Exam 4: Complex Financial Instruments

A company pays $5,000 to purchase futures contracts to buy 50 oz of silver at $40/oz. At the company's year-end, the price of silver rose and the value of the company's futures contracts increased to $6,000. Required: Record the journal entries related to these futures.

On August 15, 2021, Madison Company issued 80,000 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 $800,000 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.

What is a "future"?

On January 1, 2021, 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, 2023 by grantees still in the employ of the company, and they expire December 31, 2027. 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, 2021 to be $4.00. On March 31, 2023, 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. Required: Record the journal entries for Gilmore's stock options.

Which statement best describes the "zero common equity method"?

What is a "hedge"?

On December 15, a company enters into a foreign currency forward to buy €300,000 at C$1.60 per euro in 30 days. The exchange rate on the day of the company's year-end of December 31 was C$1.59: €l. Required: Record the journal entries related to this forward contract.

AnnuG Inc. granted 200,000 stock options to its employees. The options expire 45 years after the grant date of January 1, 2021, when the share price was $23. Employees still employed by the company six years after the grant date may exercise the option to purchase shares at $45 each; that is, the options vest to the employees after six years. A consultant estimated the value of each option at the date of grant to be $2.50 each. Required: Record the journal entries relating to the issuance of stock options.

Which of the following statements is correct?

On January 1, 2019, 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, 2019. Moonbeam estimated that without the conversion feature, the bonds would have sold for $21,013,098 (to yield 9%). On January 1, 2020, Moonbeam converted bonds with a par value of $8.8 million. At the time of conversion, the shares were selling at $30 each. Required: 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).

Assume that on January 15, 2021 Singh agrees to purchase US$100,000 for C$117,000 for delivery on January 15, 2022. The exchange rate at Singh's December 31 year-end is US$1 = C$1.20 and the January 15, 2022 exchange rate is US$1 = C$1.19. What is the foreign exchange gain or loss recognized at December 31, 2021?

Explain how convertible bonds alleviate moral hazard.

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

Briefly describe a compound financial instrument and its advantages.

McMillan Manufacturing issued 60,000 stock options to its employees. The company granted the stock options at-the-money, when the share price was $40. These options have no vesting conditions. By year-end, the share price had increased to $42. McMillan's management estimates the value of these options at the grant date to be $1.10 each. Required: Record the issuance of the stock options.

Which is a derivative on the company's own common shares?

What is a "put" option?

What are the two exceptions to the general rule of measuring derivatives at fair value, with changes in fair value recorded through income?

Briefly explain the difference between a "forward" and a "future."

Assume that on January 15, 2020, Ariel agrees to purchase US$500,000 for C$550,000 for delivery on January 15, 2021. The exchange rate at its December 31 year-end is US$1 = C$0.95 and the January 15, 2021 the exchange rate is US$1 = C$0.97. What is the foreign exchange gain or loss recognized on January 15, 2020?