Exam 14: Complex Financial Instruments

Assume that Millan agrees to purchase US$100,000 for C$84,745 on January 15,2018.The exchange rate at year end is US$1 = C$1.20 and the January 15,2018 exchange rate is US$1 = C$1.19.What journal entry is required at year end?

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

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

On September 30,2018,Pennsylvania Co.issued $3 million of 10%,10-year convertible bonds maturing on September 30,2028,with semi-annual coupon payments on March 31 and September 30.Each $1,000 bond can be converted into 80 no par value common shares.In addition,each bond included 20 detachable common stock warrants with an exercise price of $20 each.Immediately after issuance,the warrants traded at $5 each on the open market.Gross proceeds on issuance were $4.6 million (including accrued interest).From these proceeds,the company paid underwriting fees of $55,000.Without the warrants and conversion features the bond would be expected to yield 6% annually.Pennsylvania's year-end is December 31. On February 22,2021,warrant holders exercised one-half of the warrants.The shares of Pennsylvania traded at $44 each on this day. Required: a)Determine how Niagara should allocate the $4,600,000 proceeds into its components. b)Prepare all the journal entries for fiscal year 2018. c)Record the journal entry for the exercise of stock warrants on February 22,2021.

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

O'Neil Manufacturing issued 200,000 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 $1.75 each. Required: Record the issuance of the stock options.

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

Which statement best explains the accounting for compound instruments?

What is a "hedge"?

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).

A company issued 100,000 preferred shares and received proceeds of $5,750,000.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.

Identify the type of hedge under each of the following transactions:

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

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

Assume that Ariel agrees to purchase US$500,000 for C$550,000 on January 15,2013.The exchange rate at year end is US$1=C$0.95 and the January 15,2017 exchange rate is US$1=C$0.97.What journal entry is required when the contract is initiated?

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.

How would the equity portion of the compound instrument be recorded?

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

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