (Sorrentino's fiscal year-end), the options traded on the Montreal Exchange for $2.00 per option. On May 17, 2020, BWC's share price increased to $38 and the option holders exercised their options. Sorrentino had no holdings of BWC shares. Required: For Sorrentino Corporation, record the journal entries related to these call options.

Which of the following is correct about financial instruments?

Contrast options with warrants.

Enterprises need to separate the components of a compound financial instrument and account for each component separately. (a)What are the three alterative methods of allocating the cost to the components? (b)Contrast the reporting requirements for compound financial instruments under IFRS and ASPE.

Give 4 examples of cash flow hedges:

Breezy Lodge issued 25,000 at-the-money stock options to its management on January 1, 2021. These options vest on January 1, 2024. Breezy's share price was $18 on the grant date and $25 on the vesting date. Estimates of the fair value of the options showed that they were worth $4 on the grant date and $11 on the vesting date. On the vesting date, management exercised all 25,000 options. Breezy has a December 31 year-end. Required: Record all of the journal entries relating to the stock options.

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

On January 1, 2021 Taffy Inc. granted 210,000 stock appreciation rights (SARs)to its executives. Each SAR entitled its holder to receive cash equal to the difference between the market price of the common share and the benchmark price of $16. The SARs vested after three years and expired on Dec. 31, 2023. On January 1, 2024, 100,000 SARs are exercised. The market price of the shares remained at $20. On January 1, 2025, 50,000 SARS are exercised. The market price of the shares remained at $22. The remaining SARs expired. Pertinent stock-related data are listed below: Required: a. Prepare the journal entry at December 31, 2021, to record compensation expense. b. Prepare the journal entry at December 31, 2022, to record compensation expense. c. Prepare the journal entry at December 31, 2023, to record compensation expense. d. Prepare the journal entry at January 1, 2024, to record the partial exercise of the SARs. e. Prepare the journal entry at December 31, 2024, to record compensation expense. f. Prepare the journal entry at January 1, 2025, to record the partial exercise of the SARs. g. Prepare the journal entry at December 31, 2025, to record compensation expense. h. Prepare the journal entry at December 31, 2026, to record compensation expense.

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

Which of the following is correct regarding a call option?

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

A company had a debt-to-equity ratio of 1.65 before issuing convertible bonds. This ratio included $450,000 in equity. The company issued convertible bonds. The value reported for the bonds on the balance sheet is $200,000 and the conversion rights are valued at $25,000. Required: After the issuance of the convertible bonds, what is the value of the debt-to-equity ratio?

How would exercise of warrants that were part of an original compound instrument be recorded?

List three common stock compensation plans and describe them.