Exam 15: Financial Instruments: Complex Debt and Equity

On January 20X2, ABC Corporation issued $1,000,000 face amount of 8%, five year, convertible debentures.Interest is payable semi-annually on 30 June and 31 December.The debentures are convertible at the holder's option at the rate of 20 common shares for each $1,000 bond.The market rate of interest for non-convertible bonds of similar risk and maturity is 6%.The net proceeds received by ABC Corporation amounted to $1,250,000. Prepare a Journal entry for interest expense on 30 June 20X2 and 31 December 20X2.Assume that ABC uses straight-line amortization for bond premium and discount.

When a bond matures, an investor will convert if the market price of the convertible bond is higher than the conversion price of the bond.

Why would a corporation issue retractable preferred share in a private placement rather than a normal debt arrangement?

In substance, a complex financial instrument will be treated as debt if the answer is yes to two basic criteria.What are they?

Derivatives may be described as:

A company issues a financial instrument for $40,000 paying interest of $4,000 per year.How would the repayment of the financial instrument be treated if it was determined to be debt?

On January 20X2, ABC Corporation issued $1,000,000 face amount of 8%, five year, convertible debentures.Interest is payable semi-annually on 30 June and 31 December.The debentures are convertible at the holder's option at the rate of 20 common shares for each $1,000 bond.The market rate of interest for non-convertible bonds of similar risk and maturity is 6%.The net proceeds received by ABC Corporation amounted to $1,250,000. Assume that the holders of $300,000 face value bonds exercise their conversion privilege on 1 January 20X5, when market value of the common shares is $65.Prepare the journal entry to record the conversion, using the book value method.

The accounting classification of a financial instrument is determined by its tax status.

On January 1, Year 1, ABC Inc., a publicly traded enterprise, issued $4,000,000 worth of bonds with detachable stock warrants.The bonds mature on December 31st, Year 4 and pay interest annually on December 31st at a coupon rate of 6% per annum.The yield to maturity on similar bonds was 5% at the date of issue.The bonds were issued at 108. Based on the information provided, which of the following statements is most correct?

Induced conversions of convertible debt arise when the debtor offers a "sweetener" to encourage the creditor to promptly convert the debt.

VB Ltd.raises $150,000 by issuing a financial instrument that pays interest at a rate of 8% per year to the investor.At the end of the fourth year, the financial instrument is retired for $155,000.If the financial instrument is treated as debt then:

VB Ltd.raises $150,000 by issuing a financial instrument that pays interest at a rate of 8% per year to the investor.At the end of the fourth year, the financial instrument is retired for $155,000.If the financial instrument is treated as equity then:

If it is the company's option to repay the debentures through the issuance of common shares, the principal component of the bonds is debt.

A company issues a convertible bond.Management can essentially force conversion as long as:

Perpetual debt is valued as debt because it has no equity component.

S Corporation created a stock option plan for its two top executives.The plan provided that each executive would receive 1,000 options, which would enable him or her to purchase 100 shares at 75 percent of the market price on the date the options, became exercisable.The options were exercisable in two years.At the date of granting the options, the market price of the shares was $12 per share.The date of measurement for the stock option plan was the:

Stock appreciation rights (SARS)and share based payments are only payable in common shares or other equity instruments.

On January 1, 2014, ABC Incorporated issued $10,000,000 face amount of 8%, 10 year, subordinate convertible debentures at face value in a private placement.The debentures pay interest annually, in cash, on 31 December.The bonds were issued for $12 million, and that the market rate was 6%: Assume that the shares were never converted, and the principal was simply repaid at maturity.Provide the required journal entry.

An option is:

On January 1, 2014, ABC Incorporated issued $10,000,000 face amount of 8%, 10 year, subordinate convertible debentures at face value in a private placement.The debentures pay interest annually, in cash, on 31 December.The bonds were issued for $12 million, and that the market rate was 6%: Assume that on January 1st, 2015, the shares were converted when the market price of the share was $102.Prepare the required journal entry.