Exam 4: Statements of Financial Position and Changes in Equity; Disclosure Notes

On January 1,2014,ABC Incorporated issued $10,000,000 face amount of 8%,10 year,subordinated 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.

Perpetual Debt is accounted for as equity.

On January 1,2014,ABC Incorporated issued $10,000,000 face amount of 8%,10 year,subordinated 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 1^st,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.

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

KER Corp.issued 150,000 rights allowing the holder to acquire common shares in 3 years' time at an acquisition price of $30 per share-the current market price.It takes 5 rights to acquire each share.The corporation received $40,000 for the rights.Assuming all rights are exercised when the market price was $35,prepare journal entries at: announcement date,issuance date and exercise date

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 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.

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. Indicate how all amounts relating to the bonds will be shown on ABC financial statements for the year ending 31 December 20X2.

One of the most common forms of hybrid security is convertible debt.

A financial asset has any of the following characteristics except:

In order to determine if,in substance,a complex financial instrument is debt,the answer should be yes to all of the following except:

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

Explain why a company would want to classify a financial instrument as debt instead of equity?

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

On January 1,2014,ABC Incorporated issued $10,000,000 face amount of 8%,10 year,subordinated 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%: Prepare Journal entry to record the interest payment on the first interest date of 31 December 2014.

Cash flow hedges do not exist under ASPE.

Assume that a company wishes to grant stock options to a supplier in exchange for services rendered.The company chose to value this exchange at the going market rate charged by the suppliers' competitors.This is an example of a Level 2 Fair Value Hierarchy application.

On January 1^st,20x1,20,000 units of stock appreciation rights were granted to JKL Inc's 200 employees,each of which received 100 units which accrue evenly over the following three years.The rights allow the employees to receive cash compensation for any stock price increase on December 31^st,20x3,if they are still with the company at that time. The cash to be distributed is the difference between the fair value of the share and the reference price of $5 per share.Cumulative retention rates are expected to be 80% and 70% for 20x1 and 20x2 respectively.Twenty employees forfeited their rights in 20x1 and thirty forfeited their rights in 20x2.On December 31^st,20x3 there were 150 employees working for JKL Inc. The following data applies to JKL's SARS plan: Required: Prepare the required journal entries for 20x1,20x2 and 20x3 to record the compensation expense and ultimate cash payout related to the company's SARS plan. Although not required,students may find the following table helpful:

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.

All of the following are examples of derivative instruments except:

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