14.9 Exercises
Chapter 14
Exercise 14.1
On January 1, 2020, Largess Ltd. issued 1,000, 4-year, 6% convertible bonds at par of $1,000. Interest is payable each December 31. Each bond is convertible into 100 common shares, and the current fair value of each common share is $7 per share. Similar non-convertible bonds carry an interest rate of 8%.
Required:
- Calculate the present value of the debt component.
- Record the bond issuance if Largess Ltd. follows IFRS.
- Record the bond issuance if Largess Ltd. follows ASPE.
Exercise 14.2
Holloway Ltd. issued 600, $1,000 bonds at 102. Each bond was issued with 12 detachable warrants. After issuance, similar bonds were sold at 96, and the warrants had a fair value of $3.
Required:
- Record the issuance of the bonds and warrants if Holloway Ltd. follows IFRS.
- Assume now that Holloway Ltd. follows ASPE. Discuss the two alternative methods and record the issuance of the bonds and warrants for each method.
- What effect does each entry have on the debt to total assets ratio?
Exercise 14.3
Snowden Corp. issued 10,000 common shares upon conversion of 8,000 preferred shares. The preferred shares were originally issued at $10 per share and the contributed surplus account for the preferred shares had a balance of $12,000. The common shares were trading at $11.50 per share at the time of the conversion.
Required:
Record the conversion of the preferred shares.
Exercise 14.4
Rumpled Textures Inc. has $1 million of 7%, convertible bonds outstanding. Each $1,000 bond is convertible into 30 no-par value common shares. The bonds pay interest each January 31 and July 31. On July 31, 2020, just after the interest payment, the holders of $600,000 worth of these bonds exercised their conversion entitlement. On that date, the following information was determined:
| Market price of the bonds | 102 |
|---|---|
| Market price of the common shares | $26 |
| Carrying value of the common shares | $16 |
| Balance in the contributed surplus – convertible bonds | $150,000 |
| Unamortized bond premium | $80,000 |
The remaining bonds were not converted, and at their maturity date they were retired. The company follows IFRS.
Required:
- Prepare the journal entry for the bond conversion on July 31. The company uses the book value method.
- Prepare the journal entry for the remaining bonds at maturity, if not converted to shares.
- What risks arise if bondholders choose to wait to convert the bonds?
Exercise 14.5
Brownlesh Inc. issued $6 million of par value, 5% bonds at 99, and one detachable warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $5. Brownlesh Inc. follows ASPE.
Required:
Prepare the journal entry for the issuance of the instrument for both options allowed by ASPE.
Exercise 14.6
Irvin Corp. issued $2 million of par value, 7%, convertible bonds at 98. If the bonds had not been convertible, the fair value at the time of issuance would have been 97. Irvin Corp. follows ASPE.
Required:
Prepare the journal entry for the issuance of the instrument for both options allowed by ASPE.
Exercise 14.7
On August 1, 2020, Venus Ltd. issued $400,000 of 6%, non-convertible bonds at 102, which are due in ten years. In addition, each $1,000 bond was issued with 10 detachable stock warrants, each of which entitled the bondholder to purchase one of Venus Ltd.’s no-par value common shares for $60. The bonds without the warrants would normally sell at 99. On August 1, 2020, the fair value of Venus Ltd.’s common shares was $50 per share. Venus Ltd. follows IFRS.
Required:
Prepare the journal entry for the issuance of the instrument allowed by IFRS.
Exercise 14.8
On November 1, 2020, Norfolk Island Ltd. called its 8% convertible bonds for conversion, and $6 million of par value bonds were converted into 600,000 common shares. On this date, there was $350,000 of unamortized bond discount, and the company paid an additional $350,000 cash sweetener to the bondholders. At the time of conversion, the balance in the contributed surplus, convertible bonds account was $125,000, and the bond’s fair value without the conversion feature was $5.95 million. The company follows IFRS and uses the book value method to record the entry for conversion.
Required:
Prepare the conversion entry.
Exercise 14.9
On September 1, 2020, Carmel Corp. sold 4,500 of its $1,000 face value, ten-year, 8%, non-convertible bonds with detachable warrants at 101 plus accrued interest. Each bond carried two detachable warrants and each warrant was for one common share at the option price of $12 per share. Shortly after issuance, the warrants were selling for $6 each. Assume that no fair value is available for the bonds. Interest is payable on December 1 and June 1. Carmel Corp. follows ASPE.
Required:
Prepare the journal entry to record the issuance of the bonds under both options available for ASPE companies.
Exercise 14.10
On January 1, 2020, Deliverance Corp. offers five-year, 9% convertible bonds with a par value of $1,000. Interest is calculated every January 1. Each $1,000 bond may be converted into 500 common shares, which are currently trading at $3.50 per share. The effective interest rate on bonds is 10%. Deliverance Corp. issues 1,500 bonds at par and allocates the proceeds under the residual method, using debt first with the remainder of the proceeds allocated to the option.
On January 1, 2022, right after the interest payment, Deliverance Corp. offers an additional cash premium of $10,000 to the bondholders to convert. The bond’s fair value at the conversion time is $1,470,000, without the conversion feature. The company follows IFRS.
Required:
- Record the entry(ies) for the bond issuance.
- Record the entry(ies) for the bond conversion.
- Assume now that the company follows ASPE. Record the entry(ies) for the bond conversion.
Exercise 14.11
On January 1, 2020, Atlantis Corp. offers three-year, 5% convertible bonds with a par value of $1,000. Each $1,000 bond may be converted into 100 common shares, which are currently trading at $5 per share. The effective interest rate on bonds is 8%. Atlantis Corp. issues 1,000 bonds at par and allocates the proceeds under the residual method using debt first with the remainder of the proceeds allocated to the option.
On January 1, 2022, right after the interest payment, Atlantis Corp. decides to retire the convertible debt early and offers the bondholders $1,100,000 cash, which is the fair value of the instrument at the time of early retirement. The fair value of the debt portion of the convertible bonds is $981,462. The company follows IFRS.
Required:
- Record the entry(ies) for the bond issuance.
- Record the entry(ies) for the bond retirement.
Exercise 14.12
On January 1, 2020, Bronds Inc. entered into a forward contract to purchase $50,000 US for $60,000 CAD in 30 days. On January 15, the present value of the future cash flows of the contract was $25.
Required:
- Prepare the related entries for January 1, 2020, and January 15, 2020.
- Assume that the instrument is now a futures contract that is publicly traded on the futures exchange. Bronds Inc. paid a deposit of $20 with the broker. On January 15, the present value of the future cash flows of the contract was $25. Prepare the entries, if any, for January 1, 2020, and January 15, 2020.
Exercise 14.13
On January 1, 2020, Twitter Co. granted stock options (CSOP) to its chief executive officer. The details are as follows:
| Option to purchase through a stock option plan | 10,000 common shares | |
| Options share price | $34 per share | |
| Fair value of shares on grant date | $30 per share | |
| Fair value of options on date of grant | $20 per share | |
| Stock options exercise start date | January 1, 2022 | |
| Stock options exercise expiry date | December 31, 2027 |
On January 1, 2023, 7,000 of the options were exercised when the fair value of the common shares was $45. The remaining stock options were allowed to expire. The chief executive officer remained with the company throughout the period. The company follows ASPE.
Required:
Prepare all related journal entries for the stock option plan for:
- January 1, 2020
- December 31, 2020
- December 31, 2021
- January 1, 2023
- December 31, 2027
Exercise 14.14
On November 1, 2020, Agencolt Inc. adopted a stock option plan that granted options to employees to purchase 8,000 shares. On January 1, 2021, the options were granted and were exercisable within a two-year period beginning January 1, 2023 (if the employees were still employed by the company at the time of the exercise). The option price was set at $10 per share and the total compensation package was estimated to be worth $200,000, without forfeitures.
On May 1, 2023, 3,000 options were exercised when the market price of Agencolt Inc.’s shares were $15 per share. The remaining options lapsed in 2024 when some of the employees resigned from the company. The company follows IFRS and the initial assumption was that there would be no forfeitures.
Required:
(Round final answers to the nearest whole number.)
- Prepare all related journal entries for the stock option plan for the years ended December 31, 2021, to December 31, 2024, inclusive. Assume that the employees who resigned had fulfilled all their obligations to the employer at the time they purchased any stock options in May of 2023.
- What is the significance of the $15 per share regarding the decision to exercise the right to purchase shares?
* For information on the extent of disclosures required regarding compensation, refer to BCE (2013) and BCE (2015), notes 2, 21, and 26, starting at page 125.
Exercise 14.15
On September 1, Y3, Seaforth Corporation adopted a stock option plan (CSOP). The plan granted options to several employees to purchase 35,000 shares. The options were granted on January 1, Y4 and were exercisable two years after the date of grant. The options will expire on December 31, Y9. The option price was set at $25.00. Total compensation expense was estimated to be $348,100.
On May 1, Y6, 26,250 options were exercised when the market value of each share was $31.57. The remaining options expired and were not exercised.
Required:
Prepare the required journal entry (if any) on the following dates:
- September 1, Y3
- January 1, Y4
- December 31, Y4
- December 31, Y5
- May 1, Y6
- December 31, Y9
Exercise 14.16
On January 1, Y2, Stone Limited issued $1,500,000, four-year 4% convertible bonds for $1,700,000.
Interest is paid annually and Stone has a December 31 year end. Stone follows IFRS.
Similar bonds, without the conversion feature, trade in the market at 3%.
Required:
- Prepare the entry at January 1, Y2 to record the sale of the bond.
- Prepare the amortization schedule.
- Prepare the journal entry on December 31, Y2.
- Prepare the journal entries on December 31, Y3 if the bonds are converted on that day.
Exercise 14.17
On May 1, Y4, Wellington Limited paid $325 for a call to purchase 1,000 shares of London Corporation.
The strike (agreed) price was $32.50 per share at any time during the next six months. The market price of London Corporation was $32.50 on May 1, Y4.
On July 31, Y4, the market price was $39.70 and the fair value of the option was $7,800.
Required
- Prepare the journal entry to record the purchase of the option on May 1, Y4.
- Prepare the entry to record the fair value of the option at July 31, Y4.
- Prepare the entry if Wellington exercised the option and took delivery of the shares on July 31, Y4.
- Prepare the entry if Wellington settled the option, rather than taking delivery of the shares on July 31, Y4.
Exercise 14.18
On January 7, Y3, Midland Corp entered into a contract to purchase 100 ounces of gold for $1,950 per ounce on August 31, Y3. Midland does not intend to take delivery of the gold on that day.
On January 1, Y3, the fair value of the contract was zero ($0).
The fair value of the contract fluctuated with the following fair value amounts:
|
Date |
Fair Value |
|---|---|
| January 20, Y3 | $675 |
| March 15, Y3 | $396 |
| May 4, Y3 | $738 |
On the settlement date (August 31), the market price of gold was $2,007 per ounce.
Required:
Prepare all required and necessary journal entries (if needed) on all dates mentioned above.
How would the August entry differ if Midland took possession of the gold?
