Exam 4: Complex Financial Instruments

On August 15,2018,Madison Company issued 10,000 options on the shares of MVC (Middefield Valley Corporation).Each option gives the option holder the right to buy one share of MVC at $70 per share until March 16,2019.Madison received $100,000 for issuing these options.At the company's year-end of December 31,2018,the options contracts traded on the Montreal Exchange at $9.50 per contract.On March 16,2019,MVC shares closed at $63 per share,so none of the options was exercised. Required: Record the journal entries related to these call options.

Which statement is correct about the accounting for employee stock options?

Which method must be used under IFRS to account for employee stock options?

Assume that Signh agrees to purchase US$100,000 for C$84,745 on January 15,2018.The exchange rate at year-end is US$1 = C$1.20 and the January 15,2018 exchange rate is US$1 = C$1.19.What journal entry is required at January 15,2013?

List three common stock compensation plans and describe them.

What is a "hedge"?

A company issued 100,000 preferred shares and received proceeds of $5,750,000.These shares have a par value of $50 per share and pay cumulative dividends of 6%.Buyers of the preferred shares also received a detachable warrant with each share purchased.Each warrant gives the holder the right to buy one common share at $35 per share within 10 years. The underwriter estimated that the market value of the preferred shares alone,excluding the conversion rights,is approximately $55 per share.Shortly after the issuance of the preferred shares,the detachable warrants traded at $5 each. Required: Record the journal entry for the issuance of these shares and warrants under IFRS.

Give 4 examples of cash flow hedges:

LMN Company reported the following amounts on its balance sheet at July 31,2019: Liabilities Additional information 1.The bonds pay interest each July 31.Each $1,000 bond is convertible into 5 common shares.The bonds were originally issued to yield 10%.On July 31,2019,all the bonds were converted after the final interest payment was made.LMN uses the book value method to record bond conversions as recommended under IFRS. 2.No other share or bond transactions occurred during the year. Required: a.Prepare the journal entry to record the bond interest payment on July 31,2019. b.Calculate the total number of common shares outstanding after the bonds' conversion on July 31,2019. c.Prepare the journal entry to record the bond conversion.

On December 15,a company enters into a foreign currency forward to buy €300,000 at C$1.60 per euro in 30 days.The exchange rate on the day of the company's year-end of December 31 was C$1.59: €l. Required: Record the journal entries related to this forward contract.

On January 1,2018 Taffy Inc.granted 210,000 stock appreciation rights (SARs)to its executives.Each SAR entitled its holder to receive cash equal to the difference between the market price of the common share and the benchmark price of $16.The SARs vested after three years and expired on Dec.31,20 23.On January 1,2021,100,000 SARs are exercised.The market price of the shares remained at $20.On January 1,2022,50,000 SARS are exercised.The market price of the shares remained at $22.The remaining SARs expired. Pertinent stock-related data are listed below: Assume that Taffy Inc.reports its financial results in accordance with ASPE. Required: a.Prepare the journal entry at December 31,2018,to record compensation expense. b.Prepare the journal entry at December 31,2019,to record compensation expense. c.Prepare the journal entry at December 31,2020,to record compensation expense. d.Prepare the journal entry at January 1,2021,to record the partial exercise of the SARs. e.Prepare the journal entry at December 31,2021,to record compensation expense. f.Prepare the journal entry at January 1,2022,to record the partial exercise of the SARs. g.Prepare the journal entry at December 31,2022,to record compensation expense. h.Prepare the journal entry at December 31,2023,to record compensation expense.

Which statement best explains the accounting for compound instruments?

A company issues convertible bonds with face value of $10,000,000 and receives proceeds of $10,500,000.Each $1,000 bond can be converted,at the option of the holder,into 800 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $8,300,000. Required: Record the journal entry for the issuance of these bonds based on IFRS.

A company had a debt-to-equity ratio of 1.64 before issuing convertible bonds.This ratio included $500,000 in equity.The company issued convertible bonds.The value reported for the bonds on the balance sheet is $180,000 and the conversion rights are valued at $22,000. Required: After the issuance of the convertible bonds,what is the value of the debt-to-equity ratio?

A company issues convertible bonds with face value of $7,000,000 and receives proceeds of $8,500,000.Each $1,000 bond can be converted,at the option of the holder,into 100 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $7,300,000. Required: Record the journal entry for the issuance of these bonds based on IFRS.

Roman Corporation issued call options on 5,000 shares of POMPEI Inc.on October 21,2019.These options give the holder the right to buy POMPEI shares at $35 per share until May 17,2020.For issuing these options,Roman received $15,000.On December 31,2019 (Roman's fiscal year-end),the options traded on the Montreal Exchange for $3.50 per option.On May 17,2020,POMPEI's share price increased to $40 and the option holders exercised their options.Roman had no holdings of POMPEI shares. Required: For Roman Corporation,record the journal entries related to these call options.

Identify the type of hedge under each of the following transactions:

How would the liability portion of the compound instrument be recorded?

How is the subsequent conversion of bonds into common shares recorded under IFRS?

Princeton Inc.granted 290,000 stock options to its employees.The options expire 45 years after the grant date of January 1,2018,when the share price was $23.Employees still employed by the company four years after the grant date may exercise the option to purchase shares at $45 each; that is,the options vest to the employees after four years.A consultant estimated the value of each option at the date of grant to be $2.50 each. Required: Record the journal entries relating to the issuance of stock options.