Exam 14: Complex Financial Instruments

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

On August 15,2011,Madison Company issued 10,000 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 $100,000 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 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. Requirement: Record the journal entry for the issuance of these shares and warrants under IFRS.

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.

Which of the following is not an underlying?

A company located in Canada spends $2,000 to purchase a foreign currency futures contract to buy US$100,000 at C$1.05:US$1.00.The contract matures 110 days later.Under which of the following circumstances could the company consider this future contract to be a fair value hedge for accounting purposes?

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

Assume that Barun 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 Jan 15,2013?

Which method is used under ASPE to account for compound instruments?

How is the subsequent conversion of bonds into common shares recorded under IFRS?

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

Explain what a "fair value" and "cash flow" hedge is and how each is accounted for under IFRS.

LMN Company reported the following amounts on its balance sheet at July 31,2013: Liabilities Equity Preferred shares,no par,3,000,000 shares authorized,10,000 Common shares,no par,1,000,000 shares authorized,180,000 Additional information 1.The bonds pay interest each July 31.Each $1,000 bond is convertible into 10 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.

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?

A company issued 75,000 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. Requirement: Record the journal entry for the issuance of these shares and warrants under IFRS.

A company issues convertible bonds with face value of $7,000,000 and receives proceeds of $8,500,000.Each $1,000 bond can be converted,at the option of the holder,into 100 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $7,300,000. Requirement: Record the journal entry for the issuance of these bonds based on IFRS.

Assume that Millan agrees to purchase US$100,000 for C$84,745 on January 15,2013.The exchange rate at year end is US$1 = C$1.20 and the January 15,2013 exchange rate is US$1 = C$1.19.What journal entry is required at year end?

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.

What is a "future"?

AnnuG Inc.granted 200,000 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 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 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.