Exam 14: Complex Financial Instruments

Briefly describe a compound financial instrument and its advantages.

Assume that Barun 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 Jan 15,2018?

What is a "swap"?

A company issues convertible bonds with face value of $10,000,000 and receives proceeds of $10,500,000.Each $1,000 bond can be converted,at the option of the holder,into 800 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $8,300,000. Required: Record the journal entry for the issuance of these bonds based on IFRS.

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

Indicate whether the following statements are true or false with respect to characteristics of stock options.

On December 15th,2018,Hammer paid $20,000 to purchase a futures contract that entitles the company to buy US$1 million at a cost of C$1.04 million on March 15,2019.On December 31,st ,Hammer's year end,the exchange rate is US$1:C$1.09. Required: Record the journal entry for (a)the purchase of the futures contract and (b)at year-end.

What is a "forward"?

On August 15,2018,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 16,2019.Madison received $800,000 for issuing these options.At the company's year-end of December 31,2018,the options contracts traded on the Montreal Exchange at $9.50 per contract.On March 16,2019,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 "call" option?

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

A company issued 105,000 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.

Assume that Signh 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 January 15,2013?

On December 15,a company enters into a foreign currency forward to buy €100,000 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$1.55: €l. Required: Record the journal entries related to this forward contract.

A company issued 105,000 preferred shares and received proceeds of $6,100,000.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.

On December 1,2015,Mackenzie Mann Ltd.entered into a binding agreement to buy inventory costing US$300,000 for delivery on February 16,2016.Terms of the sale were COD (cash on delivery).Mackenzie Mann,which has a December 31 year-end,decided to hedge its foreign exchange risk and entered into a forward agreement to receive US$300,000 at that time.Mackenzie Mann designated the forward a fair value hedge.Pertinent exchange rates follow: Required: Record the required journal entries for December 1,December 31,and February 16 using the net method.If no entries are required,state "no entry required" and indicate why.

Windy Lake Lodge issued 24,000 at-the-money stock options to its management on January 1,2015.These options vest on January 1,2018.Windy Lake's share price was $19 on the grant date and $22 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 24,000 options.Windy Lake 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 year end?

Contrast options with warrants.

On January 1,2015,Braeben Inc.granted stock options to officers and key employees for the purchase of 180,000 of the company's no par value common shares at $30 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 Braeben'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 $2.75. On March 31,2017,30,000 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 Braeben's stock options.