Exam 14: Complex Financial Instruments

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.

Princeton Inc.granted 290,000 stock options to its employees.The options expire 45 years after the grant date of January 1,2011,when the share price was $23.Employees still employed by the company four years after the grant date may exercise the option to purchase shares at $45 each; that is,the options vest to the employees after five years.A consultant estimated the value of each option at the date of grant to be $2.50 each. Requirement: Record the journal entries relating to the issuance of stock options.

What is a "hedge"?

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.

What is a "call" option?

What is a "warrant"?

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.

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.

On January 1,2013,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 1,2013.Moonbeam estimated that without the conversion feature,the bonds would have sold for $21,013,098 (to yield 9%). On January 1,2015,Moonbeam converted bonds with a par value of $8.8 million.At the time of conversion,the shares were selling at $30 each. Requirements: 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).

A company had a debt-to-equity ratio of 1.65 before issuing convertible bonds.This ratio included $450,000 in equity.The company issued convertible bonds.The value reported for the bonds on the balance sheet is $200,000 and the conversion rights are valued at $25,000. Requirement: After the issuance of the convertible bonds,what is the value of the debt-to-equity ratio?

Which of the following is correct about financial instruments?

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

What is a "swap"?

Price Farms granted 290,000 stock options to its employees.The options expire 45 years after the grant date of January 1,2011,when the share price was $23.Employees still employed by Price five years after the grant date may exercise the option to purchase shares at $45 each; that is,the options vest to the employees after five years.A consultant estimated the value of each option at the date of grant to be $1.50 each. Requirement: Record the journal entries relating to the issuance of stock options.

Which statement is correct about hedge accounting?

A company pays $5,000 to purchase futures contracts to buy 50 oz of silver at $40/oz.At the company's year-end,the price of silver rose and the value of the company's futures contracts increased to $6,000. Requirement: Record the journal entries related to these futures.

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. Requirement: After the issuance of the convertible bonds,what is the value of the debt-to-equity ratio?

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. Requirement: Record the issuance of the stock options.

On January 1,2011,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 1,2013 by grantees still in the employ of the company,and they expire December 31,2017.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 1,2011 to be $4.00. On March 31,2013,60,000 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. Requirement: Record the journal entries for Gilmore's stock options.

Which of the following is not a financial instrument?