Question 1

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.

Accepted Answer

The answer of On December 15,2017 Welders Inc.signed a contract...

Question 2

Which of the following is correct regarding a call option?

Accepted Answer

A)  The intrinsic value of a call option is the greater of zero and (K- S), the difference between the market price and the strike price. 
B)  The time value of an option reflects the probability that the future market price of the underlying instrument will not exceed the strike price. 
C)  The time value decreases with the length of time to expiration and the volatility of the underlying instrument (such as the share price). 
D)  The time value is always positive until the option expires, so the total value of an unexpired option is always greater than the intrinsic value.

Question 3

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.

Accepted Answer

The answer of Amel Company issues convertible bonds with face...

Question 4

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 5

What is a "call" option?

Accepted Answer

A)  A contract that gives the holder the right to sell an instrument at a pre-specified price. 
B)  A contract that is derived from some other underlying quantity, index, asset or event. 
C)  A contract that gives the holder the right to acquire an instrument at a pre-specified price. 
D)  A contract that gives the holder the right to buy or sell something at a specified price.

Question 6

Which of the following statements is correct?

Accepted Answer

A)  Repayment of a bond on the first day of the fiscal year will decrease the shareholders' return on equity. 
B)  Conversion of a 10% bond with no short term maturity, into common shares on the first day of the year will have no effect the current ratio. 
C)  The sale of 2,000 common shares for cash will improve the shareholders' return on equity. 
D)  The sale of $5,000 of inventory on credit for $6,000 will have no effect on the operating margin.

Question 7

Which of the following statements is correct?

Accepted Answer

A)  Repayment of a bond on the first day of the fiscal year will have no effect on the shareholders' return on equity. 
B)  Conversion of a 10% bond with no short term maturity, into common shares on the first day of the year will worsen the current ratio. 
C)  The sale of 2,000 common shares for cash will have no effect on the current ratio. 
D)  The sale of $5,000 of inventory on credit for $6,000 will have no effect on the current ratio.

Question 8

Explain how bonds issued with warrants alleviate adverse selection problem.

Accepted Answer

The answer of Explain how bonds issued with warrants alleviate...

Question 9

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.

Accepted Answer

The answer of Enterprises need to separate the components of...

Question 10

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.

Accepted Answer

The answer of On August 15,2018,Madison Company issued 80,000 options...

Question 11

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

Accepted Answer

The answer of Explain what a "fair value" and "cash...

Question 12

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.

Accepted Answer

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

Question 13

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.

Accepted Answer

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

Question 14

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 15

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.

Accepted Answer

The answer of Breezy Lodge issued 25,000 at-the-money stock options...

Question 16

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

Accepted Answer

The answer of Explain the conceptual meaning of the difference...

Question 17

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?

Accepted Answer

A)  $500 loss. 
B)  $500 gain. 
C)  $3,500 loss. 
D)  $3,500 gain.

Question 18

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?

Accepted Answer

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

Question 19

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?

Accepted Answer

The answer of A company located in Canada spends $2,000...

Question 20

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

Accepted Answer

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

Exam 4: Complex Financial Instruments

Which of the following is correct regarding a call option?

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.

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?

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?

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