Exam 15: Financial Instruments: Complex Debt and Equity

A forward contract is:

If a company issues debt that is convertible at the shareholder's option, in substance, the debt is:

Convertible debt that is convertible to a variable number of shares at the investor's option will normally be classified as a liability.

Convertible bonds with a floating conversion price is treated solely as debt.

The incremental method to accounting for convertible bonds means that:

On April 1, Year 1, ABC Inc., a publicly traded company, issued $12,000,000 worth of 5-year, convertible bonds at 105.The bonds pay interest semi-annually, at a stated annual rate of 6%, each June 30th and December 31st.The market rate for bonds was 7%.The bonds were dated January 1, Year 1. At the date of issue, bond issue costs of $100,000 were incurred.These costs are to be amortized on straight-line basis at every interest payment date. Part 1: Prepare the required journal entries on the following dates: April 1, Year 1.June 30th, Year 1. December 31st, Year 3. Part 2: Assume that on March 31st, Year 4, half of the bondholders decided to convert their bonds to common shares.These bondholders received the interest they were due at that date. Required: Prepare the required journal entries at that date.Assume that any unamortized bond issue costs relating to these bonds only were expensed on that date. Part 3: Assume that on December 31st, Year 4, ABC Inc.decided to induce (force)conversion of the remaining bonds, which were trading at 98 on that date, by giving the bondholders an additional $400,000.Do not record the interest expense accrual or expensing of bond issue costs on this date for this part (assume that these entries have already been made). Required: Prepare the required journal entries at that date. Part 4: It is now January 1, Year 1, and Borrower Inc.is in financial distress.It currently holds long-term no payable due to its bank, the terms of which are as follows: Principal: $12,000,000 due December 31st, Year 5 Semi-Annual Interest Payments each June 30th and December 31st: $360,000 As a result of the company's distress, on January 1st, Year 1 Borrower Inc.promptly renegotiated the terms of its loan as follows: Principal: $10,000,000 due December 31st, Year 5 Semi-Annual Interest Payments each June 30th and December 31st: $300,000 The market rate of 8% per annum has been unchanged since Borrower took out its initial loan. Required: From Borrower Inc.'s perspective, is this a settlement or modification of terms? Explain by showing calculations and providing the journal entry to adjust the loan if necessary.If no entry is required, explain why. Prepare Borrower Inc.June 30th, Year 1 Interest expense entry.

Once the market price of shares rises above the conversion price on convertible bonds, the bond ceases to trade as debt, and is effectively traded as equity.

Compensatory stock options were granted to executives on January 1, 20x3, with a measurement date of June 30, 20x4, for services to be rendered during 20x3, 20x4, and 20x5.The excess of the market value of the shares over the option price at the measurement date was reasonably estimable at the date of grant.The stock option was exercised on October 31, 20x5.Compensation expense should be recognized in the income statement in which of the following years?

When convertible bonds are submitted for conversion, all of the following must be updated except:

Retractable preferred shares are those which can be redeemed only at the investor's discretion.

Which of the following forms part of the definition of a financial liability?

Rights granted to existing shareholders entitling them to purchase additional shares result in a credit to Contributed Surplus.

KIM Corp.owned a major business building in a small Canadian city.The building has a $1,155,000 mortgage that is held by a Canadian financial institution (FI).KIM Corp.has had recent cash flow problems, in part, due to the low vacancy rates in the business buildings.Interest is 15 months in arrears and totals $132,000.After discussions with the FI, they agree to a financial reorganization that results in the FI accepting $800,000 from the shareholders who agree to inject this amount of cash into the business. Required: Prepare the journal entry to record the exchange.What is this called?

Hedge accounting is often performed to minimize any accounting mismatch between the hedged and hedging items and is strictly voluntary.

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 bonds were retired for $12.5 million.Valuation models indicate that $500,000 of the proceeds is attributable to the equity portion, while the balance is attributable to the bonds.Prepare the required journal entry.

Share-based payments to suppliers are valued at the value of the goods or services received.

The tax status of a financial instrument is determined by its legal form and not its substance.

When preferred shares are classified as debt, their dividends are deducted from Retained Earnings, thus bypassing earnings.

Which of the following are requirements for hedge accounting?

Options are ONLY for the purpose of buying or selling financial instruments.