Question 1

On December 15th,2018,Hammer paid $20,000 to purchase a futures contract that entitles the company to buy US$1 million at a cost of C$1.04 million on March 15,2019.On December 31st ,Hammer's year-end,the exchange rate is US$1:C$1.09.
Required:
Record the journal entry for (a)the purchase of the futures contract and (b)at year-end.

Accepted Answer

The answer of On December 15th,2018,Hammer paid $20,000 to purchase...

Question 2

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

Accepted Answer

C)
At purchase: 84,745
At year-end: 100 / 1.20 = 83,333
Change is 84,745 - 83,333= 1,412 loss

Question 3

Contrast options with warrants.

Accepted Answer

The answer of Contrast options with warrants....

Question 4

Assume that Ariel agrees to purchase US$500,000 for C$550,000 on January 15,2017.The exchange rate at year-end is US$1 = C$0.95 and the January 15,2017 exchange rate is US$1 = C$0.97.What journal entry is required when the contract is initiated?
A) 0
B) $65,000 loss.
C) $75,000 gain.
D) $75,000 loss.

Accepted Answer

The contract is initiated at the agreed exchange rate, so no gain or loss is recognized at the initiation of the contract.

Question 5

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.

Accepted Answer

The answer of How should employee stock options be accounted...

Question 6

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

Accepted Answer

A)
At year-end: (50,000 × 0.98) = 49,000
At Jan 15 2013: 50,000 × 0.97 = 48,500
Change is 49,000 - 48,500 = 500 loss

Question 7

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.

Accepted Answer

An employee stock option is a derivative on the company's own common shares because it gives the option holder the right to buy or sell the company's shares at a predetermined price.

Question 8

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.

Accepted Answer

Warrants on common shares are a derivative that gives the holder the right, but not the obligation, to buy or sell a company's common shares at a specific price and time in the future. This is a derivative on the company's own common shares, as opposed to accounts payable, which is a liability, commodity futures contract, which is a contract for the purchase or sale of a commodity, or warranty provision, which is a provision for the repair or replacement of defective products.

Question 9

Briefly describe a compound financial instrument and its advantages.

Accepted Answer

The answer of Briefly describe a compound financial instrument and...

Question 10

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 11

Explain how bonds issued with warrants alleviate adverse selection problem.

Accepted Answer

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

Question 12

Indicate whether the following statements are true or false with respect to characteristics of stock options.

Accepted Answer

The answer of Indicate whether the following statements are true...

Question 13

How are derivative contracts generally accounted for?
A) Fair value.
B) Fair value with changes recorded through income.
C) Amortized cost.
D) Historical cost.

Accepted Answer

Derivative contracts are generally accounted for at fair value with changes in their value recorded through income. This approach reflects the market value of the derivatives and captures the gains or losses in the financial statements as they occur.

Question 14

What are the two exceptions to the general rule of measuring derivatives at fair value,with changes in fair value recorded through income?

Accepted Answer

The answer of What are the two exceptions to the...

Question 15

Assume that Signh 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 January 15,2013?
A) $701 loss.
B) $701 gain.
C) $711 loss.
D) $711 gain.

Accepted Answer

B)
At Jan 15, 2013: 100 / 1.19 = 84,034
At year-end: 100 / 1.20 = 83,333
Change is 84,034 - 83,333 = 701 gain

Question 16

Assume that MAK agrees to purchase US$500,000 for C$550,000 on January 15,2018.The exchange rate at year-end is US$1 = C$0.95 and the January 15,2018 exchange rate is US$1 = C$0.97.What journal entry is required at year-end?
A) 0
B) $65,000 loss.
C) $75,000 gain.
D) $75,000 loss.

Accepted Answer

D) 550,000 - (500,000 × 0.95) = 75,000 loss

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 year-end?
A) $3,000 loss.
B) $3,000 gain.
C) $3,500 loss.
D) $3,500 gain.

Accepted Answer

A) 52,000 - (50,000 × 0.98) = 3,000 loss

Question 18

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.

Accepted Answer

The answer of How should warrants on the company's own...

Question 19

Explain how convertible bonds alleviate moral hazard.

Accepted Answer

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

Question 20

Assume that Barun agrees to purchase US$500,000 for C$550,000 on January 15,2018.The exchange rate at year-end is US$1 = C$0.95 and the January 15,2018 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2018?
A) $10,000 gain.
B) $10,000 loss.
C) $75,000 gain.
D) $75,000 loss.

Accepted Answer

A)
At Jan 15, 2013: 500 ∗ .97 = 485k
At year-end: 500 ∗ .95 = 475
Change is 485 - 475 = 10,000 gain

Quiz 4: Complex Financial Instruments

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?

Contrast options with warrants.

Assume that Ariel agrees to purchase US$500,000 for C$550,000 on January 15,2017.The exchange rate at year-end is US$1 = C$0.95 and the January 15,2017 exchange rate is US$1 = C$0.97.What journal entry is required when the contract is initiated?

How should employee stock options be accounted for?

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?

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

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

Briefly describe a compound financial instrument and its advantages.

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.

Explain how bonds issued with warrants alleviate adverse selection problem.

Indicate whether the following statements are true or false with respect to characteristics of stock options.

How are derivative contracts generally accounted for?

What are the two exceptions to the general rule of measuring derivatives at fair value,with changes in fair value recorded through income?

Assume that Signh 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 January 15,2013?

Assume that MAK agrees to purchase US$500,000 for C$550,000 on January 15,2018.The exchange rate at year-end is US$1 = C$0.95 and the January 15,2018 exchange rate is US$1 = C$0.97.What journal entry is required at year-end?

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 year-end?

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

Explain how convertible bonds alleviate moral hazard.

Assume that Barun agrees to purchase US$500,000 for C$550,000 on January 15,2018.The exchange rate at year-end is US$1 = C$0.95 and the January 15,2018 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2018?