Exam 4: Complex Financial Instruments

A company issued 95,000 preferred shares and received proceeds of $6,000,000. These shares have a benchmark value of $48 per share and pay cumulative dividends of 6%. Buyers of the preferred shares also received a detachable warrant with each share purchased. Each warrant gives the holder the right to buy one common share at $35 per share within 10 years. The underwriter estimated that the market value of the preferred shares alone, excluding the conversion rights, is approximately $57 per share. Shortly after the issuance of the preferred shares, the detachable warrants traded at $8 each. Required: Record the journal entry for the issuance of these shares and warrants under IFRS.

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

Explain the conceptual meaning of the difference between the book value and market value methods of recording the conversion of bonds into common shares.

O'Neil Motor Parts issued 110,000 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. O'Neil's management estimates the value of these options at the grant date to be $1.60 each. Required: Record the issuance of the stock options.

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

How are derivative contracts generally accounted for?

Roman Corporation issued call options on 5,000 shares of POMPEI Inc. on October 21, 2019. These options give the holder the right to buy POMPEI shares at $35 per share until May 17, 2020. For issuing these options, Roman received $15,000. On December 31, 2019 (Roman's fiscal year-end), the options traded on the Montreal Exchange for $3.50 per option. On May 17, 2020, POMPEI's share price increased to $40 and the option holders exercised their options. Roman had no holdings of POMPEI shares. Required: For Roman Corporation, record the journal entries related to these call options.

Which of the following statements is correct?

Which method must be used under ASPE to account for employee stock options?

What is hedging?

A company had a debt-to-equity ratio of 1.55 before issuing convertible bonds. This ratio included $500,000 in equity. The company issued convertible bonds. The value reported for the bonds on the balance sheet is $180,000 and the conversion rights are valued at $22,000. Required: After the issuance of the convertible bonds, what is the value of the debt-to-equity ratio?

A company pays $7,000 to purchase futures contracts to buy 200 oz of gold at $1,600/oz. At the company's year-end, the price of gold was $1,625 and the value of the company's futures contracts increased to $10,000. Required: Record the journal entries related to these futures.

Which statement best describes the "incremental method"?

Which step is not required for hedge accounting under IFRS?

Explain how bonds issued with warrants alleviate adverse selection problem.

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

What is a "warrant"?

What is a derivative and what are two reasons why parties would enter into a derivative contract?

Assume that on January 15, 2021 MAK agrees to purchase US$500,000 for C$550,000 for delivery on January 15, 2022. The exchange rate at MAK's December 31, 2021 year-end was US$1 = C$0.95 and the January 15, 2022 exchange rate is US$1 = C$0.97.What is the foreign exchange gain or loss recognized at Jan 15, 2022?

A company issued 105,000 preferred shares and received proceeds of $6,100,000. These shares have a benchmark value of $50 per share and pay cumulative dividends of 6%. Buyers of the preferred shares also received a detachable warrant with each share purchased. Each warrant gives the holder the right to buy one common share at $35 per share within 10 years. The underwriter estimated that the market value of the preferred shares alone, excluding the conversion rights, is approximately $55 per share. Shortly after the issuance of the preferred shares, the detachable warrants traded at $5 each. Required: Record the journal entry for the issuance of these shares and warrants under IFRS.