Question 1

Becamel Company issued 100,000 preferred shares and received proceeds of $6,500,000.These shares have a par value of $60 per share and pay cumulative dividends of 8%.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 $30 per share within 10 years.The underwriter estimated that the market value of the preferred shares alone,excluding the conversion rights,is approximately $62 per share.Shortly after the issuance of the preferred shares,the detachable warrants traded at $3 each.
Required:
Record the journal entry for the issuance of these shares and warrants.

Accepted Answer

The answer of Becamel Company issued 100,000 preferred shares and...

Question 2

Which of the following is an example of a "forward"?

Accepted Answer

A)  Right to buy 100 shares of CIBC over the next 5 years. 
B)  Commitment to buy 100 barrels of oil next month at $125/barrel on the Chicago Mercantile Exchange. 
C)  Commitment to buy $100,000 US dollars in 120 days at US$ = 1.10 from another company. 
D)  Pay interest at prime +3% in exchange for receiving interest at 5%.

Question 3

Sorrentino Corporation issued call options on 20,000 shares of BWC Inc.on October 21,2019.These options give the holder the right to buy BWC shares at $35 per share until May 17,2020.For issuing these options,Sorrentino received $20,000.On December 31,2019 (Sorrentino's fiscal year-end),the options traded on the Montreal Exchange for $2.00 per option.On May 17,2020,BWC's share price increased to $38 and the option holders exercised their options.Sorrentino had no holdings of BWC shares.
Required:
For Sorrentino Corporation,record the journal entries related to these call options.

Accepted Answer

The answer of Sorrentino Corporation issued call options on 20,000...

Question 4

How should employee stock options be accounted for?

Accepted Answer

A)  Historical cost. 
B)  Fair value with changes recorded through income. 
C)  Amortized cost. 
D)  Fair value.

Question 5

Which of the following is an example of a "swap"?

Accepted Answer

A)  Right to buy 100 shares of CIBC over the next 5 years. 
B)  Commitment to buy 100 barrels of oil next month at $125/barrel. 
C)  Commitment to buy $100,000 US dollars in 4 months at US$ = 1.10. 
D)  Pay interest at prime +3% in exchange for receiving interest at 5%.

Question 6

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 7

On January 1,2018,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 1,2020 by grantees still in the employ of the company,and they expire December 31,2024.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 1,2018 to be $2.75.
On March 31,2020,30,000 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.
Required:
Record the journal entries for Braeben's stock options.

Accepted Answer

The answer of On January 1,2018,Braeben Inc.granted stock options to...

Question 8

In the table below,choose the financial instrument that best explains the example on the right side.Types of financial instrument to select from: Financial asset,financial liability,equity,compound instrument,basic option,swap,forward,future,warrant,put option,or call option.

Accepted Answer

The answer of In the table below,choose the financial instrument...

Question 9

Price Farms 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 Price five years after the grant date may exercise the option to purchase shares at $45 each; that is,the options vest to the employees after five years.A consultant estimated the value of each option at the date of grant to be $1.50 each.
Required:
Record the journal entries relating to the issuance of stock options.

Accepted Answer

The answer of Price Farms granted 290,000 stock options to...

Question 10

How are derivative contracts generally accounted for?

Accepted Answer

A)  Fair value. 
B)  Fair value with changes recorded through income. 
C)  Amortized cost. 
D)  Historical cost.

Question 11

Assume that Millan 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 year-end?

Accepted Answer

A)  $701 loss. 
B)  $701 gain. 
C)  $1,412 loss. 
D)  $1,412 gain.

Question 12

A company pays $5,000 to purchase futures contracts to buy 50 oz of silver at $40/oz.At the company's year-end,the price of silver rose and the value of the company's futures contracts increased to $6,000.
Required:
Record the journal entries related to these futures.

Accepted Answer

The answer of A company pays $5,000 to purchase futures...

Question 13

LMN Company reported the following amounts on its balance sheet at July 31,2018:
Liabilities
Convertible bonds payable,$10,000,000 face value 9%,
  Additional information
1.The bonds pay interest each July 31.Each $1,000 bond is convertible into 10 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.

Accepted Answer

The answer of LMN Company reported the following amounts on...

Question 14

What is a "swap"?

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 15

What is hedging?

Accepted Answer

The answer of What is hedging?...

Question 16

Explain how convertible bonds alleviate moral hazard.

Accepted Answer

The answer of Explain how convertible bonds alleviate moral hazard....

Question 17

Which of the following is correct about financial instruments?

Accepted Answer

A)  Accounting for financial instruments has been consistent. 
B)  There is no economic substance to financial instruments. 
C)  They may be used in support of innovations designed to circumvent accounting standards. 
D)  All financial instruments are accounted for at fair value.

Question 18

Naples Corporation issued call options on 20,000 shares of VESPUS Inc.on October 21,2019.These options give the holder the right to buy VESPUS shares at $35 per share until May 17,2020.For issuing these options,Naples received $60,000.On December 31,2020 (Naples's fiscal year-end),the options traded on the Montreal Exchange for $3.50 per option.On May 17,2020,VESPUS's share price increased to $40 and the option holders exercised their options.Naples had no holdings of VESPUS shares.
Required:
For Naples Corporation,record the journal entries related to these call options.

Accepted Answer

The answer of Naples Corporation issued call options on 20,000...

Question 19

What is an 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 20

Briefly explain the difference between a "forward" and a "future."

Accepted Answer

The answer of Briefly explain the difference between a "forward"...

Exam 4: Complex Financial Instruments