4 questions accounting complex financial instruments

4 questions accounting complex financial instruments


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.

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