Complex Financial Instruments Intermediate accounting.
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PLEASE ANSEWR 5 QUESTIONS AND PLEASE DONT USE CHEGG SITE .
1.On January 1, 2017,King Co issued a $8 million, 8%, 10-year convertible bond with annual coupon payments.Each $1,000 bond was convertible into 25 shares of King’s common shares.Prince Investments purchased the entire bond issue for $8,250,000 million on January 1, 2017.King estimated that without the conversion feature, the bonds would have sold for $7,508,435 (to yield 10%).
On January 1, 2019, Prince converted bonds with a par value of $4 million.At the time of conversion, the shares were selling at $45 each.
- Prepare the journal entry to record the issuance of the convertible bonds. Assuming both companies use IFRS.(3 Marks)
- Prepare the possible journal entries for issuance of the Bonds if both companies uses ASPE. (5 Marks)
- Prepare an effective interest amortization schedule for the period January 1, 2017-January 1, 2019 (date of conversion)Calculate the Book value of the Bonds at January 1, 2019 and prepare the journal entry to record the conversion according to IFRS (book value method)
2.On August 15, 2017, Jarvis Company issued 50,000 options on the shares of RBC (Royal Bank Corporation).Each option gives the option holder the right to buy one share of RBC at $60 per share until March 16, 2018.Jarvis received $25,000 for issuing these options.At the company’s year-end of December 31, 2017, the options contracts traded on the Montreal Exchange at $.40 per contract.On March 16, 2018, RBC shares closed at $58 per share, none of the options were exercised, so the options had to be removed and any gain or loss earned thus far reported.
Record all journal entries related to these call options.
3.On November 1, 2010, Logan Corp. adopted a stock option plan allowing some of their executives to purchase a total of 30,000 common shares. The options were granted on January 2, 2011, and were exercisable four years after the grant date (Jan 2, 2015), as long as the executives were still employees.The options expire eight years from the grant date. The exercise price was set at $46 and, using an option pricing model to value the options, the total compensation expense was estimated to be $510,000. At January 2, 2011, the market price of the shares was $49.
All of the options were exercised during 2015: 17,000 on January 3 when the market price was $62, and 13,000 on May 1 when the market price was $77.
a)Prepare journal entries relating to the stock option plan for the years 2011 through 2015. Assume that the employees perform services equally from 2011 through 2014.Year end is December 31.
4. Kearney Corporation sold call options on 20,000 shares of BCE Inc. on October 21, 2012.These options give the holder the right to buy BCE shares at $33 per share until May 17, 2013.For issuing these options, Kearney received $30,000.On December 31, 2012 (Kearney’s fiscal year-end), the options traded on the Montreal Exchange for$3.50 per option.On May 17, 2013, BCE’s share price increased to $37 and the option holders exercised their options.Kearney had no holding of BCE shares.
For Kearney Corporation, record the journal entries related to these call options.
5.For each of the unrelated situations described below, prepare the entry(ies) required to record the transactions.
1.On August 1, 2012, Alpha Corporation called its 10% convertible bonds for conversion. The $4,000,000 par value bonds were converted into 160,000 no par common shares. On August 1, there was $350,000 of unamortized premium applicable to the bonds. At the time of issuance, Contributed Surplus—Conversion Rights was credited for $150,000, which represented the equity portion of the convertible bonds, and the market value of the common shares was $20 per share. The company records the conversion using the book value method. Ignore all interest payments.
2.Beta Inc. issues 10% convertible bonds, par $1,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94.Use the residual method.
3.Gamma Ltd. issues $2,000,000 par value, 8% bonds. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $1,974,000 and the value of the warrants is $126,000. The bonds with the warrants sold at 101.Use the residual method.