Question 1

Briefly describe a compound financial instrument and its advantages.

Accepted Answer

The answer of Briefly describe a compound financial instrument and...

Question 2

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?

Accepted Answer

A) $10,000 gain. 
B) $10,000 loss. 
C) $75,000 gain. 
D) $75,000 loss.

Question 3

What is a "swap"?

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.

Question 4

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.

Accepted Answer

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

Question 5

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

Accepted Answer

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

Question 6

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

Accepted Answer

The answer of Indicate whether the following statements are true...

Question 7

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.

Accepted Answer

The answer of On December 15th,2018,Hammer paid $20,000 to purchase...

Question 8

What is a "forward"?

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.

Question 9

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.

Accepted Answer

The answer of On August 15,2018,Madison Company issued 80,000 options...

Question 10

What is a "call" 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 11

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.

Question 12

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.

Accepted Answer

The answer of A company issued 105,000 preferred shares and...

Question 13

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?

Accepted Answer

A) $701 loss. 
B) $701 gain. 
C) $711 loss. 
D) $711 gain.

Question 14

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.

Accepted Answer

The answer of On December 15,a company enters into a...

Question 15

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.

Accepted Answer

The answer of A company issued 105,000 preferred shares and...

Question 16

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

The answer of On December 1,2015,Mackenzie Mann Ltd.entered into a...

Question 17

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.

Accepted Answer

The answer of Windy Lake Lodge issued 24,000 at-the-money stock...

Question 18

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?

Accepted Answer

A) $3,000 loss. 
B) $3,000 gain. 
C) $3,500 loss. 
D) $3,500 gain.

Question 19

Contrast options with warrants.

Accepted Answer

The answer of Contrast options with warrants....

Question 20

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.

Accepted Answer

The answer of On January 1,2015,Braeben Inc.granted stock options to...

Exam 14: Complex Financial Instruments