Question 1

On January 1,2011,Braeben Inc.granted stock options to officers and key employees for the purchase of 180,000 of the company's no par value common shares at $30 each.The options were exercisable within a five-year period beginning January 1,2013 by grantees still in the employ of the company,and they expire December 31,2017.The market price of Braeben's common share was $20 per share at the date of grant.Using the Black-Scholes option pricing model,the company estimated the value of each option on January 1,2011 to be $2.75.
On March 31,2013,30,000 options were exercised when the market value of common stock was $44 per share.The remainder of the options expired unexercised.The company has a December 31 year-end.
Requirement:
Record the journal entries for Braeben's stock options.

Accepted Answer

The answer of On January 1,2011,Braeben Inc.granted stock options to...

Question 2

Which statement best describes the "zero common equity method"?

Accepted Answer

A) Under this method of accounting,for a convertible bond,all of the bond value would be counted as a liability. 
B) Under this method of accounting,for a convertible bond,the issuing entity would record a liability for the estimated value of the bond without the conversion feature. 
C) Under this method of accounting,for a convertible bond,an estimate would be made of the fair value of all components and allocated proportionally to all components. 
D) Under this method of accounting,the common share component is considered the least reliably measured amount.

Question 3

On December 15,a company enters into a foreign currency forward to buy €100,000 at C$I.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.
Requirement:
Record the journal entries related to this forward contract.

Accepted Answer

The answer of On December 15,a company enters into a...

Question 4

Which is a derivative on the company's own common shares?

Accepted Answer

A) Accounts payable. 
B) Warrants on common shares. 
C) Commodity futures contract. 
D) Warranty provision.

Question 5

Which method is used under IFRS to account for compound instruments?

Accepted Answer

A) Fair value method. 
B) Proportional method. 
C) Incremental method. 
D) Zero common equity method.

Question 6

Which method is used under ASPE to account for compound instruments?

Accepted Answer

A) Fair value method. 
B) Proportional method. 
C) Book value method. 
D) Zero common equity method.

Question 7

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

Accepted Answer

A) Book value. 
B) Market value. 
C) Fair value. 
D) Historical value.

Question 8

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.
Requirement:
After the issuance of the convertible bonds,what is the value of the debt-to-equity ratio?

Accepted Answer

The answer of A company had a debt-to-equity ratio of...

Question 9

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

Accepted Answer

The answer of Identify the type of hedge under each...

Question 10

How would exercise of warrants,that were part of the original compound instrument,be recorded?

Accepted Answer

A) Common stock is recorded at an amount equal to the fair value of the options at date of conversion. 
B) Common stock is recorded at an amount equal to the cash received plus the contributed surplus initially recorded 
C) Common stock is recorded at an amount equal to the market price of the shares on conversion date. 
D) Common stock is recorded at an amount equal to the price determined by the Black-Sholes model.

Question 11

Which step is not required for hedge accounting under IFRS?

Accepted Answer

A) Demonstration of hedge's effectiveness. 
B) Identification of the risk exposure. 
C) Payment of fees to the counterparty. 
D) Designation of the hedging instrument.

Question 12

Which is a derivative on the company's own common shares?

Accepted Answer

A) Interest rate swap contract. 
B) Foreign exchange forward contract. 
C) Employee stock option. 
D) Commodity futures contract.

Question 13

What is a "forward"?

Accepted Answer

A) A contract in which two parties agree to exchange cash flows (e.g.interest cash flows). 
B) A contract in which one party commits upfront to buy or sell commonly traded items at a defined price and maturity date. 
C) A contract in which one party commits upfront to buy or sell something at a defined price at a defined future date. 
D) A contact that gives the right,but not the obligation,to buy a share at a specified price over a specified period of time.

Question 14

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.
Requirement:
Record the journal entries related to these futures.

Accepted Answer

The answer of A company pays $7,000 to purchase futures...

Question 15

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

Accepted Answer

A) Once separated,this component is accounted for at fair value through profit or loss. 
B) Once separated,this component is accounted for in accordance with its substance. 
C) Once separated,this component is accounted for amortized cost. 
D) Once separated,this component is accounted for at historical cost.

Question 16

How are derivative contracts generally accounted for?

Accepted Answer

A) Fair value. 
B) Fair value through profit or loss. 
C) Amortized cost. 
D) Historical cost.

Question 17

How would exercise of the conversion option,that was part of the initial compound instrument,be recorded?

Accepted Answer

A) Common stock is recorded at an amount equal to the fair value of the options at date of conversion. 
B) Common stock is recorded at an amount equal to the price determined by the Black-Sholes model. 
C) Common stock is recorded at an amount equal to the market price of the shares on conversion date. 
D) Common stock is recorded at an amount equal to the cash received plus the contributed surplus initially recorded.

Question 18

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

Accepted Answer

A) $701 loss. 
B) $701 gain. 
C) $711 loss. 
D) $711 gain.

Question 19

Nappy Lodge issued 15,000 at-the-money stock options to its management on January 1,2012.These options vest on January 1,2015.Nappy's share price was $20 on the grant date and $25 on the vesting date.Estimates of the fair value of the options showed that they were worth $3 on the grant date and $11 on the vesting date.On the vesting date,management exercised all 24,000 options.Nappy has a December 31 year-end.
Requirement:
Record all of the journal entries relating to the stock options.

Accepted Answer

The answer of Nappy Lodge issued 15,000 at-the-money stock options...

Question 20

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

Accepted Answer

A) Once separated,this component is accounted for at fair value through profit or loss. 
B) Once separated,this component is accounted for in accordance with its substance. 
C) Once separated,this component is accounted for amortized cost. 
D) Once separated,this component is accounted for at historical cost.

Exam 14: Complex Financial Instruments

Which statement best describes the "zero common equity method"?

On December 15,a company enters into a foreign currency forward to buy €100,000 at C$I.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. Requirement: Record the journal entries related to this forward contract.

Which is a derivative on the company's own common shares?

Which method is used under IFRS to account for compound instruments?

Which method is used under ASPE to account for compound instruments?

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

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

How would exercise of warrants,that were part of the original compound instrument,be recorded?

Which step is not required for hedge accounting under IFRS?

Which is a derivative on the company's own common shares?

What is a "forward"?

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. Requirement: Record the journal entries related to these futures.

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

How are derivative contracts generally accounted for?

How would exercise of the conversion option,that was part of the initial compound instrument,be recorded?

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

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