Exam 14: Complex Financial Instruments

What is a "put" option?

A company issues convertible bonds with face value of $5,000,000 and receives proceeds of $6,500,000.Each $1,000 bond can be converted,at the option of the holder,into 80 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $6,300,000. Requirement: Record the journal entry for the issuance of these bonds based on IFRS.

Assume that Ariel 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 when the contract is initiated?

Explain how bonds issued with warrants alleviate adverse selection problem.

Windy Lake Lodge issued 24,000 at-the-money stock options to its management on January 1,2012.These options vest on January 1,2015.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. Requirement: Record all of the journal entries relating to the stock options.

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

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 year end?

Which statement best describes the "incremental method"?

On December 15,a company enters into a foreign currency forward to buy €300,000 at C$I.60 per euro in 30 days.The exchange rate on the day of the company's year-end of December 31 was C$1.59: €l. Requirement: Record the journal entries related to this forward contract.