Exam 14: Complex Financial Instruments

Which statement best describes the "proportional method"?

Becamel Company issued 100,000 preferred shares and received proceeds of $6,500,000.These shares have a par value of $60 per share and pay cumulative dividends of 8%.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 $30 per share within 10 years.The underwriter estimated that the market value of the preferred shares alone,excluding the conversion rights,is approximately $62 per share.Shortly after the issuance of the preferred shares,the detachable warrants traded at $3 each. Required: Record the journal entry for the issuance of these shares and 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.

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.

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.

What is a "future"?

AnnuG Inc.granted 200,000 stock options to its employees.The options expire 45 years after the grant date of January 1,2015,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 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 issues convertible bonds with face value of $5,000,000 and receives proceeds of $6,500,000.Each $1,000 bond can be converted,at the option of the holder,into 80 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $6,300,000. Required: Record the journal entry for the issuance of these bonds based on IFRS.

On January 1,2015,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 1,2017 by grantees still in the employ of the company,and they expire December 31,2021.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 1,2015 to be $4.00. On March 31,2017,60,000 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.

In the table below,choose the financial instrument that best explains the example on the right side.Types of financial instrument to select from: Financial asset,financial liability,equity,compound instrument,basic option,swap,forward,future,warrant,put option,or call option.

Nappy Lodge issued 15,000 at-the-money stock options to its management on January 1,2015.These options vest on January 1,2018.Nappy's share price was $20 on the grant date and $25 on the vesting date.Estimates of the fair value of the options showed that they were worth $3 on the grant date and $11 on the vesting date.On the vesting date,management exercised all 15,000 options.Nappy has a December 31 year-end. Required: Record all of the journal entries relating to the stock options.

LMN Company reported the following amounts on its balance sheet at July 31,2018: Liabilities Convertible bonds payable,$10,000,000 face value 9%,due July 31,2019 9,909,091 Equity Additional information 1.The bonds pay interest each July 31.Each $1,000 bond is convertible into 10 common shares.The bonds were originally issued to yield 10%.On July 31,2019,all the bonds were converted after the final interest payment was made.LMN uses the book value method to record bond conversions as recommended under IFRS. 2.No other share or bond transactions occurred during the year. Required: a.Prepare the journal entry to record the bond interest payment on July 31,2019. b.Calculate the total number of common shares outstanding after the bonds' conversion on July 31,2019. c.Prepare the journal entry to record the bond conversion.

A company had a debt-to-equity ratio of 1.64 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?

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.

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.

Price Farms 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 Price five 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 $1.50 each. Required: Record the journal entries relating to the issuance of stock options.

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

A company issued 95,000 preferred shares and received proceeds of $6,000,000.These shares have a par 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 $64 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.

How should warrants on the company's own common shares be accounted for?

Assume that MAK agrees to purchase US$500,000 for C$550,000 on January 15,2018.The exchange rate at year end is US$1 = C$0.95 and the January 15,2018 exchange rate is US$1 = C$0.97.What journal entry is required at year end?