Exam 4: Complex Financial Instruments

AnnuG Inc.granted 200,000 stock options to its employees.The options expire 45 years after the grant date of January 1,2018,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 six 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.

What is speculation?

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 "put" option?

How would exercise of warrants that were part of an original compound instrument be recorded?

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.

McMillan Manufacturing issued 60,000 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.McMillan's management estimates the value of these options at the grant date to be $1.10 each. Required: Record the issuance of the stock options.

What is a "future"?

Windy Lake Lodge issued 24,000 at-the-money stock options to its management on January 1,2018.These options vest on January 1,2021.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.

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

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 15,2017.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?

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.

Nappy Lodge issued 15,000 at-the-money stock options to its management on January 1,2018.These options vest on January 1,2021.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.

On January 1,2018,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 1,2020 by grantees still in the employ of the company,and they expire December 31,2024.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 1,2018 to be $4.00. On March 31,2020,60,000 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.

Contrast options with warrants.

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.

What are the similarities and differences between forwards and futures?

Which statement best describes the "proportional method"?

Which of the following statements is correct about accounting for financial liabilities?