Exam 4: Complex Financial Instruments

On December 15,2017 Welders Inc.signed a contract to sell 200,000 kg of copper pipes to be delivered on February 15,2018.Terms of sale were COD (cash on delivery).Welders,which has a December 31 year-end,entered into a two months forward agreement to sell the copper to mitigate its price change risk.Welders designated the forward as a fair value hedge.Pertinent commodity prices follow: Required: Record the required journal entries for December 15,December 31,and February 15 using the net method.If no entries are required,state "no entry required" and indicate why.

Which of the following is correct regarding a call option?

Amel Company issues convertible bonds with face value of $7,000,000 and receives proceeds of $7,500,000.Each $1,000 bond can be converted,at the option of the holder,into 40 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $7,200,000. Required: Record the journal entry for the issuance of these bonds.

What is a "forward"?

What is a "call" option?

Which of the following statements is correct?

Which of the following statements is correct?

Explain how bonds issued with warrants alleviate adverse selection problem.

Enterprises need to separate the components of a compound financial instrument and account for each component separately.(a)What are the three alternative methods of allocating the cost to the components? (b)Contrast the reporting requirements for compound financial instruments under IFRS and ASPE.

On August 15,2018,Madison Company issued 80,000 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 $800,000 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.

Explain what a "fair value" and "cash flow" hedge is and how each is accounted for under IFRS.

A company pays $7,000 to purchase futures contracts to buy 200 oz of gold at $1,600/oz.At the company's year-end,the price of gold was $1,625 and the value of the company's futures contracts increased to $10,000. Required: Record the journal entries related to these futures.

On December 15,a company enters into a foreign currency forward to buy €100,000 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$1.55: €l. Required: Record the journal entries related to this forward contract.

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

Breezy Lodge issued 25,000 at-the-money stock options to its management on January 1,2018.These options vest on January 1,2021.Breezy's share price was $18 on the grant date and $25 on the vesting date.Estimates of the fair value of the options showed that they were worth $4 on the grant date and $11 on the vesting date.On the vesting date,management exercised all 25,000 options.Breezy has a December 31 year-end. Required: Record all of the journal entries relating to the stock options.

Explain the conceptual meaning of the difference between the book value and market value methods of recording the conversion of bonds into common shares.

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2018.The exchange rate at year-end is US$1 = C$0.98 and the January 15,2018 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2013?

A company had a debt-to-equity ratio of 1.65 before issuing convertible bonds.This ratio included $450,000 in equity.The company issued convertible bonds.The value reported for the bonds on the balance sheet is $200,000 and the conversion rights are valued at $25,000. Required: After the issuance of the convertible bonds,what is the value of the debt-to-equity ratio?

A company located in Canada spends $2,000 to purchase a foreign currency futures contract to buy US$100,000 at C$1.05:US$1.00.The contract matures 110 days later.Under which of the following circumstances could the company consider this future contract to be a fair value hedge for accounting purposes?

How should warrants on the company's own common shares be accounted for?