Exam 15: Financial Instruments: Complex Debt and Equity

General debt carries a firm commitment to interest payments and repayment of capital at maturity.

For each type of financial instrument, the reporting enterprise should disclose:

On January 1st, 20x9, GHI Inc.granted options to its twenty employees allowing for the purchase of 12,000 shares at $5 per share.The options vest evenly over the 3 years following the date of issue.The options are only exercisable as of December 31st, 20x11.The fair value of these options (using an Option Pricing model)is $30,000. Part A: Assume that all options have vested but that none were exercised on December 31st, 20x11.Provide the required journal entry. Part B: Assume that all options have vested and all were exercised on December 31st, 20x11.Provid the required journal entry. Part C: Suppose that some of the options were forfeited by the employees.Actual and estimated forfeiture data are provided in the table below: Provide the required journal entries to record the accrual of compensation expense and the exercise o the options as per IFRS. Part D: Suppose that some of the options were forfeited by the employees.Actual and estimated forfeiture data are provided in the table below: Provide the journal entries required under ASPE.

Primary securities that have both debt and equity characteristics are called:

Futures contracts are traded on public exchanges while forward contracts are not.

If a company issues debt that is convertible at the corporation's option, in substance, the debt is equity.

An investor purchases a $10,000 bond convertible into common shares at a price of $50.How many shares are available for conversion?

Stock options have no intrinsic value when the market price of the share exceeds its conversion price.

The crucial aspect of debt on the financial statements is:

An instrument may be classified as equity even though the investor can demand payment.

Under ASPE, forfeitures which occur under a stock-based compensation structure are accrued throughout the vesting period.

Amanda Corp.owned a major business building in a small Canadian city.The building has a $1,555,000 mortgage that is held by a Canadian financial institution (FI).Amanda 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 in that they accept $50 preferred shares at a value of $1,490,000, retractable in 15 yea 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.

Embedded derivatives are those that can be detached and separately sold from their host contracts.

With respect to convertible bonds, whose conversion is mandatory, only the interest stream is valued as debt; the bond principal and conversion features are considered equity.

ASPE records complex financial instruments in keeping with their legal form, while IFRS records these based on their substance.