Exam 14: Complex Financial Instruments

On August 15,2011,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 16,2012.Madison received $800,000 for issuing these options.At the company's year-end of December 31,2011,the options contracts traded on the Montreal Exchange at $9.50 per contract.On March 16,2012,MVC shares closed at $63 per share,so none of the options was exercised. Requirement: Record the journal entries related to these call options.

A company issued 100,000 preferred shares and received proceeds of $5,750,000.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. Requirement: Record the journal entry for the issuance of these shares and warrants under IFRS.

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

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.

How should employee stock options be accounted for?

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

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

Breezy Lodge issued 25,000 at-the-money stock options to its management on January 1,2012.These options vest on January 1,2015.Breezy's share price was $18 on the grant date and $25 on the vesting date.Estimates of the fair value of the options showed that they were worth $4 on the grant date and $11 on the vesting date.On the vesting date,management exercised all 24,000 options.Breezy has a December 31 year-end. Requirement: Record all of the journal entries relating to the stock options.

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

Explain how convertible bonds alleviate moral hazard.

In the table below,choose the financial instrument that best explains the example on the right side.Types of financial instrument to select from: Financial asset,financial liability,equity,compound instrument,basic option,swap,forward,future,warrant,put option,or call option.

What is an option?

Which statement best describes the "proportional method"?

Which statement is correct about accounting for financial instruments?

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.

Which statement best explains the accounting for compound instruments?

Which statement is not correct for the "proportional method"?

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

Explain the meaning of and the difference between the book value and market value to record the conversion of bonds into common shares.

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.98 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2013?