Question 1

Which statement is not correct for the "proportional 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.

Question 2

Which of the following is correct about financial instruments?

Accepted Answer

A) Accounting for financial instruments has been consistent. 
B) There is no economic substance to financial instruments. 
C) They are often designed to circumvent accounting standards. 
D) All financial instruments are accounted for at fair value.

Question 3

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.
Requirement:
Record the journal entry for the issuance of these bonds based on IFRS.

Accepted Answer

The answer of A company issues convertible bonds with face...

Question 4

Roman Corporation issued call options on 5,000 shares of POMPEI Inc. on October 21,2012. These options give the holder the right to buy POMPEI shares at $35 per share until May 17,2013. For issuing these options,Roman received $15,000. On December 31,2012 (Roman's fiscal year-end),the options traded on the Montreal Exchange for $3.50 per option. On May 17,2013,POMPEI's share price increased to $40 and the option holders exercised their options. Roman had no holdings of POMPEI shares.
Requirement:
For Roman Corporation,record the journal entries related to these call options.

Accepted Answer

The answer of Roman Corporation issued call options on 5,000...

Question 5

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.

Question 6

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.
Requirement:
Record the issuance of the stock options.

Accepted Answer

The answer of O'Neil Motor Parts issued 110,000 stock options...

Question 7

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

Accepted Answer

A) Once separated,this component is accounted for at fair value through profit or loss. 
B) Once separated,this component is accounted for in accordance with its substance. 
C) Once separated,this component is accounted for amortized cost. 
D) Once separated,this component is accounted for at historical cost.

Question 8

Explain how bonds issued with warrants alleviate adverse selection problem.

Accepted Answer

The answer of Explain how bonds issued with warrants alleviate...

Question 9

Naples Corporation issued call options on 20,000 shares of VESPUS Inc. on October 21,2012. These options give the holder the right to buy VESPUS shares at $35 per share until May 17,2013. For issuing these options,Naples received $60,000. On December 31,2012 (Naples's fiscal year-end),the options traded on the Montreal Exchange for $3.50 per option. On May 17,2013,VESPUS's share price increased to $40 and the option holders exercised their options. Naples had no holdings of VESPUS shares.
Requirement:
For Naples Corporation,record the journal entries related to these call options.

Accepted Answer

The answer of Naples Corporation issued call options on 20,000...

Question 10

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

Accepted Answer

A) Common stock is recorded at an amount equal to the fair value of the options at date of conversion. 
B) Common stock is recorded at an amount equal to the cash received plus the contributed surplus initially recorded 
C) Common stock is recorded at an amount equal to the market price of the shares on conversion date. 
D) Common stock is recorded at an amount equal to the price determined by the Black-Sholes model.

Question 11

Which statement is correct about the accounting for employee stock options?

Accepted Answer

A) The expense is recorded over the period of vesting. 
B) The expense is recorded over the period to expiry. 
C) The expense is recorded immediately upon grant date. 
D) No expense is recorded for accounting purposes.

Question 12

Which statement best describes the "proportional 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.

Question 13

What is a "put" option?

Accepted Answer

A) A contract that gives the holder the right to sell an instrument at a pre-specified price. 
B) A contract that is derived from some other underlying quantity,index,asset or event. 
C) A contract that gives the holder the right to acquire an instrument at a pre-specified price. 
D) A contract that gives the holder the right to buy or sell something at a specified price.

Question 14

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

Accepted Answer

A) Fair value. 
B) Fair value through profit or loss. 
C) Amortized cost. 
D) Historical cost.

Question 15

LMN Company reported the following amounts on its balance sheet at July 31,2013:
Liabilities
  Equity
  Additional information
1. The bonds pay interest each July 31. Each $1,000 bond is convertible into 5 common shares. The bonds were originally issued to yield 10%. On July 31,2014,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.
Requirement:
a. Prepare the journal entry to record the bond interest payment on July 31,2014.
b. Calculate the total number of common shares outstanding after the bonds' conversion on July 31,2014.
c. Prepare the journal entry to record the bond conversion.

Accepted Answer

The answer of LMN Company reported the following amounts on...

Question 16

Sorrentino Corporation issued call options on 20,000 shares of BWC Inc. on October 21,2012. These options give the holder the right to buy BWC shares at $35 per share until May 17,2013. For issuing these options,Sorrentino received $20,000. On December 31,2012 (Sorrentino's fiscal year-end),the options traded on the Montreal Exchange for $2.00 per option. On May 17,2013,BWC's share price increased to $38 and the option holders exercised their options. Sorrentino had no holdings of BWC shares.
Requirement:
For Sorrentino Corporation,record the journal entries related to these call options.

Accepted Answer

The answer of Sorrentino Corporation issued call options on 20,000...

Question 17

Assume that MAK 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 15,2013 exchange rate is US$1 = C$0.97. What journal entry is required at year end?

Accepted Answer

A) 0 
B) $65,000 loss. 
C) $75,000 gain. 
D) $75,000 loss.

Question 18

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.
Requirement:
Record the journal entry for the issuance of these shares and warrants under IFRS.

Accepted Answer

The answer of A company issued 95,000 preferred shares and...

Question 19

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.
Requirement:
Record the issuance of the stock options.

Accepted Answer

The answer of McMillan Manufacturing issued 60,000 stock options to...

Question 20

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

Accepted Answer

A) Right to buy 100 shares of CIBC over the next 5 years. 
B) Commitment to buy 100 barrels of oil next month at $125/barrel. 
C) Commitment to buy $100,000 US dollars in 4 months at US$=1.10. 
D) Pay interest at prime +3% in exchange for receiving interest at 5%.

Exam 4: Complex Financial Instruments