Exam 14: Complex Financial Instruments

A company issued 75,000 preferred shares and received proceeds of $7,000,000.These shares have a par 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.

Which statement best describes the "incremental method"?

How would the exercise of an option,that was part of an initial compound instrument,be recorded?

What is a "put" option?

What is speculation?

Princeton Inc.granted 290,000 stock options to its employees.The options expire 45 years after the grant date of January 1,2016,when the share price was $23.Employees still employed by the company four years after the grant date may exercise the option to purchase shares at $45 each;that is,the options vest to the employees after five 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.

A company located in Canada spends $2,000 to purchase a foreign currency futures contract to buy US$100,000 at C$1.05:US$1.00.The contract matures 110 days later.Under which of the following circumstances could the company consider this future contract to be a fair value hedge for accounting purposes?

Which statement is correct about hedge accounting?

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

How are derivative contracts generally accounted for?

Which statement is correct about accounting for financial instruments?

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

Which step is not required for hedge accounting under IFRS?

Breezy Lodge issued 25,000 at-the-money stock options to its management on January 1,2015.These options vest on January 1,2018.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.

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2018.The exchange rate at year end is US$1 = C$0.98 and the January 15,2018 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2013?

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

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.

List three common stock compensation plans and describe them.

Explain how bonds issued with warrants alleviate adverse selection problem.

How should employee stock options be accounted for?