Exam 15: Financial Instruments: Complex Debt and Equity

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

The bifurcation of the proceeds from the issue of a complex financial instrument between debt and equity components will be the same, regardless of whether or not the conversion is mandatory.

The issuance of stock options will have a positive effect on a company's debt-to-equity ratio over time.

What is a "poison pill"?

Elizabeth Corp.owned a major business building in a small Canadian city.The building has a $1,345,000 mortgage that is held by a Canadian financial institution (FI).Elizabeth 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 $145,000.After discussions with the FI, they agree to a financial reorganization in that they accept $50 preferred shares at a value of $1,490,000, retractable in 15 years time at book value.The shares have first claim on the proceeds of the business building, should it be sold. Required: Prepare the journal entry to record the exchange.

When a bond has interest which may be paid in a fixed number of shares, these bonds would be classified as equity,

Cash flow hedges do not exist under ASPE.

Mutual companies will tend to record their instruments as liabilities, since these are redeemable at any time at the investor's option.

A financial asset has any of the following characteristics except:

Poison pills serve to thwart a takeover bid from an outside (hostile)takeover group.

Under ASPE, convertible debt must always be treated as debt in its entirety.

JMR Ltd.issued $100,000 of 8%, 8 year, non-convertible bond with detachable stock purchase warrants.KER Corp.purchased the entire issue.Each $1,000 bond carries 10 warrants.Each warrant entitles KER to purchase one common share for $20.The bond issue sells for 104 exclusive of accrued interest.Shortly after issuance, the warrants trade for $5 each and the bonds were quoted at 103 ex-warrants.The market value of the bonds and warrants using the proportional method was:

JMR Ltd.issues a $150,000, 7%, five-year debenture at par, repayable at maturity in common shares at DWWR's option.Interest is repayable annually in cash.Prepare the journal entry at issuance.

The conversion option attached to convertible bonds, which have a floating conversion price per share, has an intrinsic value which is based on the fair market value of the shares at the time.

Under ASPE, preferred shares must be classified as equity while shareholder loans must be classified as debt.

If cash payments to investors are dependent on one or more future events, the instrument in question would be considered equity.

An equity item is classified as debt in the financial statements and dividend payments were shown on the financial statements.For income tax purposes, the amounts will not be tax deductible.

ABC Inc., a publicly traded company, 100,000 granted stock options on January 1, Year 1, with a total value of $150,000.The option will vest over a three-year period, and employees may exercise their options as of year 4.On December 31, Year 1, it is estimated that 80% of the options will fully vest.During Year 2, an executive suddenly quit, forfeiting 20,000 options.On December 31st, Year 2 the estimate of the number of options that will fully vest by the end of Year 3 was revised to 50,000.The December 31st, Year 2 year-end accrual required with respect to these stock options would include a compensation expense amount of:

JMR Ltd.issued $300,000 of 7%, 8 year, non-convertible bond with detachable stock purchase warrants.KER Corp.purchased the entire issue.Each $1,000 bond carries 20 warrants.Each warrant entitles KER to purchase one common share for $20.The bond issue sells for 104 exclusive of accrued interest.Shortly after issuance, the warrants trade for $5 each and there was no market value for the bond.In the journal entry, the amount of the payable for the bond is:

WB Ltd.issues a $200,000, 6%, five-year debenture at par, repayable at maturity in common shares at DWWR's option.Interest is repayable annually in cash.Prepare the journal entry at issuance.