Deck 4: Complex Financial Instruments

Question 1

What is a "swap"?

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 up front to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits up front 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.

Answer 1

A

Question 2

What is a "forward"?

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 up front to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits up front 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.

Answer 2

C

Question 3

Which of the following statements is correct about accounting for financial liabilities?

A)Financial liabilities can only be accounted for using amortized cost.
B)Financial liabilities can only be accounted for using fair value though profit and loss.
C)Financial liabilities can be accounted for using historical cost.
D)Financial liabilities can be accounted for using amortized cost or fair value.

Answer 3

D

Question 4

What is a "future"?

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 up front to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits up front 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 speculation?

Question 6

What is a "call" option?

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 7

What is an option?

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 8

Which statement is correct about accounting for financial instruments?

A)All financial instruments are accounted for at fair value through profit or loss.
B)All are accounted for in accordance to their economic substance.
C)All financial instruments are accounted for at amortized cost.
D)All financial instruments are accounted for at fair value through OCI.

Question 9

Describe the underlying quantity that the derivative instrument derives its value from?

Question 10

Which of the following is correct regarding a call option?

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 11

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

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 12

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

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 $100,000 U.S. dollars in 120 days at US$ = 1.10 from another company.
D)Pay interest at prime +3% in exchange for receiving interest at 5%.

Question 13

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

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 14

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

A)Right to buy 100 shares of CIBC at $50.00 per share over the next 5 years.
B)Commitment to buy 100 barrels of oil next month at $125/barrel.
C)Commitment to buy $100,000 U.S. dollars in 4 months at US$ = 1.10.
D)Pay interest at prime +3% in exchange for receiving interest at 5%.

Question 15

What is hedging?

Question 16

What is a "warrant"?

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 up front to buy or sell commonly traded items at a defined price and maturity date.
C)A contract in which one party commits up front 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 17

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

Question 18

What is a "put" option?

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 19

Which of the following is correct about financial instruments?

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 20

What is a derivative and what are two reasons why parties would enter into a derivative contract?

Question 21

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

A)Incremental method.
B)Fair value method.
C)Proportional method.
D)Book value method.

Question 22

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

Question 23

Which of the following statements is correct?

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 24

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

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

Question 25

Briefly describe a compound financial instrument and its advantages.

Question 26

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

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 27

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

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 28

Which statement best explains the accounting for compound instruments?

A)Once separated, each component is accounted for at fair value with changes recorded through income.
B)Once separated, each component is accounted for in accordance with its substance.
C)Once separated, each component is accounted for at amortized cost.
D)Once separated, each component is accounted for at historical cost.

Question 29

Which of the following statements is correct?

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 30

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

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

Question 31

Explain how bonds issued with warrants alleviate adverse selection problem.

Question 32

Which statement best describes the "proportional method"?

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, estimate the fair value of all components and allocate proportionally to them.
D)Under this method of accounting, the common share component is considered the least reliably measured amount.

Question 33

Which statement best describes the "incremental method"?

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 most reliably measured amount.

Question 34

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

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 35

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

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 36

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

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

Question 37

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

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

Question 38

Which of the following statements is correct?

A)Repayment of a bond on the first day of the fiscal year will increase 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 improve the current ratio.
C)The sale of 2,000 common shares for cash will worsen the shareholders' return on equity.
D)The sale of $5,000 of inventory on credit for $6,000 will worsen the shareholders' return on equity.

Question 39

Explain how convertible bonds alleviate moral hazard.

Question 40

Contrast options with warrants.

Question 41

A company issued 105,000 preferred shares and received proceeds of $7,000,000. These shares have a benchmark 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 $63 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.

Question 42

A company issued 95,000 preferred shares and received proceeds of $6,000,000. These shares have a benchmark value of $48 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 $57 per share. Shortly after the issuance of the preferred shares, the detachable warrants traded at $8 each.
Required:
Record the journal entry for the issuance of these shares and warrants under IFRS.

Question 43

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.

Question 44

A company issued 100,000 preferred shares and received proceeds of $5,750,000. These shares have a benchmark 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.

Question 45

A company issued 105,000 preferred shares and received proceeds of $6,100,000. These shares have a benchmark 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.

Question 46

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?

Question 47

List three common stock compensation plans and describe them.

Question 48

LMN Company reported the following amounts on its balance sheet at July 31, 2021: 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, 2022, 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, 2022.
b. Calculate the total number of common shares outstanding after the bonds' conversion on July 31, 2022.
c. Prepare the journal entry to record the bond conversion.

Question 49

A company issues convertible bonds with face value of $5,000,000 and receives proceeds of $6,500,000. Each $1,000 bond can be converted, at the option of the holder, into 80 common shares. The underwriter estimated the market value of the bonds alone, excluding the conversion rights, to be approximately $6,300,000.
Required:
Record the journal entry for the issuance of these bonds based on IFRS.

Question 50

On January 1, 2019, Wayward Co. issued a $22 million, 8%, 6-year convertible bond with annual coupon payments. Each $1,000 bond was convertible into 35 shares of Wayward's common shares. Moonbeam Investments purchased the entire bond issue for $22.7 million on January 1, 2019. Moonbeam estimated that without the conversion feature, the bonds would have sold for $21,013,098 (to yield 9%).
On January 1, 2020, Moonbeam converted bonds with a par value of $8.8 million. At the time of conversion, the shares were selling at $30 each.
Required:
a. Prepare the journal entry to record the issuance of convertible bonds.
b. Prepare the journal entry to record the conversion according to IFRS (book value method).
c. Prepare the journal entry to record the conversion according ASPE (market value method).

Question 51

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

A)Intrinsic value of options.
B)Time value of options.
C)Market value of the shares.
D)Fair value on the grant date of the options.

Question 52

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

A)Intrinsic value of options.
B)Time value of options.
C)Fair value of the options.
D)Market value of the shares.

Question 53

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.

Question 54

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?

Question 55

O'Neil Motor Parts issued 110,000 stock options to its employees. The company granted the stock options at-the-money, when the share price was $40. These options have no vesting conditions. By year-end, the share price had increased to $42. O'Neil's management estimates the value of these options at the grant date to be $1.60 each.
Required:
Record the issuance of the stock options.

Question 56

LMN Company reported the following amounts on its balance sheet at July 31, 2022: 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, 2022, 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, 2022.
b. Calculate the total number of common shares outstanding after the bonds' conversion on July 31, 2022.
c. Prepare the journal entry to record the bond conversion.

Question 57

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

Question 58

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

A)The expense is recorded over the period of vesting.
B)The expense is recorded over the period to expiry.
C)The expense is recorded immediately upon grant date.
D)No expense is recorded for accounting purposes.

Question 59

A company issued 75,000 preferred shares and received proceeds of $7,000,000. These shares have a benchmark value of $80 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 $90 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.

Question 60

A company had a debt-to-equity ratio of 1.55 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?

Question 61

Nappy Lodge issued 15,000 at-the-money stock options to its management on January 1, 2021. These options vest on January 1, 2024. 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 15,000 options. Nappy has a December 31 year-end.
Required:
Record all of the journal entries relating to the stock options.

Question 62

Windy Lake Lodge issued 24,000 at-the-money stock options to its management on January 1, 2021. These options vest on January 1, 2024. Windy Lake's share price was $19 on the grant date and $22 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. Windy Lake has a December 31 year-end.
Required:
Record all of the journal entries relating to the stock options.

Question 63

Assume that on January 15, 2021 MAK agrees to purchase US$500,000 for C$550,000 for delivery on January 15, 2022. The exchange rate at MAK's December 31, 2021 year-end was US$1 = C$0.95 and the January 15, 2022 exchange rate is US$1 = C$0.97.What is the foreign exchange gain or loss recognized at Jan 15, 2022?

A)$10,000 gain.
B)$10,000 loss.
C)$75,000 gain.
D)$75,000 loss.

Question 64

McMillan Manufacturing issued 60,000 stock options to its employees. The company granted the stock options at-the-money, when the share price was $40. These options have no vesting conditions. By year-end, the share price had increased to $42. McMillan's management estimates the value of these options at the grant date to be $1.10 each.
Required:
Record the issuance of the stock options.

Question 65

AnnuG Inc. granted 200,000 stock options to its employees. The options expire 45 years after the grant date of January 1, 2021, when the share price was $23. Employees still employed by the company six years after the grant date may exercise the option to purchase shares at $45 each; that is, the options vest to the employees after six 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.

Question 66

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

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

Question 67

On January 1, 2021 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, 2024, 100,000 SARs are exercised. The market price of the shares remained at $20. On January 1, 2025, 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, 2021, to record compensation expense.
b. Prepare the journal entry at December 31, 2022, to record compensation expense.
c. Prepare the journal entry at December 31, 2023, to record compensation expense.
d. Prepare the journal entry at January 1, 2024, to record the partial exercise of the SARs.
e. Prepare the journal entry at December 31, 2024, to record compensation expense.
f. Prepare the journal entry at January 1, 2025, to record the partial exercise of the SARs.
g. Prepare the journal entry at December 31, 2025, to record compensation expense.
h. Prepare the journal entry at December 31, 2026, to record compensation expense.

Question 68

Assume that on January 15, 2020, Ariel agrees to purchase US$500,000 for C$550,000 for delivery on January 15, 2021. The exchange rate at its December 31 year-end is US$1 = C$0.95 and the January 15, 2021 the exchange rate is US$1 = C$0.97. What is the foreign exchange gain or loss recognized on January 15, 2020?

A)0
B)$65,000 loss.
C)$75,000 gain.
D)$75,000 loss.

Question 69

On January 1, 2021, Gilmore Inc. granted stock options to officers and key employees for the purchase of 100,000 of the company's no par value common shares at $28 each. The options were exercisable within a five-year period beginning January 1, 2023 by grantees still in the employ of the company, and they expire December 31, 2027. The market price of Gilmore'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, 2021 to be $4.00.
On March 31, 2023, 60,000 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 Gilmore's stock options.

Question 70

O'Neil Manufacturing issued 200,000 stock options to its employees. The company granted the stock options at-the-money, when the share price was $40. These options have no vesting conditions. By year-end, the share price had increased to $42. O'Neil's management estimates the value of these options at the grant date to be $1.75 each.
Required:
Record the issuance of the stock options.

Question 71

Breezy Lodge issued 25,000 at-the-money stock options to its management on January 1, 2021. These options vest on January 1, 2024. 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.

Question 72

On January 1, 2021 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, 2023. On January 1, 2024, 100,000 SARs are exercised. The market price of the shares remained at $20. On January 1, 2025, 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: Required:
a. Prepare the journal entry at December 31, 2021, to record compensation expense.
b. Prepare the journal entry at December 31, 2022, to record compensation expense.
c. Prepare the journal entry at December 31, 2023, to record compensation expense.
d. Prepare the journal entry at January 1, 2024, to record the partial exercise of the SARs.
e. Prepare the journal entry at December 31, 2024, to record compensation expense.
f. Prepare the journal entry at January 1, 2025, to record the partial exercise of the SARs.
g. Prepare the journal entry at December 31, 2025, to record compensation expense.
h. Prepare the journal entry at December 31, 2026, to record compensation expense.

Question 73

How are derivative contracts generally accounted for?

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

Question 74

Price Farms granted 290,000 stock options to its employees. The options expire 45 years after the grant date of January 1, 2021, 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.

Question 75

On January 1, 2021, 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, 2023 by grantees still in the employ of the company, and they expire December 31, 2027. 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, 2021 to be $2.75.
On March 31, 2023, 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.

Question 76

Assume that on January 15, 2021 MAK agrees to purchase US$500,000 for C$550,000 for delivery on January 15, 2022. The exchange rate at MAK's December 31, 2021 year-end was US$1 = C$0.95 and the January 15, 2022 exchange rate is US$1 = C$0.97. What is the foreign exchange gain or loss recognized at year-end?

A)0
B)$65,000 loss.
C)$75,000 gain.
D)$75,000 loss.

Question 77

How should employee stock options be accounted for?

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

Question 78

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

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

Question 79

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

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

Question 80

Princeton Inc. granted 290,000 stock options to its employees. The options expire 45 years after the grant date of January 1, 2021, 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.