Question 1

Which statement best describes the "incremental method"?

Accepted Answer

A)  Under this method of accounting, for a convertible bond, all of the bond value would be counted as a liability. 
B)  Under this method of accounting, for a convertible bond, the issuing entity would record a liability for the estimated value of the bond without the conversion feature. 
C)  Under this method of accounting, for a convertible bond, an estimate would be made of the fair value of all components and allocated proportionally to all components. 
D)  Under this method of accounting, the common share component is considered the most reliably measured amount. 
A)  Under this method of accounting, for a convertible bond, all of the bond value would be counted as a liability. 
B)  Under this method of accounting, for a convertible bond, the issuing entity would record a liability for the estimated value of the bond without the conversion feature. 
C)  Under this method of accounting, for a convertible bond, an estimate would be made of the fair value of all components and allocated proportionally to all components. 
D)  Under this method of accounting, the common share component is considered the most reliably measured amount. B

Question 2

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.

Accepted Answer

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Question 3

Describe the underlying quantity that the derivative instrument derives its value from?

Accepted Answer

That underlying quantity is something implicitly part of the asset that is related to the derivative.The quantity varies.Examples: the price of a share,the value of a stock index,the exchange rate,the temperature.

Question 4

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?

Accepted Answer

Total liabilities before bond issuance =

Question 5

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

Accepted Answer

A)  Fair value method. 
B)  Proportional method. 
C)  Book value method. 
D)  Zero common equity method. 
A)  Fair value method. 
B)  Proportional method. 
C)  Book value method. 
D)  Zero common equity method.

Question 6

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

Accepted Answer

A)  Fair value method. 
B)  Proportional method. 
C)  Incremental method. 
D)  Zero common equity method. 
A)  Fair value method. 
B)  Proportional method. 
C)  Incremental method. 
D)  Zero common equity method.

Question 7

What is a "warrant"?

Accepted Answer

A)  A contract in which two parties agree to exchange cash flows (e.g. interest cash flows). 
B)  A contract in which one party commits upfront to buy or sell commonly traded items at a defined price and maturity date. 
C)  A contract in which one party commits upfront to buy or sell something at a defined price at a defined future date. 
D)  A contact that gives the right, but not the obligation, to buy a share at a specified price over a specified period of time. 
A)  A contract in which two parties agree to exchange cash flows (e.g. interest cash flows). 
B)  A contract in which one party commits upfront to buy or sell commonly traded items at a defined price and maturity date. 
C)  A contract in which one party commits upfront to buy or sell something at a defined price at a defined future date. 
D)  A contact that gives the right, but not the obligation, to buy a share at a specified price over a specified period of time.

Question 8

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

Accepted Answer

A)  Intrinsic value of options. 
B)  Time value of options. 
C)  Fair value of the options. 
D)  Market value of the shares. 
A)  Intrinsic value of options. 
B)  Time value of options. 
C)  Fair value of the options. 
D)  Market value of the shares.

Question 9

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.

Accepted Answer

IFRS requires use of the incremental met

Question 10

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.

Accepted Answer

IFRS requires use of the incre

Question 11

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).

Accepted Answer

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Question 12

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

Accepted Answer

A)  Under this method of accounting, for a convertible bond, all of the bond value would be counted as a liability. 
B)  Under this method of accounting, for a convertible bond, the issuing entity would record a liability for the estimated value of the bond without the conversion feature. 
C)  Under this method of accounting, for a convertible bond, an estimate would be made of the fair value of all components and allocated proportionally to all components. 
D)  Under this method of accounting, the common share component is considered the least reliably measured amount. 
A)  Under this method of accounting, for a convertible bond, all of the bond value would be counted as a liability. 
B)  Under this method of accounting, for a convertible bond, the issuing entity would record a liability for the estimated value of the bond without the conversion feature. 
C)  Under this method of accounting, for a convertible bond, an estimate would be made of the fair value of all components and allocated proportionally to all components. 
D)  Under this method of accounting, the common share component is considered the least reliably measured amount.

Question 13

Which step is not required for hedge accounting under IFRS?

Accepted Answer

A)  Demonstration of hedge's effectiveness. 
B)  Identification of the risk exposure. 
C)  Payment of fees to the counterparty. 
D)  Designation of the hedging instrument. 
A)  Demonstration of hedge's effectiveness. 
B)  Identification of the risk exposure. 
C)  Payment of fees to the counterparty. 
D)  Designation of the hedging instrument.

Question 14

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 31st ,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.

Accepted Answer

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Question 15

Which of the following statements is correct?

Accepted Answer

A)  Repayment of a bond on the first day of the fiscal year will increase the shareholders' return on equity. 
B)  Conversion of a 10% bond with no short term maturity, into common shares on the first day of the year will improve the current ratio. 
C)  The sale of 2,000 common shares for cash will worsen the shareholders' return on equity. 
D)  The sale of $5,000 of inventory on credit for $6,000 will worsen the shareholders' return on equity. 
A)  Repayment of a bond on the first day of the fiscal year will increase the shareholders' return on equity. 
B)  Conversion of a 10% bond with no short term maturity, into common shares on the first day of the year will improve the current ratio. 
C)  The sale of 2,000 common shares for cash will worsen the shareholders' return on equity. 
D)  The sale of $5,000 of inventory on credit for $6,000 will worsen the shareholders' return on equity.

Question 16

What are the two exceptions to the general rule of measuring derivatives at fair value,with changes in fair value recorded through income?

Accepted Answer

The two exceptions to this gen

Question 17

Which statement is correct about accounting for financial instruments?

Accepted Answer

A)  All financial instruments are accounted for at fair value through profit or loss. 
B)  All are accounted for in accordance to their economic substance. 
C)  All financial instruments are accounted for at amortized cost. 
D)  All financial instruments are accounted for at fair value through OCI. 
A)  All financial instruments are accounted for at fair value through profit or loss. 
B)  All are accounted for in accordance to their economic substance. 
C)  All financial instruments are accounted for at amortized cost. 
D)  All financial instruments are accounted for at fair value through OCI.

Question 18

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.

Accepted Answer

Note that in the absence of ot

Question 19

Which statement is correct about hedge accounting?

Accepted Answer

A)  Hedge accounting must be reported in profit or loss. 
B)  Hedge accounting must be reported in OCI. 
C)  The financial effects of the hedging item and instrument offset 100% in hedge accounting. 
D)  It permits the hedging item and the hedging instrument to be recorded in the same way. 
A)  Hedge accounting must be reported in profit or loss. 
B)  Hedge accounting must be reported in OCI. 
C)  The financial effects of the hedging item and instrument offset 100% in hedge accounting. 
D)  It permits the hedging item and the hedging instrument to be recorded in the same way.

Question 20

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

Accepted Answer

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Which statement best describes the "incremental method"?

Describe the underlying quantity that the derivative instrument derives its value from?

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

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

What is a "warrant"?

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

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

Which step is not required for hedge accounting under IFRS?

Which of the following statements is correct?

What are the two exceptions to the general rule of measuring derivatives at fair value,with changes in fair value recorded through income?

Which statement is correct about accounting for financial instruments?

Which statement is correct about hedge accounting?

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

Current Liabilities and Contingencies

Non-Current Financial Liabilities

Equities

Earnings Per Share

Accounting for Income Taxes

Pensions and Other Employee Future Benefits

Accounting for Leases

Statement of Cash Flows

Accounting Changes

Filters

Exam 4: Complex Financial Instruments

Which statement best describes the "incremental method"?

Describe the underlying quantity that the derivative instrument derives its value from?

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

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

What is a "warrant"?

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

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

Which step is not required for hedge accounting under IFRS?

Which of the following statements is correct?

What are the two exceptions to the general rule of measuring derivatives at fair value,with changes in fair value recorded through income?

Which statement is correct about accounting for financial instruments?

Which statement is correct about hedge accounting?

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

Current Liabilities and Contingencies

Non-Current Financial Liabilities

Equities

Earnings Per Share

Accounting for Income Taxes

Pensions and Other Employee Future Benefits

Accounting for Leases

Statement of Cash Flows

Accounting Changes

Filters