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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
CHAPTER 16
COMPLEX FINANCIAL INSTRUMENTS
ASSIGNMENT CLASSIFICATION TABLE
TopicsBrief
Exercises Exercises Probe!s"ri#i$%
Assi%$!e$#s
1. nderstandingderi!ati!es
1, ", # 1, ", $ 1, ", #, % &, ', (, )
". *o+ to account forderi!ati!es
1, ", #, %,$
1, ", #, %,$
1, ", #,%, $, &
)
#. Accounting forhyrid-comoundinstruments
&, ', (, ),1/, 11,1", 1#,1%, 1$,1&
$, &, ', (,), 1/, 11,1", 1#,1%
$, &, ',(, )
1, ",
%. 0tock comensationlans
1', 1( 1/
$. 0hareasedcomensation
1) 1$, 1&,1'
$, &, 1/ ", $
&. 2ifferences et+een A03E and I450
", ), 1/,11, 1",1%, 1&,"/, "1
#, $, ',1), "/
&, ', 1" %, $, '
6'. 2eri!ati!e instrumentsfor hedging
$ 11, 1" #, %, $, )
6(. *edge accounting 1(, 1),"/
11, 1" &
6). 0A50 "/, "1, "" "1, "", "#
61/. 7tions ricing models "#
6This material is dealt +ith in an Aendi8 to the chater.
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ASSIGNMENT CLASSIFICATION TABLE &Co$#i$'e()
97TE: If your students are sol!ing the endofchater material using a financialcalculator or an E8cel sreadsheet as oosed to the 3; tales, lease note thatthere +ill e a difference in amounts. E8cel and financial calculators yield a more
recise result as oosed to 3; tales. The amounts used for the rearation of <ournal entries in solutions ha!e een reared from the results of calculationsarri!ed at using the 3; tales.
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ASSIGNMENT CHARACTERISTICS TABLE
I#e! *escrip#io$Le+e of *iffic'#,
Ti!e&!i$'#es)
E1&1 2eri!ati!e transaction. 0imle 1/1$
E1&" 2eri!ati!e transaction. 0imle 1/1$ E1&# 3urchase Commitment 0imle 1/1$ E1&% 2eri!ati!es In!ol!ing Entity=s 7+n 0hares 0imle 1/1$ E1&$ Issuance and con!ersion of onds. Moderate "/"$ E1&& Issuance and con!ersion of onds. Moderate "/"$ E1&' Con!ersion of onds. Moderate "/"$ E1&( Con!ersion of onds. 0imle 1/"/ E1&) Con!ersion of onds and e8ired rights 0imle 1/"/ E1&1/ Con!ersion of onds Moderate "/"$
E1&11 Con!ersion of onds. 0imle 1/"/ E1&1" Con!ersion of onds. Comle8 #/%/
E1&1# Issuance of onds +ith detachale +arrants. 0imle 1/1$ E1&1% Issuance, e8ercise, and termination of stock
otions.Moderate "$#$
E1&1$ Issuance, e8ercise, and termination of stockotions.
Moderate 1/1$
E1&1& Issuance of onds +ith detachale +arrants. 0imle 1/1$ E1&1' Issuance and e8ercise of stock otions. Moderate 1$"$6E1&1( Cash 4lo+ *edge. Moderate 1$"/6E1&1) Cash 4lo+ *edge. Moderate 1$"/6E1&"/ 4air ;alue *edge. Comle8 "/"$
6E1&"1 0tock areciation rights. Moderate 1$"$6E1&"" 0tock areciation rights. Moderate 1$"$6E1&"# 0tock areciation rights. Moderate "$#/31&1 Call otion contract > urchased. Moderate #/%/31&" Call otion contract > +ritten. Moderate #/%/31&# 3ut otion contract > deri!ati!e instrument. Moderate #/%/31&% 2eri!ati!es In!ol!ing Entity=s 7+n 0hares Moderate #/%/31&$ Entries for !arious financial instruments. Moderate #$%/31&& Correction of issuance of ond, calculate
yield.Moderate #$%/
31&' Issuance of notes +ith +arrants. 0imle 1$"/31&( ?onds, +arrants, con!ersion rights. Moderate #/#$
31&) @oan, C073, and for+ard contract Moderate #/#$31&1/ 0tock otion lan. Moderate #/#$631&11 4air !alue hedge interest rate s+a. Comle8 #$%$631&1" Cash flo+ hedge > futures contract. Comle8 %/$/631&1# 4air !alue hedge > ut otion. Comle8 %/$/
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 16-1
S.+er Rio L#(/ s0o'( .cco'$# for #0e c. op#io$ .# #0e cos# #o.c'ire i# &2344) .$( recor( i# .s *eri+.#i+es 5 Fi$.$ci.Asse#sLi.bii#ies/ S.+er Rio L#(/ is $o# obi%.#e( #o exercise #0eop#io$ .$( b', #0e s0.res/ T0e i$+es#!e$# 7o'( be !e.s're(.# f.ir +.'e .# #0e repor#i$% (.#e 7i#0 . %.i$ or oss8 if .$,8reco%$i9e( i$ $e# i$co!e for #0e (iffere$ce be#7ee$ #0e cos#.$( #0e !.r:e# +.'e/
T0is c. op#io$ res'#s i$ .((i#io$. co'$#erp.r#,cre(i# ris:
&ris: #0.# #0e o#0er p.r#, 7i f.i #o f'fi #0eir si(e of #0e b.r%.i$).$( i'i(i#, ris: &ris: #0.# S.+er 7i $o# be .be #o co!e 'p 7i#0#0e !o$e, #o exercise #0e co$#r.c# if #0e co$#r.c# is i$ #0e!o$e,)/ If #0e op#io$ 7.s p'rc0.se( o$ .$ exc0.$%e8 #0eco'$#erp.r#, ris: (is.ppe.rs/ I$ .((i#io$8 #0ere is s#i . ris: #0.##0e op#io$s 7i ose +.'e & price ris:)/ No#e #0.# si$ce #0is is .p'rc0.se( op#io$8 S.+er 0.s #0e ri%0# b'# $o# #0e obi%.#io$ #oexercise #0e op#io$ .#0o'%0 i# 7o'( 7.$# #o exercise i# if #0eco$#r.c# 7.s i$ #0e !o$e, .# #0e exercise (.#e/
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BRIEF EXERCISE 16-;
&.) T0is p'rc0.se co!!i#!e$# is .$ exec'#or, co$#r.c# #0.# c.$be se##e( o$ . $e# b.sis b, p.,i$% c.s0 .s oppose( #o
#.:i$% (ei+er, of #0e .ppes/ U$(er IFRS8 bec.'se *.i,Pro('ce L#(/ i$#e$(s o$ #.:i$% (ei+er, of #0e .ppes8 #0eco$#r.c# is (esi%$.#e( .s <expec#e( 'se= .$( $o# .cco'$#e(for .s . (eri+.#i+e> r.#0er8 #0e #r.$s.c#io$ is $o# reco%$i9e('$#i (ei+er, of #0e .ppes #.:es p.ce/ O$ Apri 18 ;41?8*.i, Pro('ce recor(s@
I$+e$#or,////////////////////////////////////////////////// 18444Acco'$#s P.,.be/////////////////////////// 18444
&b) U$(er ASPE8 . p'rc0.se co!!i#!e$# is %e$er.,.cco'$#e( for .s .$ '$exec'#e( co$#r.c# .$( is $o#reco%$i9e( '$#i #0e '$(er,i$% $o$-fi$.$ci. i#e! is(ei+ere(/ T0erefore *.i, Pro('ce L#(/ 7o'( $o# .cco'$#for #0e co$#r.c# .s . (eri+.#i+e> r.#0er8 #0e #r.$s.c#io$ 7o'($o# be reco%$i9e( '$#i (ei+er, of #0e .ppes #.:es p.ce/O$ Apri 18 ;41?8 *.i, Pro('ce recor(s@
I$+e$#or,////////////////////////////////////////////////// 18444
Acco'$#s P.,.be/////////////////////////// 18444
&c) T0is co$#r.c# res'#s i$ . price ris: for *.i, Pro('ce si$ce#0e, 0.+e oc:e( i$ . price .$( #0e +.'e of #0e .ppes !.,c0.$%e/ T0e co$#r.c# fixes #0e c.s0 fo7s 0o7e+er8 so#0ere is $o c.s0 fo7 ris:/ I# .so exposes #0e e$#i#, #o .co'$#erp.r#,cre(i# ris: �e ris: #0.# #0e s'ppier 7i $o#be .be #o f'fi #0e co$#r.c#) .$( . i'i(i#, ris: �e ris:#0.# *.i, Pro('ce 7i $o# be .be #o co!e 'p 7i#0 #0ef'$(s #o p., #0e s'ppier)/
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BRIEF EXERCISE 16-
&.)
.$'.r, 18 ;41?No o'r$. e$#r, $ecess.r, si$ce #0e f.ir +.'e of #0e for7.r(co$#r.c# 7o'( be 24/
.$'.r, 138 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies / / / 3
G.i$/////////////////////////////////////////////////// 3
&b) T0is co$#r.c# res'#s i$ . price ris: &si$ce Gi$se$% 0.s.%ree( #o p., . fixe( price for #0e 2US .$( #0e +.'e of #0e 2US
!., c0.$%e)8 cre(i#co'$#erp.r#, ris: &si$ce #0e o#0er p.r#, #o#0e co$#r.c# !., $o# be .be #o f'fi i#s si(e of #0e b.r%.i$870ic0 is (ei+eri$% #0e 2US) .$( i'i(i#, ris: �e ris: #0.#Gi$se$% 7i $o# be .be #o co!e 'p 7i#0 #0e f'$(s #o se##e #0eir si(e of #0e co$#r.c# i/e/8 (ei+er, of 2C38;D4) No#e #0.# #0eco$#r.c# ei!i$.#es c.s0 fo7 ris: si$ce #0e e$#i#, :$o7s ex.c#,70.# i# 7i p., for #0e 2US/
BRIEF EXERCISE 16-?
.$'.r, 18 ;41?*eposi#s///////////////////////////////////////////////////// ;3
C.s0////////////////////////////////////////////////// ;3
.$'.r, 138 ;41?
*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies 3
G.i$////////////////////////////////////////////////// 3
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BRIEF EXERCISE 16-3
P.cer L#(/ is f.ce( 7i#0 . prese$#.#io$ iss'e@ s0o'( #0e 218444cos# of #0e op#io$ be #re.#e( .s .$ i$+es#!e$#8 si!i.r #o #0e
cos# of .$ op#io$ #o p'rc0.se #0e s0.res of .$o#0er co!p.$,I$ #0is #r.$s.c#io$8 P.cer L#(/ 0.s .%ree( #o b', b.c: . fixe($'!ber of #0e co!p.$,=s o7$ s0.res for . fixe( .!o'$# of co$si(er.#io$/
IAS ; s#.#es #0.# #0is #,pe of fixe( for fixe( #r.$s.c#io$ 7o'(be prese$#e( .s . re('c#io$ fro! s0.re0o(ers= e'i#, .$( $o#.s .$ i$+es#!e$#/ T0is is8 effec#i+e,8 #0e prospec#i+e re#ire!e$#of s0.res &or .c'isi#io$ of #re.s'r, s0.res8 if #0.# is per!i##e()/
BRIEF EXERCISE 16-6
T0ese bo$(s .re co$si(ere( #o be . perpe#'. (eb# obi%.#io$/.!ieso$ is obi%.#e( #o pro+i(e #o #0e 0o(er p.,!e$#s o$.cco'$# of i$#eres# .# fixe( (.#es ex#e$(i$% i$#o #0e i$(efi$i#ef'#'re8 .$( . pri$cip. p.,!e$# for #0e f.ce +.'e of #0e bo$(+er, f.r i$#o #0e f'#'re/ T0e bo$(s 7o'( be repor#e( o$.!ieso$=s s#.#e!e$# of fi$.$ci. posi#io$ .# #0e prese$# +.'e
of #0e .$$'i#, of i$#eres# p.,!e$#s o+er #0e #er! of #0e bo$(8c.c'.#e( .# #0e !.r:e# r.#e of i$#eres# &.# #0e (.#e of iss'e)8i%$ori$% #0e f'#'re +.'e of #0e pri$cip. p.,!e$#/ Bec.'se #0eperpe#'. bo$(=s +.'e is (ri+e$ soe, b, #0e co$#r.c#'.obi%.#io$ #o p., i$#eres# i# 7o'( be c.ssifie( .s . o$%-#er!(eb# o$ #0e s#.#e!e$# of fi$.$ci. posi#io$/ I# 7o'( $o# bere!e.s're( .$$'., '$ess (esi%$.#e( '$(er #0e f.ir +.'eop#io$8 i$ 70ic0 c.se i# 7o'( be re+.'e( .# f.ir +.'e .$(%.i$sosses boo:e( #o $e# i$co!e/
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BRIEF EXERCISE 16-
U$(er #0e #er!s of #0e .%ree!e$# 7i#0 #0e preferre(s0.re0o(ers8 i# is 0i%0, i:e, #0.# Si:, Li!i#e( 7i re(ee! #0epreferre( s0.res before #0e (i+i(e$( r.#e (o'bes .f#er fi+e,e.rs/ Accor(i$%,8 f.i're #o (o so 7o'( res'# i$ Si:, p.,i$%.$ ex#re!e, 0i%0 (i+i(e$( #o #0e preferre( s0.re0o(ers/ Si:,0.s i##e or $o (iscre#io$ #o .+oi( p.,i$% o'# #0e c.s0 #o re(ee!#0e s0.res before #0e e$( of #0e fif#0 ,e.r .$( #0is i:e,obi%.#io$ #o (ei+er c.s0 cre.#es . i.bii#,/ Co$se'e$#,8 #0epreferre( s0.res s0o'( be c.ssifie( .s o$%-#er! (eb# o$ #0es#.#e!e$# of fi$.$ci. posi#io$/
Bec.'se #0e preferre( s0.res .re c.ssifie( .s o$%-#er! (eb# o$
#0e s#.#e!e$# of fi$.$ci. posi#io$8 #0e (i+i(e$(s (ec.re( .$(p.i( #o preferre( s0.re0o(ers 7o'( be c.ssifie( .s i$#eres#expe$se o$ #0e s#.#e!e$# of i$co!e/ I# !i%0# be (esir.be #osep.r.#e #0e .!o'$# of (i+i(e$(s &repor#e( .s i$#eres# expe$se)p.i( o$ #0e preferre( s0.res 7i#0 #0e i$#eres# p.i( o$ o#0er (eb#/
BRIEF EXERCISE 16-D
U$(er IFRS8 #0e preferre( s0.res 7o'( be recor(e( .s . i.bii#,bec.'se #0e co$#i$%e$# se##e!e$# pro+isio$ is b.se( o$ .$e+e$# o'#si(e #0e co!p.$,=s co$#ro/
Ho7e+er8 '$(er ASPE8 #0e preferre( s0.res 7o'( be .cco'$#e(for .s . i.bii#, o$, 70e$ i# is 0i%0, i:e, #0.# #0e fir!=s $e#i$co!e 7i (rop beo7 23448444 i$ . f'#'re fisc. perio(/ If #0e#ri%%eri$% e+e$# is '$i:e,8 #0e$ #0e preferre( s0.res 7o'( be.cco'$#e( for .s e'i#,/
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BRIEF EXERCISE 16-
T0e so'#io$ is #0e s.!e for IFRS .$( ASPE/
"0e$ . preferre( s0.re pro+i(es for !.$(.#or, re(e!p#io$ b,#0e iss'er for . fixe( or (e#er!i$.be .!o'$# .# . fixe( or (e#er!i$.be f'#'re (.#e or %i+es #0e 0o(er #0e ri%0# #o re'ire#0e iss'er #o re(ee! #0e s0.re .# or .f#er . p.r#ic'.r (.#e for .fixe( or (e#er!i$.be .!o'$#8 #0e i$s#r'!e$# !ee#s #0e(efi$i#io$ of . fi$.$ci. i.bii#,/ Co$se'e$#,8 #0e preferre(s0.re s0o'( be c.ssifie( .s o$%-#er! (eb# o$ #0e s#.#e!e$# of fi$.$ci. posi#io$/
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BRIEF EXERCISE 16-14
&.)
PJ .$$'i#, ,e.rs8 K8 2348444 2 1;68363PJ 21844484448 i$ ,e.rs8 K ;81D4
PJ of #0e (eb# co!po$e$# b, i#sef 2 DD8?3
&b) U$(er IFRS8 #0e procee(s .re .oc.#e( #o #0e i.bii#, .$(e'i#, co!po$e$#s '$(er #0e resi('. !e#0o(8 7i#0 #0e(eb# co!po$e$# !e.s're( firs# &%e$er., .# #0e prese$#+.'e of f'#'re c.s0 fo7s)/
To#. procee(s .# p.r 2 184448444
PJ of #0e (eb# co!po$e$# b, i#sef &DD8?3)
I$cre!e$#. +.'e of op#io$ 2 1418;33
C.s0///////////////////////////////////////////////////////////// 184448444Bo$(s P.,.be////////////////////////////////////// DD8?3Co$#rib'#e( S'rp's 5 Co$+ersio$ Ri%0#s 1418;33
&c) U$(er ASPE8 #0e e'i#, co!po$e$# !., be !e.s're( .# 24/I$ #0is c.se8 #0e o'r$. e$#r, 7o'( be@
C.s0///////////////////////////////////////////////////////////// 184448444Bo$(s P.,.be//////////////////////////////////////
184448444
A#er$.#i+e,8 !e.s're #0e co!po$e$# #0.# is !os# e.si,
!e.s'r.be firs# &of#e$ #0e (eb# co!po$e$#)8 .$( .pp, #0eresi('. #o #0e o#0er co!po$e$#/ T0is op#io$ is co$sis#e$#7i#0 #0e re'ire( #re.#!e$# '$(er IFRS/
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BRIEF EXERCISE 16-11
&.)
C.s0 &344 X 218444 X 1/4)////////////////////////////////// 3138444Bo$(s P.,.be//////////////////////////////////////////////
?D38444Contributed Surplus—Conversion Rights/
48444
U$(er IFRS8 #0e resi('. !e#0o( is .ppie( 70ereb, c.s0 is.oc.#e( #o #0e +.'e of #0e (eb# i$s#r'!e$# firs#8 .$( #0eresi('. is .oc.#e( #o e'i#,/ T0e (eb# +.'e is c.c'.#e( .sfoo7s@ 344 x 218444 x 4// T0is .ss'!es #0.# #0e 7.rr.$#s .re
.cco'$#e( for .s e'i#, i$s#r'!e$#s/
&b)
U$(er ASPE &D36/;4 .$( /;1) o$e op#io$ is #o !e.s're #0eco!po$e$# #0.# is !os# e.si, !e.s'r.be firs# &of#e$ #0e (eb#co!po$e$#)8 .$( .pp, #0e resi('. #o #0e o#0er co!po$e$#/T0is op#io$ is co$sis#e$# 7i#0 #0e re'ire( #re.#!e$# '$(er IFRS8.$( #0e o'r$. e$#r, 7o'( be #0e s.!e .s '$(er IFRS/ I$ #0isc.se8 #0e 7.rr.$# is .so e.si, !e.s'r.be so #0e e$#i#, co'(recor( #0e #r.$s.c#io$ .s foo7s@
C.s0 &344 X 218444 X 1/4)////////////////////////////////// 3138444Bo$(s P.,.be//////////////////////////////////////////////
34;8344Contributed Surplus—Conversion Rights/
1;8344
A$o#0er op#io$ is #o !e.s're #0e e'i#, co!po$e$# .# 24/ I$#0is c.se8 #0e o'r$. e$#r, 7o'( be@
C.s0 &344 X 218444 X 1/4)///////////////////////////////// 3138444Bo$(s P.,.be///////////////////////////////////////////// 3138444
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BRIEF EXERCISE 16-1;
Bo$(s P.,.be//////////////////////////////////////////////////// 3148444Co!!o$ S0.res////////////////////////////////////////// 3148444
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BRIEF EXERCISE 16-1
Preferre( S0.res///////////////////////////////////////////////// D48444
Contributed Surplus—Conversion Rights//////// D8444
Co!!o$ S0.res////////////////////////////////////////// DD8444
BRIEF EXERCISE 16-1?
&.) A p'##.be s0.re co$#.i$s . 7ri##e$ p'# op#io$ #0.# re'ires#0e co!p.$, #o p., c.s0 or o#0er .sse#s if #0e op#io$ isexercise(/ T0e 0o(er 0.s #0e ri%0# #o exercise #0e op#io$870ic0 is be,o$( #0e co!p.$,=s co$#ro/ For #0ese
re.so$s8 p'##.be s0.res .re $or!., c.ssifie( .s .i.bii#,/ Ho7e+er8 '$(er IFRS8 #0e s0.res !., be c.ssifie(.s e'i#, if #0e s0.res .re i$-s'bs#.$ce e'i#,i$s#r'!e$#s/ Bec.'se #0e p'##.be co!!o$ s0.res e$#i#e#0e 0o(er #o . pro r.#. s0.re of *.+iso$=s $e# .sse#s 'po$i'i(.#io$8 bec.'se #0e s0.res (o $o# 0.+e preferre( r.$:or (i+i(e$( prefere$ce8 .$( bec.'se #0ere .re $o o#0er co!!o$ s0.res8 *.+iso$=s p'##.be co!!o$ s0.res !.,be c.ssifie( .s e'i#, '$(er IFRS/
&b) U$(er ASPE8 #0e cri#eri. for c.ssific.#io$ of p'##.bes0.res .s e'i#, .re si!i.r #o #0e IFRS cri#eri./ T0erefore'$(er ASPE8 *.+iso$=s p'##.be co!!o$ s0.res !., .sobe c.ssifie( .s e'i#,/
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BRIEF EXERCISE 16-13
&.) T0ese .re !.$(.#ori, re(ee!.be preferre( s0.res8 70ic0
!'s# be c.ssifie( .s . i.bii#, '$(er IFRS/ T0e !.$(.#or,re(e!p#io$ i!poses . co$#r.c#'. obi%.#io$ #o (ei+er c.s0 or o#0er .sse#s 'po$ re(e!p#io$8 70ic0 represe$#s .fi$.$ci. i.bii#,/
&b) U$(er ASPE8 !.$(.#ori, re(ee!.be preferre( s0.res&.so referre( #o .s 0i%0o7 preferre( s0.res) .re re'ire(#o be c.ssifie( .s e'i#,/
&c) T0is #,pe of #r.$s.c#io$ i$+o+i$% preferre( s0.res is.bee( .$ es#.#e free9e bec.'se #0e f.ir +.'e of #0eb'si$ess=s .sse#s is fro9e$ .# . poi$# i$ #i!e &b, free9i$%#0e re(e!p#io$ +.'e of #0e preferre( s0.res .# . +.'ee'. #o f.ir +.'e of #0e b'si$ess=s .sse#s .# #0e #i!e of #r.$si#io$)/ T0e s'ccessi+e o7$ers #0e$ p'rc0.seco!!o$ s0.res i$ #0e $e7 corpor.#io$ .# . $o!i$..!o'$#8 70ic0 .o7s #0e! #o be$efi# fro! s'bse'e$#i$cre.ses i$ #0e b'si$ess=s +.'e/
BRIEF EXERCISE 16-16
&.) U$(er IFRS8 . i.bii#, exis#s si$ce #0e co$#i$%e$#se##e!e$# pro+isio$ &b.se( o$ #0e f.ir +.'e of #0eco!p.$,=s co!!o$ s0.res) is b.se( o$ .$ e+e$# o'#si(e#0e co!p.$,=s co$#ro/ T0e preferre( s0.res .re re'ire(#o be c.ssifie( .s . i.bii#,/
&b) U$(er ASPE8 #0e preferre( s0.res 7o'( be c.ssifie( .s .i.bii#, o$, if #0e co$#i$%e$c, is 0i%0, i:e, #o occ'r/ I$#0is c.se8 i# is co$si(ere( '$i:e, #0.# P.r:er=s co!!o$s0.res 7i excee( . f.ir +.'e of 2144 per s0.re8 .$(#0erefore '$i:e, #0.# #0e co$#i$%e$c, 7i occ'r/ T0epreferre( s0.res 7o'( be c.ssifie( .s e'i#,/
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BRIEF EXERCISE 16-1
Fo'r co!!o$ s#oc: co!pe$s.#io$ p.$s .re@
1/ Co!pe$s.#or, s#oc: op#io$ p.$s &CSOPs)
;/ *irec# .7.r(s of s#oc:
/ S#oc: .ppreci.#io$ ri%0#s p.$s &SARs)
?/ Perfor!.$ce-#,pe p.$s
BRIEF EXERCISE 16-1D
T0e !.i$ (iffere$ce be#7ee$ .$ e!po,ee s#oc: op#io$ p.$&ESOP) .$( . co!pe$s.#or, s#oc: op#io$ p.$ &CSOP) is #0.#7i#0 ESOPs8 #0e e!po,ee 's'., p.,s for #0e op#io$s &ei#0er f', or p.r#i.,)/ T0's ESOP #r.$s.c#io$s .re reco%$i9e( .sc.pi#. #r.$s.c#io$s &c0.r%e( #o e'i#, .cco'$#s)/ T0e e!po,eeis i$+es#i$% i$ #0e co!p.$,/
Ho7e+er8 CSOPs8 o$ #0e o#0er 0.$(8 .re pri!.ri, see$ .s .$.#er$.#i+e 7., #o co!pe$s.#e p.r#ic'.r8 of#e$ se$ior8e!po,ees for #0eir ser+ices8 i:e . b.r#er #r.$s.c#io$/ T0eser+ices .re re$(ere( b, #0e e!po,ee i$ s'ppor# of #0e .c# of pro('ci$% re+e$'es/ T0's CSOP #r.$s.c#io$s .re reco%$i9e( o$#0e i$co!e s#.#e!e$# &c0.r%e( #o .$ expe$se .cco'$#)/
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BRIEF EXERCISE 16-1
111? No e$#r,
1;11? Co!pe$s.#io$ Expe$se////////////// 38444
Co$#rib'#e( S'rp'sS#oc:Op#io$s
////////////////////////////// 38444
1;113 Co!pe$s.#io$ Expe$se////////////// 38444
Co$#rib'#e( S'rp'sS#oc:Op#io$s ////////////////////////////// 38444
238444 21468444 X 1;
BRIEF EXERCISE 16-;4
&.)
U$(er ASPE8 . c.s0-se##e( p.$ is !e.s're( .# i$#ri$sic +.'e/
;41?@ 38?44 X &2;; 5 2;4) X 34K 238?44
;413@ 38?44 X &2? 5 2;4) 5 238?44 248;44
&b)
U$(er IFRS8 . c.s0-se##e( p.$ is !e.s're( .# #0e f.ir +.'e of #0e SARs p.$8 70ic0 is es#i!.#e( 'si$% .$ op#io$s prici$%!o(e .$( i$corpor.#es bo#0 i$#ri$sic +.'e .$( #i!e +.'e/
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BRIEF EXERCISE 16-;1
&.) *ece!ber 18 ;41?
Co!pe$s.#io$ Expe$se///////////////////////////////////////////////////38444Li.bii#, '$(er S#oc:-Appreci.#io$Ri%0#s P.$s////////////////////////////////////////////////////// 38444
&21348444 X 34K)
&b) *ece!ber 18 ;41?Co!pe$s.#io$ Expe$se///////////////////////////////////////////////////348444
Li.bii#, '$(er S#oc:-Appreci.#io$Ri%0#s P.$s////////////////////////////////////////////////////// 348444
&&24 5 2;4) X 148444) X 34K
BRIEF EXERCISE 16-;;
Perfor!.$ce-#,pe p.$s .7.r( specifie( exec'#i+es co!!o$s0.res &or c.s0) if specifie( perfor!.$ce cri#eri. .re .##.i$e(('ri$% #0e perfor!.$ce perio( &%e$er., #0ree #o fi+e ,e.rs)/ Aperfor!.$ce-#,pe p.$=s co!pe$s.#io$ cos# is !e.s're( b, #0ef.ir +.'e of s0.res &or c.s0) iss'e( o$ #0e exercise (.#e/ T0e
co!p.$, !'s# 'se i#s bes# es#i!.#es #o !e.s're #0eco!pe$s.#io$ cos# before #0e (.#e of exercise8 .$( .oc.#e #0eco!pe$s.#io$ cos# o+er #0e perfor!.$ce perio( 'si$% #0eperce$#.%e .ppro.c0/
U$(er o#0er co!pe$s.#or, p.$s8 op#io$s .re +.'e( .# #0e (.#eof %r.$# 'si$% .$ op#io$s prici$% !o(e s'c0 .s B.c:-Sc0oes8.$( #0eir +.'e is .oc.#e( e+e$, o+er #0e perio( of re'ire(ser+ice/
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BRIEF EXERCISE 16-;
F.ir +.'e is !os# re.(i, (e#er!i$e( 70ere #0ere is .$ .c#i+e!.r:e# 7i#0 p'bis0e( prices/ "0ere #0is is $o# #0e c.se8 .
+.'.#io$ #ec0$i'e is 'se(/ For op#io$s8 op#io$ prici$% !o(es.re 'sef' for c.c'.#i$% f.ir +.'e/
T0e i$p'#s #o #0e !o(e i$c'(e@
1/ T0e exercise price/ T0is is #0e price .# 70ic0 #0e op#io$!., be se##e(/ I# is .%ree( 'po$ b, bo#0 p.r#ies #o #0eco$#r.c#/
;/ T0e expec#e( ife of #0e op#io$/ T0is is #0e #er! of #0eop#io$/ I# is .%ree( 'po$ b, bo#0 p.r#ies #o #0e co$#r.c#/So!e op#io$s !., o$, be se##e( .# #0e e$( of #0e #er!&:$o7$ .s E'rope.$ op#io$s) 70ie o#0ers !., be se##e(.# poi$#s ('ri$% #0e #er! &:$o7$ .s A!eric.$ op#io$s)/
/ T0e c'rre$# !.r:e# price of #0e '$(er,i$% s#oc:/ T0is isre.(i, .+.i.be fro! #0e s#oc: !.r:e#/
?/ T0e +o.#ii#, of #0e '$(er,i$% s#oc:/ T0is is #0e !.%$i#'(eof f'#'re c0.$%es i$ #0e !.r:e# price/ Jo.#ii#, oo:s .#0o7 #0e specific s#oc: price !o+es re.#i+e #o #0e !.r:e#/
3/ T0e expec#e( (i+i(e$( ('ri$% #0e op#io$ ife/6/ T0e ris:-free r.#e of i$#eres# for #0e op#io$ ife/ I$ %e$er.8
%o+er$!e$# bo$(s c.rr, . re#'r$ #0.# is co$si(ere( #o be#0e ris:-free re#'r$/
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SOLUTIONS TO EXERCISES
EXERCISE 16-1 &14-13 !i$'#es)
&.) .$'.r, ;8 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////34
C.s0/////////////////////////////////////////////////////////////////////// 34
&b) M.rc0 18 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////138134
G.i$//////////////////////////////////////////////////////////////////////// 138134&2138344 5 234)
&c) T0e %.i$ i$cre.ses $e# i$co!e for #0e perio( b, 2138134/
&() As $o i$for!.#io$ is pro+i(e( .s #o o#0er i$+es#!e$#s or expos'res #0.# .c:so$ !., 0.+e8 i# .ppe.rs #0.# #0eco!p.$, 0.s 'se( #0e op#io$ for spec'.#i+e p'rposes/.c:so$ .ppe.rs $o# #o be 0e(%i$% #o !i$i!i9e #0e ris: of . c'rre$# or f'#'re #r.$s.c#io$/
&e) T0is (eri+.#i+e 7i expose #0e co!p.$, #o . price
ris: 8 .s #0e price of #0e '$(er,i$% is . +.ri.be #0.# !.,c0.$%e #0e +.'e of #0e op#io$/ I$ .((i#io$8 #0ere is .cre(i#co'$#erp.r#, ris: �e ris: #0.# #0e o#0er p.r#, #o #0eco$#r.c# 7i $o# 0o$o'r #0eir si(e of #0e co$#r.c#) .$( .i'i(i#, ris: �e ris: #0.# .c:so$ 7i $o# be .be #o0o$o'r i#s si(e of #0e co$#r.c#)/ Si$ce #0is is . p'rc0.se(op#io$8 .c:so$ 0.s #0e ri%0# b'# $o# #0e obi%.#io$ #oexercise #0e op#io$/ If #0e op#io$ is i$ #0e !o$e,8 .c:so$7o'( 7.$# #o exercise i#/
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EXERCISE 16-; &14-13 !i$'#es)
&.) Apri 18 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////134
C.s0/////////////////////////////////////////////////////////////////////// 134
&b) '$e 48 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////?8D34
G.i$ QQQQQQQQQQQQQQ ?8D34
&238444 5 2134)
&c) ',8 18 ;41?FJ-NI I$+es#!e$#s/////////////////////////////////////////////////////////////18;34
Loss QQQQQQQQQQQQQQQQQQ/ ;34C.s0 &344 X 2;3)//////////////////////////////////////////////////////// 1;8344*eri+.#i+es5Fi$.$ci. Asse#sLi.bii#ies////////////////// 38444
344 X 2?/34
(d) Rec. #0.# #0e f.ir +.'e of . c. op#io$ is b.se( o$ #0ei$#ri$sic +.'e .$( #0e #i!e +.'e/ The option is a 6-monthoption and it was exercised after three months. Because theoption was exercised (with three months remaining), Petey
would not be able to recover the time value portion of theoption’s fair value.
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EXERCISE 16- &14-13 !i$'#es)
&.) U$(er IFRS8 #0is p'rc0.se co!!i#!e$# is .$ exec'#or,co$#r.c# #0.# c.$ be se##e( o$ . $e# b.sis b, p.,i$% c.s0 .s
oppose( #o #.:i$% (ei+er, of #0e or.$%es/ Ho7e+er8bec.'se Fres0 'ice f', i$#e$(s #o #.:e (ei+er, of #0eor.$%es8 #0e co$#r.c# is (esi%$.#e( .s <expec#e( 'se= .$($o# .cco'$#e( for .s . (eri+.#i+e> r.#0er8 #0e co$#r.c# is $o#reco%$i9e( '$#i (ei+er, of #0e or.$%es #.:es p.ce/
T0erefore8 #0ere .re $o o'r$. e$#ries re'ire( .# ei#0er .$'.r, 1 or .$'.r, 1/ A o'r$. e$#r, 7i be recor(e(70e$ Fres0 'ice .c#'., #.:es (ei+er, of or.$%es/
&b) If Fres0 'ice (oes $o# i$#e$( #o #.:e (ei+er, of #0eor.$%es8 #0e$ #0e exec'#or, co$#r.c# 7i be +ie7e( .s .(eri+.#i+e bec.'se i# c.$ be se##e( o$ . $e# b.sis/T0erefore8 #0e co$#r.c# 7o'( be recor(e( .# f.ir +.'e/
Bec.'se #0ere 7.s $o cos# #o e$#er i$#o #0e co$#r.c#8 #0ere7o'( be $o i$i#i. e$#r, o$ .$'.r, 1/
Ho7e+er8 #0e co$#r.c# 7i be !.r:e( #o !.r:e# .$( 7ic0.$%e .s #0e price of or.$%es c0.$%e/ T0erefore #0efoo7i$% o'r$. e$#r, 7i be !.(e o$ .$'.r, 1@
Loss &148444 X &4/34 5 4/?)) ////////////////////////////////////144*eri+.#i+es5Fi$.$ci. Asse#sLi.bii#ies/////////// 144
&c) U$(er ASPE8 #0is p'rc0.se co!!i#!e$# co$#r.c# 7o'( $o#be .cco'$#e( for .s . (eri+.#i+e bec.'se #0is .%ree!e$# is
$o# exc0.$%e #r.(e(/ T0erefore8 #0e co$#r.c# 7o'( $o# bereco%$i9e( '$#i (ei+er, of or.$%es #.:es p.ce/
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EXERCISE 16-? &14-13 !i$'#es)
&.) T0e (eri+.#i+e is co$si(ere( . fixe(-for-fixe( (eri+.#i+e i$ .$e$#i#,=s o7$ s0.res .s #0e op#io$ s#ip'.#es #0.# #0e e$#i#,
7i p'rc0.se &b', b.c:) . fixe( $'!ber of s0.res for .fixe( .!o'$# of co$si(er.#io$/ IFRS s#.#es #0.# #0is#r.$s.c#io$ 7o'( be prese$#e( .s . re('c#io$ fro!s0.re0o(ers= e'i#, .$( $o# .s .$ i$+es#!e$#/ T0is is8effec#i+e,8 #0e prospec#i+e re#ire!e$# of s0.res &or .c'isi#io$ of #re.s'r, s0.res8 if #0.# is per!i##e()/
E'i#, 5 Fixe(-for-fixe( *eri+.#i+e ///////////////////////////;34C.s0///////////////////////////////////////////////////////////////////// ;34
&b) Bec.'se #0e op#io$ .o7s . c0oice i$ 0o7 #0e op#io$ 7i bese##e(8 #0e i$s#r'!e$# is . fi$.$ci. .sse# or i.bii#,&(eri+.#i+e) b, (ef.'# '$(er IFRS '$ess . possibese##e!e$# op#io$s res'# i$ i# bei$% .$ e'i#, i$s#r'!e$#/ I$#0is c.se8 o$e se##e!e$# op#io$ is #0e (ei+er, of c.s0/T0erefore8 i# 7i be c.ssifie( .s . fi$.$ci. .sse#&(eri+.#i+e)/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-3 &13 5 ;3 !i$'#es)
Type of financial
instrument
Timing of
recognition
Measurement Gains or
Losses
1. Financial derivative –
forward contract
When fair value
fluctuates. Value
at acquisition is
$nil.
PV of future cash
flows
Net Income
2. Non-financial
derivative –
exchange- traded
futures
When fuel prices
fluctuate. Value at
acquisition is $nil.
PV of future cash
flows
Net Income
3. This is not a financial
instrument
N/A N/A N/A
4. This is a purchasecommitment (and
therefore not
exchange traded)
As these are notexchange traded
and the company
intends to take
delivery of the
steel, these are
not recognized in
the financial
statements under
either ASPE or
IFRS
Not recognizedunless onerous
N/A
5. Contra equity - this is
a purchased call
option that is
settleable only in the
entity’s own equity
instruments (fixed for
fixed)
When options are
purchased and
cash is paid
Cash paid N/A
6. Non-financial
derivative –
exchange- traded
futures
Initial margin is
similar to a bank
account.
Cash deposited
on margin
Net Income
7. Liability. Increase in
redemption amount
makes it highly likely
company will redeem,
When shares are
issued
PV of future cash
flows
Net Income
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
and imposes a
liability to deliver
cash or other assets
at the time of
redemption.
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EXERCISE 16-3 &Co$#i$'e()
Type of financial
instrument
Timing of
recognition
Measurement Gains or
Losses
8. Hybrid instrument.
Warrants are written
call options, and debt
is a liability.
When debt is
issued
IFRS – debt at PV of
future cash flows
and rest to equity
ASPE – may allocate
$0 to the warrant or
may bifurcate the
initial amount
between debt and
equity allocating the
more easily
measurable firstwith the residual to
the other component
Net Income for
debt
component
including
interest and
gains/losses
upon
extinguishment
9. Hybrid instrument –
conversion option is
a written call option
and is equity since a
fixed number of
shares will be issued.
When debt is
issued
IFRS – debt at PV of
future cash flows
and rest to equity
ASPE– may allocate
$0 to the conversion
feature or may
bifurcate the initial
amount betweendebt and equity
allocating the more
easily measurable
first with the
residual to the other
component
Net Income for
debt
component
including
interest and
gains/losses
upon
extinguishment
10.Liability – these are
puttable shares and
since the option to
put the shares back
to the company is
beyond the control of
the entity, they are
liabilities unless
certain specific
conditions are met.
When
instruments
are issued
Amount received Net Income for
debt
component
including
interest and
gains/losses
upon
extinguishment
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EXERCISE 16-6 &;4-;3 !i$'#es)
1/ F.ir +.'e of bo$(s 7i#0o'# 7.rr.$#s is 2;D38444
&2448444 X /3)
C.s0 &2448444 X 1/4?)/////////////////////// 1;8444Bo$(s P.,.be///////////////////////////// ;D38444Co$#rib'#e( S'rp'sS#oc: ".rr.$#s ;8444
;/ U$(er ASPE8 #0e firs# op#io$ is #o !e.s're #0e co!po$e$##0.# is !os# e.si, !e.s'r.be firs# &of#e$ #0e (eb#co!po$e$#)8 .$( .pp, #0e resi('. #o #0e o#0er co!po$e$#/T0e seco$( op#io$ is #o !e.s're #0e e'i#, co!po$e$# .#24/ T0e e$#ries '$(er #0ese #7o .ppro.c0es .re8
respec#i+e,8 .s foo7s@
C.s0 &21484448444 X /)/////////////////////////////8448444Bo$(s P.,.be///////////////////////////// 8448444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s////////////////// ?448444
C.s0 &21484448444 X /)///////////////////// 8448444Bo$(s P.,.be///////////////////////////// 8448444
/ U$(er ASPE8 #0e firs# op#io$ is #o !e.s're #0e co!po$e$##0.# is !os# e.si, !e.s'r.be firs#8 .$( .pp, #0e resi('.#o #0e o#0er co!po$e$#/
C.s0 //////////////////////////////////////////////////// 186448444Bo$(s P.,.be///////////////////////////// 1D8?448444Co$#rib'#e( S'rp'sS#oc: ".rr.$#s 18;448444
J.'e of bo$(s p's 7.rr.$#s &2;484448444 X /D) 2186448444
J.'e of 7.rr.$#s &;448444 X 26) 18;448444 J.'e of bo$(s 21D8?448444
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EXERCISE 16-6 &Co$#i$'e()
T0e seco$( op#io$ is #o !e.s're #0e e'i#, co!po$e$# .#24/
C.s0 //////////////////////////////////////////////////// 186448444Bo$(s P.,.be///////////////////////////// 186448444
?/ Loss o$ Re(e!p#io$ of Bo$(s////////// 48444
Re#.i$e( E.r$i$%s///////////////////////////////38444Bo$(s P.,.be//////////////////////////////////// 8;38444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s //////////////////////// ;48444
Co!!o$ S0.res////////////////////////// 148138444C.s0////////////////////////////////////////////// 638444
28338444 5 &21484448444 5 238444) 2638444 5 248444
3/ F.ir +.'e of bo$(s 7i#0o'# 7.rr.$#s 2?38444&23448444 X /3)
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T0e 7.rr.$#s .re e'i#, i$s#r'!e$#s si$ce #0e, .re fixe( forfixe(/
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EXERCISE 16- &;4-;3 !i$'#es)
&.) C.s0///////////////////////////////////////////////////////// 3848444Bo$(s P.,.be &2684448444 X /)// 38D;48444I$#eres# P.,.be////////////////////////////// 48444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s ///////////////////// 648444
&2684448444 X K X ;1;) &2684448444 X /D) 248444
&b) I$#eres# P.,.be ///////////////////////////////////// 48444
I$#eres# Expe$se///////////////////////////////////// 1D6814;
Bo$(s P.,.be///////////////////////////////// 6814; C.s0 &2684448444 X K ;)///////////// ;48444
C.c'.#io$s@
P.r +.'e 2684448444Iss'.$ce price / 38D;48444To#. (isco'$# 2 1D48444
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*isco'$# .!or#i9e( 26814;&? X 2183;3)
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EXERCISE 16- &Co$#i$'e()
&c) Bo$(s P.,.be &2183448444 5 2?181D6)// 18?3D8D1?Co$#rib'#e( S'rp's
Co$+ersio$ Ri%0#s /////////////////////////// 138444Co!!o$ S0.res///////////////////////// 18?8D1?
C.c'.#io$s@
*isco'$# re.#e( #o ;3K of #0e bo$(s &21D48444 X /;3) 2?38444
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C.s0//////////////////////////////////////////////////////// 3848444Bo$(s P.,.be /////////////////////////////// 38DD48444I$#eres# P.,.be////////////////////////////// 48444
&2684448444 X K X ;1;) &2684448444 X /D) 248444
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EXERCISE 16- &Co$#i$'e()
&e) T0e bo$(0o(ers 7o'( o$, be !o#i+.#e( #o co$+er#bo$(s i$#o co!!o$ s0.res if #0e, percei+e( .$ i$cre.se i$#0e +.'e of #0eir i$+es#!e$#8 .$( if #0e, 7o'( %e# co!!o$s0.res 7i#0 . f.ir +.'e 0i%0er #0.$ #0e f.ir +.'e of #0ebo$(s #0.# 7ere %i+e$ 'p i$ #0e co$+ersio$/ T0e boo: +.'eof 70.# #0e, %.+e 'p .# #0e #i!e of co$+ersio$ is s0o7$ i$#0e e$#r, .bo+e .s 218?8D1? for 48444 co!!o$ s0.res/T0is 7or:s o'# #o si%0#, o+er 2? per s0.re/ Li:e, #0eco!!o$ s0.res .re #r.(i$% .# .$ .!o'$# 0i%0er #0.$ 2?b, . %oo( !.r%i$/ T0ere s0o'( be .$ excess o+er #0e boo:+.'e of 2? .s #0e bo$(0o(ers .re %i+i$% 'p . s#e.(, c.s0i$fo7 fro! #0e i$#eres# i$co!e ob#.i$e( fro! #0e bo$(s i$
exc0.$%e for s0.res8 70ic0 !i%0# $o# ,ie( .$, (i+i(e$(s/T0is is especi., #r'e .s co$#i$'i$% #o 0o( #0e bo$(spro+i(es . re#'r$ i$ #0e for! of i$#eres#8 ,e# #0e op#io$fe.#'re oc:s i$ #0e s#oc: .ppreci.#io$ i$ f.+o'r of #0e0o(er 5 so #0e i!!e(i.#e oppor#'$i#, for . %.i$ !'s# beco$si(er.be/
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EXERCISE 16-D &14-;4 !i$'#es)
&.) Bo$(s P.,.be &2;8?448444 2??8344) ;8???8344Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s //////////////////////////// ;;8;44
Preferre( S0.res///////////////////////////// ;8?66844
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(i+i(e$(s .##r.c# $o $e# #.x i$ . corpor.#io$/
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EXERCISE 16- &14-;4 !i$'#es)
&.)Bo$(s P.,.be/////////////////////////////////////// 68444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s //////////////////////////// 138444
Co!!o$ S0.res///////////////////////////// 184D8444
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2448444 X 28;148444 268444284448444
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Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s Expire( ////// 138444
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EXERCISE 16-14 &;4-;3 !i$'#es)
&.) C.s0///////////////////////////////////////////////////////// 148D448444Bo$(s P.,.be///////////////////////////////// D83448444
Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s ////////////////////
;8448444
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&;8448444 X 4K)Co!!o$ S0.res //////////////////////////// 8;D38444
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Sc0e('e 1Co!p'#.#io$ of C.rr,i$% J.'e of Bo$(s Co$+er#e(
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-14 &Co$#i$'e()
&c) Co!p'#.#io$ of Co!!o$ S0.res Res'#i$% fro! Co$+ersio$
N'!ber of s0.res co$+er#ibe o$ .$'.r, 18 ;41?@
N'!ber of bo$(s &21484448444 218444) 148444
N'!ber of s0.res for e.c0 bo$( X 3348444
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/ I$cre.se( i$co!e fro! re('ce( i$#eres# cos#s &#o beco!p'#e( o$ .$ .f#er-#.x b.sis)/
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T0e (is.(+.$#.%es of #0e co$+ersio$ #o H.!!o$(Corpor.#io$ i$c'(e@
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;/ Exis#i$% s0.re0o(ers 7i co$cei+.b, press're #0eco!p.$, $o# #o (i'#e #0eir o7$ers0ip .$( po7er #o+o#e �is !., .c#'., be '$i:e,8 .s #0e f.c# of #0e
EXERCISE 16-14 &Co$#i$'e()
co$+ersio$ fe.#'re 7o'( 0.+e bee$ f', (iscose(si$ce #0e i$i#i. iss'.$ce of #0e bo$(s8 .$( #0epossibii#, of co$+ersio$ 7o'( be f', refec#e( i$ #0eprice of #0e s0.res)/
/ Press're fro! $e7 s0.re0o(ers for (i+i(e$( p.,o'#/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-11 &14-;4 !i$'#es)
Bo$(s P.,.be/////////////////////////////////////// 181;38444Co$#rib'#e( S'rp's
Co$+ersio$ Ri%0#s //////////////////// 8444Co!!o$ S0.res///////////////////////////// 181?8444
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C.rr,i$% .!o'$# of bo$(s co$+er#e(@
218;448444 X 283448444 2181;384442D84448444
C.rr,i$% .!o'$# of ri%0#s exercise( o$ co$+ersio$@
218;448444X 2648444 28444
2D84448444
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-1; &4-?4 !i$'#es)
&.) &1) *ece!ber 18 ;413I$#eres# Expe$se///////////////////////////////////// ;4?8444
Bo$(s P.,.be &21;48444 X 1;4)////////// 68444 C.s0 &2684448444 X K X 61;)/////// ;148444
&;) .$'.r, 18 ;416Bo$(s P.,.be//////////////////////////////////////// ?468?44Co$#rib'#e( S'rp's
Co$+ersio$ Ri%0#s //////////////////// D8444Co!!o$ S0.res///////////////////////////// ?1?8?44
1/4? ess 1/4; ;K X 26 !iio$ X 6/66K
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Pre!i'! .!or#i9e(&21;48444 X ;14) ;?8444
B..$ce 268444
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268?44F.ce +.'e of bo$( re(ee!e( ?448444C.rr,i$% +.'e of bo$( re(ee!e( 2?468?44
&) M.rc0 18 ;416I$#eres# Expe$se///////////////////////////////////// 68D44
Bo$(s P.,.be//////////////////////////////////////// ;44
&21;48444 14 X 1; X 6/66K)
I$#eres# P.,.be////////////////////////////// 8444
&2?448444 X K X 1;)
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EXERCISE 16-1; &Co$#i$'e()
M.rc0 18 ;416Bo$(s P.,.be//////////////////////////////////////// ?468;44Co$#rib'#e( S'rp's
Co$+ersio$ Ri%0#s //////////////////// D8444Co!!o$ S0.res////////////////////// ?1?8;44
Pre!i'! .s of .$'.r, 18 ;416 for 2?448444 of bo$(s 268?44268?44 D ,e.rs re!.i$i$% X 1; &;44)
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&?) '$e 48 ;416I$#eres# Expe$se///////////////////////////////////// 168D44Bo$(s P.,.be//////////////////////////////////////// 38;44
I$#eres# P.,.be////////////////////////////////////// 8444
&2?448444 X K X 1;)
C.s0///////////////////////////////////////////////// 1D8444
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2D8;44
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EXERCISE 16-1; &Co$#i$'e()
&b) Bo$(0o(ers 7o'( be !o#i+.#e( #o 0o( off co$+er#i$%#0eir i$+es#!e$# i$ bo$(s i$#o co!!o$ s0.res #o co$#i$'e#o #.:e .(+.$#.%e of #0e sec'ri#, .$( s#e.(, c.s0 fo7sfro! #0e i$#eres# .$( #0e re#'r$ of c.pi#. .# #0e !.#'ri#,(.#e of #0e bo$(s/ S0o'( #0e +.'e of #0e co!!o$ s0.resco$#i$'e #o ci!b 0i%0er8 #0e oppor#'$i#, #o co$+er# is s#i.+.i.be '$#i #0e co$+ersio$ ri%0# expires/ O$ #0e o#0er 0.$(8 if #0e f.ir +.'e of #0e co!!o$ s0.res (eci$es8 #0ebo$(0o(er c.$ co$#i$'e #o 0o( #0e bo$(s #o #0eir !.#'ri#, .$( recei+e #0e f.ce +.'e of #0e bo$(8 .$( coec#i$#eres# p.,!e$#s #o !.#'ri#,/
T0e ris: i$ pos#po$i$% #0e co$+ersio$ ies i$ #0e +o.#ii#,of #0e f.ir +.'e of #0e co!!o$ s0.res/ If #0e bo$(0o(er (oes $o# co$+er# 70e$ #0e co!!o$ s0.re f.ir +.'e is0i%08 #0e bo$(0o(er c.$$o# re.i9e . %.i$ o$ #0e res.e of #0e s0.res/ S'bse'e$#,8 if #0e f.ir +.'e of #0e co!!o$s0.res (eci$es #0e bo$(0o(er 7i $o# be .be #o se #0ebo$( .# . s'bs#.$#i. %.i$ si$ce #0e i$ce$#i+e #o co$+er# #oco!!o$ s0.res is $o7 $o$-exis#e$# .$( #0e co$+ersio$ri%0# is 7or#0ess/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-1 &14-13 !i$'#es)
&.)
ASPE .o7s for #7o op#io$s@ 1) #o .oc.#e #0e e$#ire iss'.$ce #o#0e (eb# co!po$e$#> or ;) #o 'se #0e resi('. !e#0o(/
Resi('. !e#0o(@
T0e resi('. !e#0o( '$(er ASPE .o7s for #0e firs# .oc.#io$ #obe #o #0e co!po$e$# #0.# is !ore e.si, !e.s'r.be8 i$ #0isc.se8 #0e e'i#, co!po$e$#@
OXFOR* CORP/
o'r$. E$#r,Sep#e!ber 18 ;41?
C.s0 &2384?8444 2118444)////////////////////////// 38?;18444Bo$(s P.,.beSc0e('e 1/////////////////// 38;3;8444Co$#rib'#e( S'rp'sS#oc: ".rr.$#s
Sc0e('e 1 //////////////////////////////////////////// 3;8444
I$#eres# P.,.beSc0e('e ;///////////////// 118444
&To recor( #0e iss'.$ce of #0e bo$(s)
Sc0e('e 1Pre!i'! o$ Bo$(s P.,.be .$( J.'e of S#oc: ".rr.$#s
S.es price &38;44 X 218444 X 1/4;) 2384?8444*e('c# +.'e .ssi%$e( #o s#oc: 7.rr.$#s
&38;44 X ; 148?44 X 23) 3;8444
Bo$(s p.,.be 238;3;8444
Sc0e('e ;
Accr'e( Bo$( I$#eres# #o *.#e of S.eF.ce +.'e of bo$(s 238;448444I$#eres# r.#e KA$$'. i$#eres# 2 ?6D8444
Accr'e( i$#eres# for !o$#0s 5 &2?6D8444 X 1;) 2 118444
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-1 &Co$#i$'e()
Aoc.#io$ of 9ero #o e'i#,
A seco$( op#io$ is .+.i.be '$(er ASPE 70ereb, #0e e$#ireiss'.$ce is .oc.#e( #o #0e (eb#/
OXFOR* CORP/o'r$. E$#r,
Sep#e!ber 18 ;41?
C.s0 &2384?8444 2118444)////////////////////////// 38?;18444Bo$(s P.,.be///////////////////////////////////////// 384?8444
I$#eres# P.,.beSc0e('e 1///////////////// 118444
Sc0e('e 1Accr'e( Bo$( I$#eres# #o *.#e of S.e
F.ce +.'e of bo$(s 238;448444I$#eres# r.#e KA$$'. i$#eres# 2 ?6D8444
Accr'e( i$#eres# for !o$#0s 5 &2?6D8444 X 1;) 2 118444
&b)
A o7er (eb# #o #o#. .sse#s r.#io i$(ic.#es be##er (eb#-p.,i$%.bii#, .$( o$%-r'$ so+e$c,/ Aoc.#i$% #0e e$#ire iss'.$ce #o#0e (eb# co!po$e$# &.$( #0erefore 9ero #o e'i#,) res'#s i$ .0i%0er (eb# #o #o#. .sse#s r.#io co!p.re( #o 'si$% #0e resi('.!e#0o(/ T0e cre(i#or !., .so .$.,9e #0.# #0e '$(er,i$%
fi$.$ci. i$s#r'!e$# is #0e s.!e '$(er e.c0 op#io$8 .$( #0.# #0eco!p.$,=s .cco'$#i$% c0oice is .ffec#i$% #0is c.c'.#e( r.#io/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-1? &13-;3 !i$'#es)
.) U$(er ASPE8 fi$.$ci. i.bii#ies #0.# .re i$(exe( #o .$e$#i#,=s perfor!.$ce .re !e.s're( .# #0e 0i%0er of #0e
.!or#i9e( cos# .$( #0e .!o'$# o7i$% .# #0e s#.#e!e$# of fi$.$ci. posi#io$ (.#e %i+e$ #0e fe.#'re/ T0erefore8 #0e
o'r$. e$#r, 'po$ iss'.$ce is recor(e( .# #0e iss'e.!o'$#/
C.s0 &218444 x 144 x 1/4)/////////////////////// 148444Bo$(s P.,.be///////////////////////////////// 148444
&b) T0e bo$( .!or#i9e( c.rr,i$% .!o'$# s0o'( be co!p.re( #o#0e po#e$#i. c.s0 o'#fo7 '$(er #0e i$(exi$% fe.#'re #o(e#er!i$e i#s ,e.r-e$( c.rr,i$% .!o'$#/
A!or#i9e(cos#
I$(exe( fe.#'re Hi%0er of #7o op#io$s
*ec/ 18;41?
214;8?44&2148444 5 2644)
238444&2;34 x x 144)
214;8?44
*ec/ 18
;413
21418D44
&214;8?44 5 2644)
21438444
&234 x x 144)
21438444
*ec/ 18;416
21418;44&21418D44 5 2644)
2138444&2?34 x x 144)
21;48444
T0e .!or#i9.#io$ of #0e pre!i'! is c.c'.#e( .s foo7s@Bo$( Pre!i'!@ 28444
Ve.rs #o M.#'ri#,@ 3A!or#i9.#io$ per ,e.r@ 2644
A#0o'%0 #0e i$(exe( fe.#'re c.c'.#es . re(e!p#io$ fe.#'re.# 21384448 #0e bo$( .%ree!e$# s#.#es #0.# #0e bo$(s c.$$o# bere(ee!e( for !ore #0.$ 218;44 per bo$(/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-13 &13-;3 !i$'#es)
&.)
1;1? No e$#r, &#o#. co!pe$s.#io$ cos# is 23348444)
1;11? Co!pe$s.#io$ Expe$se/////////////////////// ;38444Co$#rib'#e( S'rp'sS#oc: Op#io$s ;38444To recor( co!pe$s.#io$ expe$se for ;41? &1; X 23348444)
?113 Co$#rib'#e( S'rp'sS#oc: Op#io$s ;18DCo!pe$s.#io$ Expe$se///////////////// ;18D
&2;38444 X 8344?38444)
&To recor( #er!i$.#io$ of s#oc:op#io$s 0e( b, resi%$e( e!po,ees)
1;113 Co!pe$s.#io$ Expe$se/////////////////////// ;38611Co$#rib'#e( S'rp'sS#oc: Op#io$s ;38611To recor( co!pe$s.#io$ expe$se for ;413 &1; X 23348444) 5 ;18D
116 C.s0 &18344 X 2?;)/////////////////////////// 18;8444Co$#rib'#e( S'rp'sS#oc: Op#io$s// D38444
&23348444 X 18344?38444 or
2348;;; X 18344?18344)Co!!o$ S0.res///////////////////////// 184D8444
&To recor( iss'.$ce of 18344 s0.res 'po$exercise of op#io$s .# op#io$ price of 2?;)
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-13 &Co$#i$'e()
&No#e #o i$s#r'c#or@ T0e f.ir +.'e of #0e s0.res 0.s $oree+.$ce i$ #0is e$#r, .$( #0e foo7i$% o$e/)
3116 C.s0 &148444 X 2?;)/////////////////////////////////?;48444Co$#rib'#e( S'rp'sS#oc: Op#io$s////1;;8;;;
&23348444 X 148444?38444 or
2348;;; X 148444?18344)Co!!o$ S0.res/////////////////////////////// 3?;8;;;
&To recor( iss'.$ce of 148444 s0.res 'po$ exercise of re!.i$i$% op#io$s .# op#io$ price of 2?;)
&b) The pricing model may not take into account forfeituresbec.'se #0e, c.$$o# be re.so$.b, es#i!.#e(/ T0eobec#i+e of offeri$% s#oc: op#io$s is #o .##r.c#8 !o#i+.#e8.$( re!'$er.#e seec#e( i$(i+i('.s i$ #0e or%.$i9.#io$/I$c'(i$% . re('c#io$ of #0e expec#e( expe$(i#'re b, .$.rbi#r.r, .!o'$# of forfei#'res is co$#r.r, #o #0e %o. .$((oes $o# refec# !.$.%e!e$#=s i$#e$#io$/ H.( forfei#'resbee$ i$c'(e( i$ #0e es#i!.#e .# #0e #i!e of #0e %r.$# of #0eop#io$s #0e #o#. co!pe$s.#io$ expe$se 7o'( be
propor#io$.#e, re('ce(8 b.se( o$ !.$.%e!e$#=s bes#es#i!.#e/
&c) Fo'r co!!o$ co!pe$s.#io$ p.$s .re@
1/ Co!pe$s.#or, s#oc: op#io$ p.$s &CSOPs)
;/ *irec# .7.r(s of s#oc:
/ S#oc: .ppreci.#io$ ri%0#s p.$s &SARs)
?/ Perfor!.$ce-#,pe p.$s
T0ese (iffere$# p.$s .re 'se( #o co!pe$s.#e e!po,ees .$(especi., !.$.%e!e$#/ I# is %e$er., .%ree( #0.# effec#i+eco!pe$s.#io$ pro%r.!s@
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-13 &Co$#i$'e()
1/ Mo#i+.#e e!po,ees #o 0i%0 e+es of perfor!.$ce/
;/ Hep re#.i$ exec'#i+es .$( recr'i# $e7 #.e$#/
/ B.se co!pe$s.#io$ o$ e!po,ee .$( co!p.$,perfor!.$ce/
?/ M.xi!i9e #0e e!po,ee=s .f#er-#.x be$efi# .$( !i$i!i9e #0ee!po,er=s .f#er-#.x cos#/
3/ Use perfor!.$ce cri#eri. #0.# #0e e!po,ee c.$ i$f'e$ce/
&() T0e !.i$ (iffere$ce be#7ee$ .$ e!po,ee s#oc: op#io$p.$ &ESOP) .$( . co!pe$s.#or, s#oc: op#io$ p.$ &CSOP)is #0.# 7i#0 ESOPs8 #0e e!po,ee 's'., p.,s for #0eop#io$s &ei#0er f', or p.r#i.,) .$( #0ere !., be . +er,.r%e $'!ber of p.r#icip.$#s .cross #0e co!p.$,/ T0'sESOP #r.$s.c#io$s .re reco%$i9e( .s c.pi#. #r.$s.c#io$s&c0.r%e( #o e'i#, .cco'$#s)/ T0e e!po,ee is i$+es#i$% i$#0e co!p.$,/
CSOPs8 o$ #0e o#0er 0.$(8 .re pri!.ri, see$ .s .$.#er$.#i+e 7., #o co!pe$s.#e p.r#ic'.r8 of#e$ se$ior8e!po,ees for #0eir ser+ices8 i:e . b.r#er #r.$s.c#io$/ T0eser+ices .re re$(ere( b, #0e e!po,ees i$ #0e .c# of pro('ci$% re+e$'es/ T0's CSOP #r.$s.c#io$s .rereco%$i9e( o$ #0e i$co!e s#.#e!e$# &c0.r%e( #o .$expe$se .cco'$#)/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-16 &;3-3 !i$'#es)
&.)111? No e$#r,
1;11? Co!pe$s.#io$ Expe$se/////////////////// 38444Co$#rib'#e( S'rp's S#oc: Op#io$s/////////////////////// 38444
&2348444 X 1;)
1;113 Co!pe$s.#io$ Expe$se/////////////////// 38444Co$#rib'#e( S'rp's S#oc: Op#io$s//////////////////////// 38444
3116 C.s0 &D8444 X 2;3)//////////////////////////// ;448444Co$#rib'#e( S'rp's S#oc: Op#io$s///////////////////////////////// 448444
Co!!o$ S0.res //////////////////////// 3448444&2348444 X D8444;48444)
1;11 Co$#rib'#e( S'rp's S#oc: Op#io$s///////////////////////////////// ?348444
Co$#rib'#e( S'rp's 5
Expire( S#oc: Op#io$s///////////
?348444&2348444 5 2448444)
&b) T0e !.r:e# price of #0e H.r7oo( s0.res .# #0e (.#e of %r.$# 7o'( i:e, be o7er #0.$ #0e exercise price/ T0eobec#i+e of iss'i$% #0e s#oc: op#io$s is pri$cip., #o!o#i+.#e e!po,ees #o 7or: .# e$0.$ci$% #0e !.r:e# +.'eof #0e co!p.$,=s s0.res/ T0e op#io$s 0.+e . ser+iceperio(8 #,pic., of !ore #0.$ o$e ,e.r/ Co$se'e$#,8 #0eco!p.$, 7o'( 7.$# #o .o7 for .$ 'p7.r( !o+e!e$# i$
#0e s0.re price #o 's#if, #0e re!'$er.#io$ of :e,e!po,ees 70ose 7or: 7o'( 0.+e e( #o #0e i$cre.se i$#0e !.r:e# +.'e of #0e s0.res/ If #0e !.r:e# +.'e of #0es0.res .# #0e (.#e of %r.$# 7.s .# or %re.#er #0.$ #0eexercise price8 #0e i$ce$#i+e 7o'( be s'bs#.$#i.,re!o+e(8 .$( so #0e p.$ 7o'( be ess effec#i+e/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-16 &Co$#i$'e()
&c) T0e !.r:e# price of #0e H.r7oo( s0.res .# M., 18 ;416 of 21 is $o# 'se( i$ recor(i$% #0e exercise of #0e s#oc:op#io$s/ Fro! .$ .cco'$#i$% perspec#i+e8 #0e !.r:e# priceis $o# ree+.$#/ I# is $o$e#0eess ree+.$# #o #0e exec'#i+esi$ !.:i$% #0eir (ecisio$ #o exercise #0eir s#oc: op#io$s/T0e !.r:e# price is !e$#io$e( #o i$(ic.#e #0.# #0e #i!i$% of #0e exercise is 's#ifie(8 or .# e.s# !.:es se$se/ T0e!.r:e# price of #0e s0.res excee(s #0e c.rr,i$% +.'e of #0e s#oc: op#io$s p's #0e c.s0 p.i(/ Exec'#i+esexercisi$% . s#oc: op#io$ 7o'( 0.+e p.i( 2;3 .$( co'(rese #0e s0.res i!!e(i.#e, for 218 for . %.i$ of 26 per
s0.re/
&() *'ri$% ;41 #0e !.r:e# price of #0e s0.res i:e, fe beo72;3 per s0.re/ T0is 7o'( exp.i$ 70, $o .((i#io$. s#oc:op#io$s 7ere exercise(8 .$( 7ere ef# #o .pse8 .s #0ere7.s $o be$efi# #o be %.i$e( b, #0e exec'#i+es i$ exercisi$%#0e!/ T0e, co'( $o# reco+er #0e c.s0 re'ire( #oexercise #0e s#oc: op#io$ #0ro'%0 #0e res.e of #0e s0.resif #0e s#oc: price 7.s beo7 #0e exercise price of 2;3 per s0.re/
&e) T0e exec'#i+es 0o(i$% #0e s#oc: op#io$s !i%0# (e., #0eexercise of #0e op#io$s #o pos#po$e #0e re'ire!e$# of ob#.i$i$% #0e $ecess.r, c.s0 #o exercise #0e op#io$/ Of#e$exec'#i+es !'s# se #0e s0.res ob#.i$e( o$ #0e exercise of s#oc: op#io$s #o p., off b.$: o.$s sec're( #o ob#.i$ #0e$ecess.r, c.s0 re'ire(/ Procee(s fro! #0e s.e of #0es0.res .re .so 'se( for #0e p.,!e$# of #0e perso$.i$co!e #.x #0.# is .ssesse( o$ #0e i$co!e for #.x
p'rposes re.i9e( o$ #0e s.e of #0e s0.res ob#.i$e(#0ro'%0 #0e exercise of s#oc: op#io$s/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-1 &14-13 !i$'#es)
&.) .$'.r, 18 ;41?No e$#r,
&b) *ece!ber 18 ;41?Co!pe$s.#io$ Expe$se/////////////////// 1;8344
Co$#rib'#e( S'rp's S#oc: Op#io$s /////////////////////// 1;8344
&38444 X 214 X 1?)
&c) .$'.r, 18 ;41C.s0 &?8444 X 26;)//////////////////////////// ;?D8444Co$#rib'#e( S'rp's
S#oc: Op#io$s///////////////////////////////// ?48444Co!!o$ S0.res /////////////////////// ;DD8444&38444 X 214 X ?8444 38444)
&() *ece!ber 18 ;4;1Co$#rib'#e( S'rp's S#oc: Op#io$s //////////////////////////////// 148444
Co$#rib'#e( S'rp's 5Expire( S#oc: Op#io$s/////////// 148444
&38444 X 214 X 18444 38444)
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-1D &13-;4 !i$'#es)
&.)
'$e 48 ;41? No#e R.#e A!o'$#I$#eres# p.i( 2 1448444 /3K 2 834
C.s0 recei+e( o$ s7.p &34)
I$#eres# expe$se 2 1448444 K 2 8444
&3/ K 1K) X 61;
&3/ K 1K) 5 6K X 21448444 X 61;
*ece!ber 18 ;41? No#e R.#e A!o'$#
I$#eres# p.i( 2 1448444 /D3K 2 8D34
C.s0 recei+e( o$ s7.p &D34)
I$#eres# expe$se 2 1448444 K 28444
&6/ K 1K) X 61;
&6/ K 1K) 5 6K X 21448444 X 61;
&b)
'$e 48 ;41?
I$#eres# Expe$se///////////////////////////////////////////////////////////////834C.s0//////////////////////////////////////////////////////////////////////////// 834
C.s0///////////////////////////////////////////////////////////////////////////////////34I$#eres# Expe$se//////////////////////////////////////////////////////// 34
*ece!ber 18 ;41?I$#eres# Expe$se///////////////////////////////////////////////////////////////8D34
C.s0//////////////////////////////////////////////////////////////////////////// 8D34
C.s0///////////////////////////////////////////////////////////////////////////////////D34I$#eres# Expe$se//////////////////////////////////////////////////////// D34
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
&c) T0e i$#eres# r.#e s7.p is . c.s0 fo7 0e(%e bec.'se #0e0e(%e is e$#ere( i$#o #o pro#ec# T0o!pso$ .%.i$s# +.ri.#io$s i$f'#'re c.s0 fo7s c.'se( b, #0e c0.$%es i$ #0e pri!e i$#eres#r.#e/ A# #0e #i!e of e$#eri$% i$#o #0e co$#r.c#8 T0o!pso$ 0.($o# ,e# i$c'rre( #0e i$#eres# c0.r%es for #0e $o#e/ T0e c.s0fo7s .re #0erefore re.#e( #o f'#'re i$#eres# p.,!e$#s/Co$se'e$#, #0e 0e(%e c.$$o# be . f.ir +.'e 0e(%e/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-1 &13-;4 !i$'#es)
&.)
*ece!ber 18 ;41? No#e R.#e A!o'$#I$#eres# p.i( 2 1484448444 3/DK 2 3D48444
C.s0 p.i( o$ s7.p ;48444
I$#eres# expe$se 2 1484448444 6K 2 6448444
&6K 5 3/DK) X 21484448444
*ece!ber 18 ;413 No#e R.#e A!o'$#
I$#eres# p.i( 2 1484448444 6/6K 2 6648444
C.s0 recei+e( o$ s7.p &648444)
I$#eres# expe$se 2 1484448444 6K 2 6448444
&6/6K 5 6K) X 21484448444
&b) *ece!ber 18 ;41?I$#eres# Expe$se///////////////////////////////////////////////////////////////3D48444
C.s0////////////////////////////////////////////////////////////////////////// 3D48444
I$#eres# Expe$se///////////////////////////////////////////////////////////////;48444
C.s0////////////////////////////////////////////////////////////////////////// ;48444*ece!ber 18 ;413
I$#eres# Expe$se///////////////////////////////////////////////////////////////6648444C.s0////////////////////////////////////////////////////////////////////////// 6648444
C.s0///////////////////////////////////////////////////////////////////////////////////648444I$#eres# Expe$se////////////////////////////////////////////////////// 648444
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-1 &Co$#i$'e()
&c) T0e i$#eres# r.#e s7.p is . c.s0 fo7 0e(%e bec.'se#0e 0e(%e 7.s e$#ere( i$#o #o pro#ec# Veo7:$ife .%.i$s#+.ri.#io$s i$ f'#'re c.s0 fo7s c.'se( b, #0e c0.$%es i$#0e LIBOR r.#e of i$#eres#/ A# #0e #i!e of e$#eri$% i$#o #0eco$#r.c#8 Veo7:$ife 0.( $o# ,e# i$c'rre( #0e i$#eres#c0.r%es for #0e $o#e/ T0e c.s0 fo7s .re #0erefore re.#e(#o f'#'re i$#eres# p.,!e$#s/ Co$se'e$#, #0e 0e(%ec.$$o# be . f.ir +.'e 0e(%e/
&() If #0e co!p.$, foo7s 0e(%e .cco'$#i$% '$(er IFRS8#0e s7.p 7o'( be reco%$i9e(8 re!e.s're( #o f.ir +.'e .#
e.c0 repor#i$% (.#e8 .$( %.i$s .$( osses i$ f.ir +.'e7o'( be boo:e( #o OCI '$(er 0e(%e .cco'$#i$%/ As #0ei$#eres# c.s0 fo7s .c#'., occ'r8 #0e %.i$sosses i$ OCI.re #r.$sferre( #o $e# i$co!e/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-;4 &;4-;3 !i$'#es)
&.) *ece!ber 18 ;41?
I$#eres# Expe$se///////////////////////////////////////////////////////////////38444C.s0//////////////////////////////////////////////////////////////////////////// 38444
&2184448444 X /3K)
&b) *ece!ber 18 ;41?C.s0///////////////////////////////////////////////////////////////////////////////////18444
I$#eres# Expe$se//////////////////////////////////////////////////////// 18444
&c) *ece!ber 18 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////?D8444
U$re.i9e( G.i$ or Loss//////////////////////////////////////////// ?D8444
&() *ece!ber 18 ;41?U$re.i9e( G.i$ or Loss //////////////////////////////////////////////////?D8444
Bo$(s P.,.be//////////////////////////////////////////////////////////// ?D8444
&e) F.ir +.'e 0e(%e .cco'$#i$% c.$ be .ppie( #o #0is 0e(%e
bec.'se #0e expos're is fro! . reco%$i9e( i.bii#,8 �efixe(-r.#e bo$( p.,.be)/ T0e co!p.$, is co$cer$e( #0.##0e i$#eres# r.#es 7i (eci$e .$( #0erefore #0.# #0e bo$(7i beco!e o$ero's &f.ir +.'e 7i i$cre.se)/
&f) U$(er ASPE8 #0e firs# #7o e$#ries 7o'( be recor(e( b'##0e bo$( 7o'( $o# be re+.'e( .$( #0e s7.p 7o'( $o# bereco%$i9e( &$or re!e.s're()/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-;1 &13-;3 !i$'#es)
&.)
F.ir J.'e
Pre-es#.b/Price
*iffe-re$ce
N'!ber of Ri%0#s
To#.Co!pe$-s.#io$
Accr'.E$#r,
B..$ceof Li.bii#,
;41? 26 2; 2? ?48444 21648444 2?48444 2?48444 ;3K
;413 ?4 ; D ?48444 ;48444 1;48444 1648444 34K
;416 ?3 ; 1 ?48444 3;48444 ;48444 48444 3K
;41 6 ; ? ?48444 1648444 &;48444) 1648444 144K
;41D ?D ; 16 ?48444 6?48444 ?D48444 6?48444
&b)*ece!ber 18 ;41?
Co!pe$s.#io$ Expe$se///////////////////////////////////// ?48444Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s ?48444
*ece!ber 18 ;41Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s ;48444
Co!pe$s.#io$ Expe$se////////////////////////////// ;48444
*ece!ber 18 ;41D
Co!pe$s.#io$ Expe$se///////////////////////////////////// ?D48444Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s ?D48444
&c)'$e 18 ;41
Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s ;48444C.s0 ;48444 X &2?6 5 2;)//////////////////////////////// ;D48444
Co!pe$s.#io$ Expe$se QQQQQQQQQQ ?48444
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-;1 &Co$#i$'e()
&() If B.rre## .ppies IFRS8 #0e proce('re is .!os# i(e$#ic. #o#0e s#eps #.:e$ i$ p.r# &.)/ T0e o$, (iffere$ce is #0.# #0eco'!$ 0e.(e( 'p To#. Co!pe$s.#io$ i$ #0e #.be 7o'($o# be c.c'.#e( .# #0e i$#ri$sic +.'e of #0e SARso'#s#.$(i$%/ I$s#e.(8 #0is co'!$ 7o'( be co!pe#e( b,i$ser#i$% #0e f.ir +.'e of #0e SARs (e#er!i$e( 'si$% .$op#io$ prici$% !o(e/ T0e proce('re of 0o7 #0e #o#. is.ppie( #o expe$se e.c0 ,e.r is #0e s.!e .s '$(er ASPE/
&e) U$(er ASPE8 SARs p.$s .re reco%$i9e( .# #0eir i$#ri$sic+.'e .# e.c0 fi$.$ci. s#.#e!e$# (.#e8 .$( co!pe$s.#io$
expe$se is .ffec#e( b, #0e f.ir +.'e of #0e co!p.$,=ss0.res .# e.c0 fi$.$ci. s#.#e!e$# (.#e/ T0e f.ir +.'e of #0e co!p.$,=s s0.res !., c0.$%e ('e #o e+e$#s #0.# 7erebe,o$( #0e co$#ro or i$f'e$ce of #0e exec'#i+e e!po,eei$ #0e SARs pro%r.!8 .$( B.rre##=s co!pe$s.#io$ expe$se!., or !., $o# refec# #0e +.'e of #0e ser+ices pro+i(e(b, M'rfi## i$ #0e ,e.r/ As 7e8 if f.ir +.'e of #0e co!p.$,=ss0.res f'c#'.#e si%$ific.$#,8 co!pe$s.#io$ expe$se !.,.so f'c#'.#e si%$ific.$#,8 .$( c.c'.#e( profi# !., $o#be .$ .cc'r.#e refec#io$ of #0e co!p.$,=s perfor!.$ce i$#0e ,e.r/ A$ i$+es#or s0o'( c.ref', co$si(er #0e effec#sof #0e SARs pro%r.! 70e$ .$.,9i$% B.rre##=s profi#/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-;; &13-;3 !i$'#es)
&.) Sc0e('e of Co!pe$s.#io$ Expe$se - S#oc: Appreci.#io$ Ri%0#s &;448444)
*.#e
F.ir
J.'e
Pre-es#.bis0e(
Price
C'!'.#i+eCo!pe$-
s.#io$
Reco%$i9.be
Perce$-#.%e
Accr'e(
Co!pe$-s.#io$
Accr'e( #o
*.#e
Expe$se;413
2
Expe$se;416
2
Expe$se;41
2
Expe$se;41D
21;113
1;116
1;11
1;11D
213
11
;1
1
21;
1;
1;
1;
2 6448444
4
18D448444
18?448444
;3K
34K
3K
144K
2 1348444 &1348444)
4
18348444 348444
218?448444
1348444
&1348444)18348444
348444
&b) Co!pe$s.#io$ Expe$se/////////////////////////////////////////////////////////// 348444Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s/////////// 348444
&c) Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s////////////////// 18?448444C.s0 ;448444 X &21 5 21;)//////////////////////////////////////////// 18?448444
&() Co!pe$s.#io$ expe$se for ;416 refec#s . (rop i$ #0e f.ir +.'e of #0e s0.res8 b'# i# (oes $o#refec# #0e (rop i$ f.ir +.'e of #0e s0.res #o beo7 #0e pre-es#.bis0e( price of 21; per s0.re/O$ *ece!ber 18 ;4168 . (ebi# of 21348444 #o Li.bii#, U$(er S#oc:-Appreci.#io$ Ri%0#s P.$s.$( . cre(i# of 21348444 #o Co!pe$s.#io$ Expe$se 7o'( be recor(e(8 res'#i$% i$ . 9erob..$ce i$ Li.bii#, U$(er S#oc:-Appreci.#io$ Ri%0#s P.$s/ If f.ir +.'e of #0e s0.res (ropsbeo7 #0e pre-es#.bis0e( price of 21;8 #0e SARs .re o'#-of-#0e-!o$e, .$( 7o'( $o# beexercise( b, #0e officers i$ #0e pro%r.!/ T0's co!pe$s.#io$ expe$se s0o'( $o# refec# .(rop i$ f.ir +.'e of #0e s0.res #o beo7 #0e pre-es#.bis0e( price of 21; per s0.re/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-; &;3-4 !i$'#es)
&.) Sc0e('e of Co!pe$s.#io$ Expe$se - S0.re Appreci.#io$ Ri%0#s &348444)
*.#e
F.ir J.'e
Pre-es#.-
bis0e(Price
C'!'.#i+eCo!pe$-
s.#io$Reco%$i9.be
Perce$-
#.%eAccr'e(
Co!pe$-
s.#io$
Accr'e(#o *.#e
Expe$se
;41?
Expe$se
;413
Expe$se
;416
Expe$se
;41
Expe$se
;41D
1;11?
1;113
1;116
1;11
1;11D
26
?3
6
?D
2;
;
;
;
;
2;448444
348444
6348444
;448444
D448444
;3K
34K
3K
144K
2348444 1;38444 138444 1;8344 ?D8344
&;D8344) ;448444 64484442D448444
234844421;38444
21;8344
2&;D8344)
26448444
&b);41?
Co!pe$s.#io$ Expe$se////////////////////////////////////////////////////////////////////// 348444Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s////////////////////// 348444;41
Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s///////////////////////////// ;D8344Co!pe$s.#io$ Expe$se////////////////////////////////////////////////////////////// ;D8344
;41DCo!pe$s.#io$ Expe$se////////////////////////////////////////////////////////////////////// 6448444
Li.bii#, '$(er S0.re Appreci.#io$ Ri%0#s P.$s////////////////////// 6448444
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 16-; &Co$#i$'e()
&c) Fro! #0e perspec#i+e of #0e e!po,ee8 #0e c0.r.c#eris#icsof #0e SAR .$( #0e s#oc: op#io$ .re +er, (iffere$#/
A#0o'%0 bo#0 pro+i(e . for! of co!pe$s.#io$ b.se( o$#0e i$cre.se i$ #0e f.ir +.'e of #0e s0.res of #0e e!po,er8#0e (iffere$ces i$ #0e fe.#'res #o #0e e!po,ee .rei!por#.$#/
I$ #0e c.se of #0e exercise of s#oc: op#io$s #0e e!po,ee!'s# pro+i(e c.s0 .$( #0e op#io$s #o ob#.i$ s0.res i$ #0eco!p.$,/ I$ or(er #o reco+er #0e c.s08 #0e s0.resob#.i$e( fro! #0e s#oc: op#io$ $ee( #o be so(/ O$ #0eo#0er 0.$( #0e e!po,ee $ee( $o# p., .$, c.s0 #o #0e
co!p.$, i$ exercisi$% . SAR/ T0e .##er see!s !ore.##r.c#i+e o$ #0is b.sis .o$e/
&() Perfor!.$ce-#,pe co!pe$s.#io$ p.$s .7.r( #0eexec'#i+es co!!o$ s0.res &or c.s0) if specifie(perfor!.$ce cri#eri. .re .##.i$e( ('ri$% #0e perfor!.$ceperio( &%e$er., #0ree #o fi+e ,e.rs)/
A$ ex.!pe of . perfor!.$ce-#,pe p.$ is #0e .7.r( of
c.s0 if #0e re#'r$ o$ .sse#s or e'i#, i$cre.ses #o !ee# .cer#.i$ #0res0o(/ O#0er #.r%e#s i$c'(e %ro7#0 i$ s.es8%ro7#0 i$ e.r$i$%s per s0.re &EPS)8 or . co!bi$.#io$ of #0ese f.c#ors/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
TIME AN* PURPOSE OF PROBLEMS
3rolem 1&1 Time #/%/ minutesB
3urosethe student calculates and records the urchase and the transactionsconcerning a call otion contract for shares o!er t+o accounting eriods and alsorecords the ultimate settlement of the call otion.
3rolem 1&"
Time #/%/ minutesB
3urosethe student calculates and records the +riting of a call otion contractfor shares o!er t+o accounting eriods and also records the ultimate settlementof the call otion.
3rolem 1&#
Time #/%/ minutesB
3urosethe student calculates and records the urchase and the ad<ustmentsconcerning a ut otion contract for shares o!er t+o accounting eriods and alsorecords the ultimate +riteoff of the ut otion as the market !alue ne!er fallselo+ the strike rice.
3rolem 1&%
Time #$%$ minutesB
3urosethe student analyDes a deri!ati!e that in!ol!es an entity=s o+n shares,and ro!ides the alternati!e accounting treatment under A03E and I450.
3rolem 1&$ Time #$%/ minutesB
3uroseto ro!ide the student +ith an oortunity to reare entries toroerly account for a series of transactions in!ol!ing the issuance and e8erciseof common stock rights and detachale stock +arrants, lus the granting ande8ercise of stock otions. The student is reuired to reare the necessary
<ournal entries to record these transactions and the shareholders= euity sectionof the statement of financial osition as at the end of the year.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
TIME AN* PURPOSE OF PROBLEMS &CONTINUE*)
3rolem 1&& Time 1/1$ minutesB
3uroseto ro!ide the student +ith an oortunity to analyDe three searatefinancial instruments: 1B a financial liaility loanBF "B a comensatory stock otionlanF and #B for+ard contract.
3rolem 1&'
Time #$%/ minutesB
3uroseto ro!ide the student +ith the oortunity to e8erience a situation in+hich the initial recording of a con!ertile ond +as incorrectly done in a rior year. ?ased on the incorrect treatment, the student must re!ise the accounting of the issuance of the con!ertile ond, and reare a correcting entry after calculating the aroriate yield to aly to the calculation of the ond using the
effecti!e interest method. 4inally, comment on the effect if the correction on thedettoeuity ratio is reuired in the rolem.
3rolem 1&(
Time 1$"/ minutesB
3uroseto ro!ide the <ournal entry of the issuance of a note ayale soldtogether +ith a +arrant. The incremental method alies in this case. Thestudent must then reare the related amortiDation tale for the note and somead<usting <ournal entries.
3rolem 1&) Time #/#$ minutesB
3uroseto ro!ide the student +ith an oortunity to record the issuance of onds +ith detachale +arrants and con!ersion rights. nder+riting feesincurred in the issuance of the onds are also recorded in the rolem. Thestudent must calculate the effecti!e yield rate for the onds, reare anamortiDation tale, and reare <ournal entries for the issuance, con!ersion, ande8ercise of +arrants. 4inally some analysis concerning the likely !alue of theshares issued in the con!ersion is discussed.
3rolem 1&1/ Time #/#$ minutesB
3uroseto ro!ide the student +ith an understanding of the entries to roerlyaccount for a stock otion lan o!er a eriod of years. The student is reuired to
reare the <ournal entries +hen the stock otion lan +as adoted, +hen theotions +ere granted, +hen the otions +ere e8ercised, and +hen the otionse8ired.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
TIME AND PURPOSE OF PROBLEMS (CONTINUED)
63rolem 1&11 Time #$%$ minutesB
3urosethe student calculates and records the transactions concerning a fair !alue hedge interest rate s+a, o!er t+o accounting eriods and also ro!idesartial statement of financial osition and statement of income disclosure at threeoints in time o!er the term of the s+a.
63rolem 1&1" Time %/$/ minutesB
3urosethe student calculates and records the transactions concerning a cashflo+ hedge concerning the urchase of gold, o!er t+o accounting eriods andalso ro!ides artial statement of financial osition and statement of incomedisclosure at t+o oints in time o!er the term of the futures contract.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 16-1
&.) ', 8 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////;?4
C.s0//////////////////////////////////////////////////////////////////////////// ;?4
&b) Sep#e!ber 48 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////18144
G.i$ &218?4 5 2;?4)/////////////////////////////////////////////////// 18144
&c) *ece!ber 18 ;41?Loss &218?4 5 2D;3)/////////////////////////////////////////////////////////313
*eri+.#i+es5Fi$.$ci. Asse#sLi.bii#ies////////////////// 313
&() .$'.r, ?8 ;413C.s0 ;44 X &23 5 24) /////////////////////////////////////////////////18444
G.i$///////////////////////////////////////////////////////////////////////////// 13*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// D;3
', 8 ;41? 2 ;?4Sep#/ 48 ;41? 18144
*ec/ 18 ;41? &313)
B..$ce 2D;3
The option is “in the money” at the exercise date since Hing Wa(the option holder) can purchase the shares for $70 when theyare worth $75.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-;
&.) ', 8 ;41?
C.s0///////////////////////////////////////////////////////////////////////////////////;?4*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// ;?4
&b) Sep#e!ber 48 ;41?Loss($1,340 – $240)/////////////////////////////////////////////////////////18144
*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// 18144
&c) *ece!ber 18 ;41?*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////313
G.i$ &218?4 5 2D;3)/////////////////////////////////////////////////// 313
&() .$'.r, ?8 ;413*eri+.#i+es > Fi$.$ci. Asse#sLi.bii#ies///////////////////////D;3
Loss //////////////////////////////////////////////////////////////////////////////////13C.s0 ;44 x &23 5 24)//////////////////////////////////////////// 18444
', 8 ;41? 2 ;?4
Sep#/ 48 ;41? 18144
*ec/ 18 ;41? &313)B..$ce 2 D;3
The option is “in the money” (for the holder) at the exercise datesince the holder of the option can purchase the shares for $70when they are worth $75. Hing Wa loses because they must sellthe shares at a price below the current market value.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-
&.) ', 8 ;41?
*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies///////////////////////?D4C.s0//////////////////////////////////////////////////////////////////////////// ?D4
&b) Sep#e!ber 48 ;41?
Loss &2?D4 5 2;34)////////////////////////////////////////////////////////////;4*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// ;4
&c) *ece!ber 18 ;41?
Loss &2;34 5 2144)////////////////////////////////////////////////////////////134*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// 134
&() .$'.r, 18 ;413P'# op#io$ is $o# exercise( .s #0e !.r:e# price of M,:i.s0.res excee(s 2348 #0e s#ri:e price/
Loss///////////////////////////////////////////////////////////////////////////////////144*eri+.#i+es 5 Fi$.$ci. Asse#sLi.bii#ies//////////////// 144
', 8 ;41? 2 ?D4
Sep#/ 48 ;41? &;4)
*ec/ 18 ;41? &134)
B..$ce 2 144
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-?
&.) T0e (eri+.#i+e is co$si(ere( . fixe(-for-fixe( (eri+.#i+e i$.$ e$#i#,=s o7$ s0.res .s #0e op#io$ s#ip'.#es #0.# #0ee$#i#, 7i iss'e . fixe( $'!ber of s0.res for . fixe(.!o'$# of co$si(er.#io$/ IFRS s#.#es #0.# #0is #r.$s.c#io$7o'( be prese$#e( .s . re('c#io$ fro! s0.re0o(ers=e'i#, .$( $o# .s .$ i$+es#!e$#/ T0is is8 effec#i+e,8 #0eprospec#i+e re#ire!e$# of s0.res &or .c'isi#io$ of #re.s'r,s0.res8 if #0.# is per!i##e()/
E'i#, 5 Fixe(-for-fixe( *eri+.#i+e /////////////////////////////////34
C.s0/////////////////////////////////////////////////////////////////////// 34
&b) Bec.'se #0e op#io$ .o7s . c0oice i$ 0o7 #0e op#io$ 7ibe se##e(8 #0e i$s#r'!e$# is . fi$.$ci. .sse#i.bii#,&(eri+.#i+e) b, (ef.'# '$(er IFRS '$ess . possibese##e!e$# op#io$s res'# i$ i# bei$% .$ e'i#, i$s#r'!e$#/If #0is c. op#io$ co$#r.c# .o7s bo#0 p.r#ies . c0oice #ose##e #0e op#io$ b, ei#0er exc0.$%i$% #0e s0.res or
se##i$% o$ . $e# b.sis8 o$e se##e!e$# op#io$ is #0e(ei+er, of c.s08 .$( #0e c. op#io$ 7i be c.ssifie( .s .(eri+.#i+e/
&c) ASPE is sie$# .bo'# #0e .cco'$#i$% for (eri+.#i+esi$+o+i$% #0e e$#i#,=s o7$ s0.res> 0o7e+er8 #0e #re.#!e$#of si!i.r i#e!s 7o'( s'ppor# prese$#i$% #0e op#io$ .s .co$#r. e'i#, i#e! bec.'se i# ce.r, (oes $o# !ee# #0e
(efi$i#io$ of .$ .sse#/ T0erefore8 #0e co$c'sio$ 7i $o#c0.$%e/
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-3
&.) 1/ Me!or.$('! e$#r, !.(e #o i$(ic.#e #0e $'!ber of ri%0#s iss'e( i$c'(i$% f' (e#.is .s #o c0.r.c#eris#ics/
;/ C.s0 /////////////////////////////////////////////////// ;448444Bo$(s P.,.be &2;448444 x 4/6) 1;8444Co$#rib'#e( S'rp's
S#oc: ".rr.$#s///////////////// D8444
/ C.s0 ////////////////////////////////////////////////// ;DD8444
Co!!o$ S0.res/////////////////////// ;DD8444
&1448444 5 148444) ri%0#s exercise( &14 ri%0#ss0.re) X 2; 2;DD8444
?/ Co$#rib'#e( S'rp'sS#oc: ".rr.$#s/ 68?44&2D8444 X D4K)
C.s0/////////////////////////////////////////////////////// ?D8444Co!!o$ S0.res/////////////////////////// 3?8?44
/D4 X 2;4484442144 per bo$( 186447.rr.$#s exercise(> 18644 X 24 2?D8444
3/ Co!pe$s.#io$ Expe$se////////////////////// 348444Co$#rib'#e( S'rp's 5 S#oc: Op#io$s///////////////////////// 348444
214 X 38444 op#io$s 2348444
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PROBLEM 16-3 &Co$#i$'e()
6/ For op#io$s exercise(@C.s0 &?8444 X 24)////////////////////////////////// 1;48444
Co$#rib'#e( S'rp'sS#oc: Op#io$s/// ?48444&D4K X 2348444)
Co!!o$ S0.res/////////////////////////// 1648444
For op#io$s .pse(@Co$#rib'#e( S'rp'sS#oc: Op#io$s/// 148444
Co!pe$s.#io$ Expe$se////////////// 148444
&No#e #o i$s#r'c#or@ T0is e$#r, pro+i(es .$ oppor#'$i#, #o
i$(ic.#e #0.# . cre(i# #o Co!pe$s.#io$ Expe$se occ'rs70e$ #0e e!po,ee f.is #o f'fi .$ obi%.#io$8 s'c0 .sre!.i$i$% i$ #0e e!po, of #0e co!p.$,8 perfor!i$% cer#.i$
ob f'$c#io$s8 e#c/ Ho7e+er8 if . s#oc: op#io$ .psesbec.'se #0e s0.re price is o7er #0.$ #0e exercise price8#0e$ . cre(i# #o Co$#rib'#e( S'rp'sExpire( S#oc:Op#io$s occ'rs/)
&b)
S0.re0o(ers= E'i#,@
S0.re C.pi#.@Co!!o$ S0.res8 .'#0ori9e(
184448444 s0.res8 1?8644 s0.res
iss'e( .$( o'#s#.$(i$%
2?814;8?44Co$#rib'#e( S'rp'sS#oc: ".rr.$#s 18644
2?814?8444Re#.i$e( E.r$i$%s 348444
To#. S0.re0o(ers= E'i#, 2?8D3?8444 2D8444 5 268?44C.c'.#io$s@
Co!!o$ S0.resN'!ber A!o'$#
A# be%i$$i$% of ,e.r Fro! s#oc: ri%0#s &e$#r, W .bo+e)Fro! s#oc: 7.rr.$#s &e$#r, W? .bo+e)Fro! s#oc: op#io$s &e$#r, W6 .bo+e)
To#.
448444844418644?8444
1?8644
286448444
;DD8444
3?8?44 1648444
2?814;8?44
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PROBLEM 16-3 &Co$#i$'e()
&c) Expir.#io$ of s#oc: op#io$s (oes $o# !.:e i# i$correc# #o0.+e recor(e( co!pe$s.#io$ expe$se re.#e( #o #0e
expire( s#oc: op#io$s8 ('ri$% #0e ser+ice perio(/ T0e ri%0##o exercise #0e s#oc: op#io$s 7.s e.r$e( b, #0e exec'#i+e('ri$% #0e ser+ice perio(8 .$( #0e co!p.$, be$efi#e( fro!#0e exec'#i+e=s ser+ices ('ri$% #0e ser+ice perio(/T0erefore8 co!pe$s.#io$ expe$se 7.s proper, recor(e(i$ #0e ser+ice perio( &.$( $ee( $o# be re+erse( i$ #0e e+e$#of expir.#io$ of #0e s#oc: op#io$s)/ T0e .cco'$#i$%#re.#!e$# res'#e( i$ recor(i$% of co!pe$s.#io$ expe$sei$ #0e ,e.rs #0.# re.#e( re+e$'e 7.s e.r$e(/
If #0e exec'#i+e 0.( f'fie( #0e e!po,!e$# co$#r.c# .$(#0e s#oc: op#io$s expire(8 #0e foo7i$% o'r$. e$#r,7o'( be recor(e( for #0e expir.#io$/
Co$#rib'#e( S'rp's S#oc: Op#io$s///////////////////////////////// 148444
Co$#rib'#e( S'rp's 5Expire( S#oc: Op#io$s///////////
148444
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PROBLEM 16-6
&.)
Financial Instrument #1
This is a hybrid financial instrument. Under ASPE, thecompany can allocate the proceeds between the liabilityand the equity portion, or allocate 100% to the liability, as isrequired in this case. Under IFRS, the company mustalways measure the debt component first (generally at thepresent value of the cash flows), and assign the rest of thevalue to equity since it is a residual item.
ASPE IFRS*ebi# Cre(i# *ebi# Cre(i#
C.s0 384448444 384448444 No#es P.,.be 384448444 ?83684; Co$#rib'#e(
S'rp's -Co$+ersio$Ri%0#s ?;8;D
To recor( iss'e of co$+er#ibe (eb#/
2384448444 X /D3 &#.be A;) 21348444 x ?/;?D &T.be A?) 2?83684;/I$#eres# Expe$se 1348444 ;;D83? No#es P.,.be D83? I$#eres# P.,.be 1348444 1348444To recor( i$#eres# expe$se for ,e.r 2?83684; x 3K 2;;D83?
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PROBLEM 16-6 &Co$#i$'e()
Fi$.$ci. I$s#r'!e$# W;@
T0is is . co!pe$s.#or, s#oc: op#io$ p.$/ T0e e$#ries .re
#0e s.!e '$(er ASPE .$( IFRS/
ASPE IFRS*ebi# Cre(i# *ebi# Cre(i#
Co!pe$s.#io$ Expe$se 3348444 3348444 Co$#rib'#e( S'rp's 5
S#oc: Op#io$s3348444 3348444
To recor( .$$'. co!pe$s.#io$ expe$se re.#e( #o CSOPC.s0 ;348444 ;348444
Co$#rib'#e( S'rp's 5S#oc: Op#io$s 338444 338444
Co!!o$ S0.res 438444 438444To recor( o$e e!po,ee exercisi$% op#io$s .$( p'rc0.si$%s0.res/
23348444 X 114
Fi$.$ci. I$s#r'!e$# W@
T0is is . for7.r( co$#r.c#/ T0e e$#ries .re #0e s.!e '$(er
ASPE .$( IFRS/
ASPE IFRS*ebi# Cre(i# *ebi# Cre(i#
*eri+.#i+es 5 Fi$.$ci.Asse#sLi.bii#ies
48444 48444
G.i$ 48444 48444To recor( %.i$ o$ for7.r( co$#r.c#/
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PROBLEM 16-6 &Co$#i$'e()
&b)
B..$ces .# *ece!ber 18 ;41?@Acco'$# B..$ce '$(er
ASPEB..$ce
'$(er IFRS*eri+.#i+es 5 Fi$.$ci. Asse#s 248444 *r 248444 *r I$#eres# P.,.be 1348444 Cr 1348444 Cr No#es P.,.be 384448444 Cr ?86?38?;6 Cr Co$#rib'#e( S'rp's 5 S#oc:Op#io$s ?38444 Cr ?38444 Cr Co$#rib'#e( S'rp's 5Co$+ersio$ Ri%0#s ?;8;D Cr
No#e #o i$s#r'c#or@I# !., be 'sef' #o i's#r.#e #0e foo7i$% proof@
No#es P.,.be '$(er IFRS ?86?38?;6 Cr Co$#rib'#e( S'rp's 5Co$+ersio$ Ri%0#s ?;8;D Cr S'b#o#. 384D83? Cr
Less@ A!or#i9.#io$ #o (.#e of$o#e (isco'$# &D83?) *r B..$ce '$(er ASPE 384448444 Cr
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PROBLEM 16-
&.) E$#r, .# .$'.r, 18 ;41? s0o'( 0.+e bee$@
C.s0 &2184448444 X 1/4D)//////////////////////// 184D48444Bo$(s P.,.be &2184448444 X /D)/ / D48444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s////////////////////// 1448444
A# #0e iss'.$ce of #0e co$+er#ibe bo$(8 #0e boo::eeper
s0o'( 0.+e reco%$i9e( #0e (eb# &bo$() .$( co$+ersio$ri%0# &e'i#,) co!po$e$#s sep.r.#e, i$ #0e .cco'$#s/
As #0e co!p.$, is co!pi.$# 7i#0 IFRS8 #0e resi('.!e#0o(8 .s i's#r.#e( i$ #0e correc#e( e$#r, .bo+e8 s0o'(0.+e bee$ 'se(/ U$(er IFRS8 #0e (eb# co!po$e$# is!e.s're( firs#8 7i#0 #0e resi('. +.'e .ssi%$e( #o e'i#,si$ce i# is . resi('. i#e!/
&b) ASPE (oes 0.+e .$ op#io$ #o .o7 for #0e e'i#, por#io$ #o
be .oc.#e( 9ero8 7i#0 . #0e procee(s bei$% .oc.#e( #o#0e (eb# co!po$e$#/ If #0is op#io$ 7.s .+.i.be8 #0eboo::eeper 7o'( be correc#/ Ho7e+er8 #0is is .$ op#io$.#re.#!e$# .$( #0e correc#io$ $o#e( i$ p.r# &.) .bo+e is s#i i$or(er .s #0e co!p.$, is . p'bic, .cco'$#.be e$#erprise.$( !'s# prep.re fi$.$ci. s#.#e!e$#s i$ .ccor(.$ce 7i#0IFRS/
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PROBLEM 16- &Co$#i$'e()
&c) Using either a financial calculator or Excel the effectiveinterest rate on the bonds is calculated as follows:
Excel formula =RATE(nper,pmt,pv,fv,type)
Usi$% . fi$.$ci. c.c'.#or@
PJ 2 D48444
I K Vie(s 14/3?D; K
N 3
PMT 2 &1448444)
FJ 2 &184448444)
T,pe 4
&()Sc0e('e of Bo$( *isco'$# A!or#i9.#io$
Effec#i+e I$#eres# Me#0o(14K Bo$(s So( #o Vie( 14/3?D;K
14K 14/3?D;K
C.s0 Effec#i+e *isco'$# C.rr,i$%
*.#e P.i( I$#eres# A!or#/ A!o'$#
.$/ 18 ;41? 2D48444*ec/ 18 ;41? 21448444 2148;?1 28;?1 D8;?1
*ec/ 18 ;413 1448444 1483D 83D D68D;?
*ec/ 18 ;416 1448444 14864 864 48D?
*ec/ 18 ;41 1448444 14?8 ?8 38161
*ec/ 18 ;41D 1448444 14?8D ?8D 18444844423448444 23;48444 2;48444
ro'$(e( 21&e)
.$'.r, 18 ;413Re#.i$e( E.r$i$%s &2148;?1 5 2D68?44)///////////// 168D?1
Bo$( P.,.be &2184668?44 5 2D8;?1)//////////////// D813
Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s/////////////////////////////
1448444
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PROBLEM 16- &Co$#i$'e()
&f)*ece!ber 18 ;413
I$#eres# Expe$se//////////////////////////////////////////////////// 1483DBo$(s P.,.be/////////////////////////////////////////////// 83D
C.s0//////////////////////////////////////////////////////////////// 1448444
&%) The debt to equity ratio, following the correction in part (e)above, will be substantially improved as $100,000 previouslyclassified as part of debt is now correctly classified asequity. This will have a significant effect on the debt toequity ratio, as both the change to the numerator and thechange to the denominator lead to a decrease in the ratio.The improvement in the ratio is reduced by the charge toRetained Earnings for correction in the error in interestexpense from 2014.
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PROBLEM 16-D
&.) T0e e$#r, for #0e iss'.$ce of #0e $o#es o$ .$'.r, 18 ;41?@
The present value of the note is: $1,200,000 X .56743 (factorfor a single payment in 5 years at 12%) = $680,912 (Roundedby $4).
Usi$% . fi$.$ci. c.c'.#or@
PJ 2 Vie(s 26D481;
I 1;K
N 3
PMT 2 4FJ 2 &18;448444)
T,pe 4
Exce for!'. PJ&r.#e8$per8p!#8f+8#,pe)
.$'.r, 18 ;41?C.s0///////////////////////////////////////////////////////////////// 184448444
No#es P.,.be////////////////////////////////////////// 6D481;
Co$#rib'#e( S'rp'sS#oc: ".rr.$#s// 184DD
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PROBLEM 16-D &Co$#i$'e()
&b)T0e .!or#i9.#io$ sc0e('e for #0e 9ero i$#eres# be.ri$% $o#e is@
Sc0e('e For I$#eres# A$( *isco'$# A!or#i9.#io$Effec#i+e I$#eres# Me#0o(
218;448444 $o#e iss'e( #o ,ie( 1;K
*.#eC.s0I$#eres#
Effec#i+eI$#eres#
*isco'$#A!or#i9e(
C.rr,i$%A!o'$#
111? 2 6D481;1;11? 24 2 D184 2 D184 6;86;11;113 4 18313 18313 D3?8161;116 4 14;8?6 14;8?6 3686;
1;11 4 11?86 11?86 18418?;D1;11D 4 1;D83; 1;D83; 18;448444To#. 24 23184DD 23184DD
26D481; X 1;K 2D18426D481; 2D184 26;86;1
&c)*ece!ber 18 ;41?
I$#eres# Expe$se///////////////////////////////////////////// D184
No#es P.,.be////////////////////////////////////////// D184
(d).$'.r, 18 ;41
C.s0 &3448444 x 2;4)QQQQ//////////////////////// 1484448444Co$#rib'#e( S'rp's 5 S#oc: ".rr.$#s//////// 1383??
Co!!o$ S0.res////////////////////////////////////// 1481383??&2 184DD X 21383??)
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PROBLEM 16-
&.)
Sep#e!ber 48 ;41?@C.s0///////////////////////////////////////////////////////////////// ?86448444
Bo$(s P.,.be//////////////////////////////////////// ?8;448444Co$#rib'#e( S'rp's S#oc: ".rr.$#s////////////////////////////////// ;?48444Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s////////////////////////////
1648444
&2?84448444 18444 X ;4 7.rr.$#s X 2)
&b)
Usi$% ei#0er . fi$.$ci. c.c'.#or or Exce8 #0e effec#i+ei$#eres# r.#e o$ #0e bo$(s is c.c'.#e( .s foo7s@
Exce for!'. RATE&$per8p!#8p+8f+8#,pe)
Usi$% . fi$.$ci. c.c'.#or@
PJ 2 ?8;448444
I K Vie(s /6?6 K
N ;4PMT 2 &1648444)
FJ 2 &?84448444)
T,pe 4
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PROBLEM 16- &Co$#i$'e()
&c)Sc0e('e of Bo$( Pre!i'! A!or#i9.#io$
Effec#i+e I$#eres# Me#0o(DK Se!i-.$$'. Bo$(s So( #o Vie( /;D;K
?K /6?6K
C.s0 Effec#i+e Pre!i'! C.rr,i$%
*.#e P.i( I$#eres# A!or#/ A!o'$#
Sep#/ 48;41? 2?8;448444
M.r/ 18 ;413 21648444 213841 2686 ?81841
Sep#/ 48;413 1648444 13;8 8;; ?81D38D4D
M.r/ 18 ;416 1648444 13;831? 8?D6 ?81D8;;
Sep#/ 48;416 1648444 13;8;?1 83 ?814836M.r/ 18 ;41 1648444 13183 D84?1 ?816;83;;
Sep#/ 48;41 1648444 1318666 D8? ?813?81DD
M.r/ 18 ;41D 1648444 13186; D86D ?81?38334
Sep#/ 48;41D 1648444 13184? D83 ?81683
M.r/ 18 ;41 1648444 1348;1 8; ?81;81D
Sep#/ 48;41 1648444 1348D 861 ?811841
&()
*ece!ber 18 ;41?I$#eres# Expe$se///////////////////////////////////////////// 68316
I$#eres# P.,.be/////////////////////////////////////// 68316&213841 X 6 268316)
M.rc0 18 ;413I$#eres# Expe$se///////////////////////////////////////////// 68313I$#eres# P.,.be////////////////////////////////////////////// 68316Bo$(s P.,.be//////////////////////////////////////////////// 686
C.s0////////////////////////////////////////////////////////// 1648444
No#e #o i$s#r'c#or@ I# 7o'( be e$#ire, re.so$.be #o recor( o$e0.f of #0e .!or#i9.#io$ of #0e bo$( pre!i'! .# #0e ,e.r e$(8*ece!ber 1/ T0is 7o'( i$cre.se #0e c'rre$# i$#eres# p.,.be#o be e'. #o #0e c.s0 i$#eres# p.,.be of 2D48444/
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PROBLEM 16- &Co$#i$'e()
&e)M.rc0 ;8 ;41@
C.s0///////////////////////////////////////////////////////////////// 6448444Co$#rib'#e( S'rp's S#oc: ".rr.$#s &2;?48444 X )/////////////
1;48444Co!!o$ S0.res//////////////////////////////// ;48444
N'!ber of 7.rr.$#s exercise(@ &2?84448444 218444 X ;47.rr.$#s X 1; ?48444 )N'!ber of co!!o$ s0.res iss'e(@ ?48444 7.rr.$#s X 1 ?48444&?48444 X 213 26448444)
&f)Sep#e!ber 48 ;41@
Bo$(s P.,.be//////////////////////////////////////////////// ?811841Co$#rib'#e( S'rp's Co$+ersio$ Ri%0#s ////////////////////////////////
1648444Co!!o$ S0.res//////////////////////////////// ?8;841
&%) N'!ber of co!!o$ s0.res iss'e(@ &2?84448444 218444 X D4co!!o$ s0.res ;48444)
The bondholders would only be motivated to convert bondsinto common shares if they perceived an increase in thevalue of their investment, and if they would get commonshares with a market value higher than the fair value of thebonds that were given up in the conversion. The carryingamount of what they gave up at the time of conversion isshown in the entry above as $4,277,701 for 320,000 commonshares. This works out to slightly below $13.37 per share.Likely the common shares are trading at an amount higher
than $13.37 by a good margin. There should be an excessover the carrying amount of $13.37 as the bondholders aregiving up a steady cash inflow from the interest incomeobtained from the bonds in exchange for shares, whichmight not yield any dividends.
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PROBLEM 16-14
;41?/ No o'r$. e$#r, 7o'( be recor(e( .# #0e #i!e #0e s#oc:op#io$ p.$ 7.s .(op#e(/ Ho7e+er8 . !e!or.$('! e$#r, i$ #0e o'r$. !i%0# be !.(e o$ No+e!ber 48 ;41?8 i$(ic.#i$% #0.# .s#oc: op#io$ p.$ 0.( .'#0ori9e( #0e f'#'re %r.$#i$% #o officersof op#io$s #o b', 48444 co!!o$ s0.res .# 2D . s0.re/
;413 .$'.r, ;No e$#r,
*ece!ber 1
Co!pe$s.#io$ Expe$se///////////////////////////////// ;483;?Co$#rib'#e( S'rp'sS#oc: Op#io$s// ;483;?
&To recor( co!pe$s.#io$ expe$se
.##rib'#.be #o ;413;;8444 op#io$s)
Pro-r.#. c.c'.#io$@ ;413 ;416 To#.
Presi(e$# 138444 18444 ;D8444
Jice-Presi(e$# 8444 8444 1?8444
To#. op#io$s ;;8444 ;48444 ?;8444
Co!pe$s.#io$ Expe$se 2 ;483;? 2 148?6 2?448444 ;;8444 ?;8444 X 2?448444 2;483;? ;48444 ?;8444 X 2?448444 2148?6
;416 *ece!ber 1Co!pe$s.#io$ Expe$se///////////////////////////////// 148?6
Co$#rib'#e( S'rp'sS#oc: Op#io$s// 148?6&To recor( co!pe$s.#io$ expe$se
.##rib'#.be #o ;416;48444 op#io$s)
Co$#rib'#e( S'rp'sS#oc: Op#io$s/////////// ;483;?Co$#rib'#e( S'rp'sExpire(
S#oc: Op#io$s //////////////////////////////////// ;483;?&To recor( .pse of presi(e$#=s .$( +ice-
presi(e$#=s op#io$s #o b', ;;8444 s0.res)
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PROBLEM 16-14 &Co$#i$'e()
;41 *ece!ber 1C.s0 &;48444 X 2D)////////////////////////////////////////// 1648444
Co$#rib'#e( S'rp'sS#oc: Op#io$s/////////// 148?6Co!!o$ S0.res//////////////////////////////// 348?6
&To recor( iss'.$ce of ;48444 co!!o$ s0.res
'po$ exercise of op#io$s .# 2D)
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PROBLEM 16-11
&.) &1) *ece!ber 18 ;41?No e$#r, re'ire(at the date of the swap because the fair valueof the swap at inception is zero.
&;) '$e 48 ;413I$#eres# Expe$se///////////////////////////////////////////////////////////////?448444
C.s0/////////////////////////////////////////////////////////////////// ?448444&21484448444 X DK X 61;)
&) '$e 48 ;413
C.s0///////////////////////////////////////////////////////////////////////////////////348444 I$#eres# Expe$se ///////////////////////////////////////////////////// 348444
21484448444 X &DK 5 K) X 61;
I$#eres#Recei+e(
&P.i()S7.p recei+.be &DK X 21484448444 X 1;)//////////////////////2 ?448444P.,.be .# LIBOR &K X 1484448444 X 1;)//////////////////////&348444)C.s0 se##e!e$#//////////////////////////////////////////////////////////////// 348444
&?) '$e 48 ;413No#es P.,.be///////////////////////////////////////////////////////////////////;448444
U$re.i9e( G.i$ or Loss ////////////////////////////////////////// ;448444
&3) '$e 48 ;413U$re.i9e( G.i$ or Loss ////////////////////////////////////////////////// ;448444
*eri+.#i+es5Fi$.$ci. Asse#sLi.bii#ies////////////////// ;448444
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-11 &Co$#i$'e()
&b)M.s#er Corp/
S#.#e!e$# of Fi$.$ci. Posi#io$ &p.r#i.)*ece!ber 18 ;41?
Lo$%-#er! i.bii#iesNo#es p.,.be 21484448444
I$co!e S#.#e!e$# &p.r#i.)For #0e Ve.r E$(e( *ece!ber 18 ;41?
No i#e!s #o repor#
&c)M.s#er Corp/
S#.#e!e$# of Fi$.$ci. Posi#io$ &p.r#i.)'$e 48 ;413
C'rre$# i.bii#ies*eri+.#i+es 5 Fi$.$ci. Li.bii#ies 2;448444
Lo$%-#er! i.bii#ies
No#es p.,.be 28D448444
S#.#e!e$# of I$co!e &p.r#i.)For #0e Six Mo$#0s E$(e( '$e 48 ;413
I$#eres# expe$se 2348444&2?448444 5 2348444)
O#0er re+e$'es .$( %.i$s@
U$re.i9e( %.i$ 5 No#es p.,.be 2;448444U$re.i9e( oss 5 S7.p co$#r.c# &;448444)4
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-11 &Co$#i$'e()
&() M.s#er Corp/ S#.#e!e$# of Fi$.$ci. Posi#io$ &p.r#i.)
*ece!ber 18 ;413O#0er .sse#s
*eri+.#i+es 5 Fi$.$ci. Asse#s 2648444
C'rre$# i.bii#iesNo#es p.,.be 21484648444
I$co!e S#.#e!e$# &p.r#i.)For #0e Ve.r E$(e( *ece!ber 18 ;413
Income StatementInterest expenseFirst six months $ 350,000 [as shown in
(c)]Nex# six !o$#0s 38444 &see beo7) Total $ 725,000
Unrealized Gain—Swap $ 60,000Unrealized Loss—Notes Payable (60,000) Total $ 0
*Swap receivable (8% X $10,000,000 X 1/2) $ 400,000Payable at LIBOR (7.5% X $10,000,000 X 1/2) 375,000Cash settlement $ 25,000
Interest expense unadjusted June 30–December 31, 2014 $ 400,000
C.s0 se##e!e$# &;38444)$ 375,000
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-1;
&.) Apri 18 ;41?No e$#r, re'ire(
&b) '$e 48 ;41?*eri+.#i+es-Fi$.$ci. Asse#sLi.bii#ies//////////////////////////38444
U$re.i9e( G.i$ or Loss - OCI ///////////////////////////////// 38444
&c) Sep#e!ber 48 ;41?*eri+.#i+es-Fi$.$ci. Asse#sLi.bii#ies//////////////////////////;8344
U$re.i9e( G.i$ or Loss - OCI ///////////////////////////////// ;8344
&() Oc#ober 18 ;41?R.7 M.#eri.s ///////////////////////////////////////////////////////////////////138344
C.s0 &344 o'$ces X 213)//////////////////////////////// 138344
C.s0 8344*eri+.#i+es-Fi$.$ci. Asse#sLi.bii#ies/////////////////// 8344
&e) *ece!ber ;48 ;41?Acco'$#s Recei+.beC.s0//////////////////////////////////348444
S.es Re+e$'e//////////////////////////////////////////////////////////// 348444
Cos# of Goo(s So(//////////////////////////////////////////////////;448444Fi$is0e( Goo(s I$+e$#or,///////////////////////////////////////// ;448444
Unrealized Gain or Loss - OCI ........................................ 8344Cos# of Goo(s So( ////////////////////////////////////////////////// 8344
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-1; &Co$#i$'e()
&f)S#.#e!e$# of Fi$.$ci. Posi#io$ &p.r#i.)
'$e 48 ;41?C'rre$# .sse#s*eri+.#i+es-Fi$.$ci. Asse#sLi.bii#ies 238444
S0.re0o(ers= E'i#,Acc'!'.#e( O#0er Co!pre0e$si+e I$co!e 238444
Statement of Comprehensive Income (partial)For #0e Six Mo$#0s E$(e( '$e 48 ;41?
O#0er Co!pre0e$si+e I$co!e@U$re.i9e( 0o(i$% %.i$ 5 F'#'res co$#r.c# 238444
&%) S#.#e!e$# of Co!pre0e$si+e I$co!e &p.r#i.)For #0e Ve.r E$(e( *ece!ber 18 ;41?
S.es 2348444Cos# of %oo(s so( &2;448444 - 28344) 1;8344
Gross profi# &i$c'(e( i$ $e# i$co!e) 2138344O#0er co!pre0e$si+e i$co!e@ U$re.i9e( 0o(i$% %.i$s o$ c.s0 fo7 0e(%e
8344 Re.i9e( %.i$ o$ c.s0 fo7 0e(%e #r.$sferre( #o $e# i$co!e
&8344) OCI8 ,e.r e$(e( *ece!ber 18 ;41?-4-
*Note that the $200,000 cost of goods sold includes the $157,500paid for the gold. IFRS also permits the amount in OCI to benetted with the asset inventory when it is acquired.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
PROBLEM 16-1; &Co$#i$'e()
(h)
Under ASPE and using hedge accounting, the futures contractwould not be recognized in the accounts until the hedged item
(the gold inventory) was acquired and recognized on the balance
sheet. The gold would be purchased at $315 per ounce (total
$157,500) and the previously unrecognized future is settled with
the company receiving $7,500 cash which is credited against the
inventory cost. This brings the inventory cost to $150,000,
which reflects the locked in price of $300 per ounce under the
futures contract.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
CASES
No#e@ See #0e C.se Pri!er o$ #0e S#'(e$# 7ebsi#e8 .s 7e .s#0e S'!!.r, of #0e C.se Pri!er i$ #0e fro$# of #0e #ex#/ No#e#0.# #0e firs# fe7 c0.p#ers i$ +o'!e 1 ., #0e fo'$(.#io$ for fi$.$ci. repor#i$% (ecisio$ !.:i$%/
CA 16-1 AIR CANA*A
O+er+ie7
The industry is a challenging one +ith many ankrutcies and significant
cometition. The comany=s main e8ense is fuel +hich accounts for significant
amount of total costs of the comanythe need is to manage cost . Air Canada uses a hedging strategy to fi8 its fuel costs. *edges are
comle8 and there are oerational risks risks in imlementing andmanaging the hedgesB.
A$.,sis .$( reco!!e$(.#io$s
Issue: Accounting for hedge of fuel
Aly hedge accounting 2o not The hedged item is the
anticiated fuel acuisitions andthe hedging items are thederi!ati!es used to lock in therices on these.
4rom an economic ersecti!e,these financial instruments +illfi8 or ca the rice for asignificant ercentage of fuelacuisitions and so this is aneconomic hedge.
*edge accounting is otional. There is a cost associated +ith
alying hedge accountingaccountants must rearedocumentation and assesseffecti!eness and all this muste auditedB.
*edge accounting has risksassociated +ith it as thetransactions and accounting are!ery comle8.
Could note disclose thee8istence of the hedge instead.
7ther.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
CA 16-1 (Continued)
Aly hedge accounting 2o not nder I450, the anticiated fuel
acuisitions +ill not e
recogniDed in the financialstatements ut the hedgingitems deri!ati!esB +ill e sincethey meet the accountingdefinition of deri!ati!es. They+ill e measured at fair !alue ateach reorting dateF thegains-losses +ill other+ise ereflected in net income. Thuse!en though there is aneconomic hedge in lace +ith nofurther risk of loss, gains-losses
+ill e ooked through netincome and introduce !olatility.This is not reflecti!e of the factthat the comany has takenstes to rotect itself and get ridof the !olatility from aneconomic ersecti!e.
7ne otion is to use hedgeaccounting. This +ill result in thegains-losses from there!aluation of the deri!ati!es toe ooked through other
comrehensi!e income thusshielding the net incomenumer. The gains-losses +ill ereclassified to net income +henthe fuel is actually used. Thishas the effect of remeasuringthe fuel costs to reflect thelockedin rices. This +ouldgenerally e treated as a cashflo+ hedge as it is a hedge of afuture transaction and relatedcash flo+s.
The comany +ill ha!e toidentify the hedging relationshiand assess the effecti!eness ofthe hedge.
7ther.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
CA 16-1 (Continued)
5ecommendation:
*edge accounting makes sense in this case as it ro!ides greater transarency
and allo+s users to see the imact of the actions management has taken torotect the comany.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
CA 16-; COACH CORPORATION
O+er+ie7
The comany uses erformanceased comensation lans that areased on net income.
0u<ecti!e estimates of ad det e8ense affect the calculation. 9et income is therefore a key numer. I450 is a constraint since this is a ulic comany.
A$.,sis .$( reco!!e$(.#io$s
0u<ecti!ity of income is affecting comensation of e8ecuti!es. Controller faces ethical issue. As long as ad det e8ense is calculated using est estimates, it should
not change <ust ecause of the comensation lan. Accounting should e neutral and uniased.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
IC 16-1 ON-LINE *EALS
7!er!ie+
Gro+ing comany thinking of going ulic
GAA3 is a constraint > due to 4I agreement reuiring audited financials >also thinking of going ulic so est to use GAA3 and in articular I450
May e a ias to make statements look etter in order to increase initialshare rice > senior management is comensated +ith stock otions and+ill stand to enefit greatly from higher share rices.
As auditor +ould e cautious and conser!ati!e due to increased riskassociated +ith otentially going ulic.
Analysis and recommendations
Issue: 5e!enues
Gross 9et Must e8amine +hether they are
acting as a rincial e.g. sellingthings for a rofitB or agent >ro!iding a ser!ice of selling
In this case > +here they areuying locks of rooms orflights, they ha!e the risks andre+ards of o+nershi and standto lose if they do not sell the+hole lock
They are acting as rincials >selling assets that they ha!elegal title to locks of roomsand flightsB
7ther
@ooks like they are ro!iding aser!ice of utting sellers anduyers together
The re!enue is therefore a tyeof commission and should esho+n on a net asis
Would ha!e to analyDe carefullyut for many of the items +herethey are utting uyers andsellers together > there is no riskof loss to them. If the item is notsold then the loss rests +ith theairline or hotel comany
7ther
5ecommendation: Would ha!e to analyDe carefully as there are multile tyes oftransactions. 0afer to sho+ on a net asis until more info can e otainedregarding +hether they take legal title of the rooms-flights and +hether they areat risk of loss.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
IC 16-1 (Continued)
Issue: Wesite costsCaitaliDe E8ense
The +esite is a critical asset
that +ill ro!ide future enefit yro!iding the latform y +hich72I interacts +ith its customers
Without this > no sales or futurecash inflo+s can occur
The +esite is o+ned andcontrolled y the comany
7ther
0eems like the +esite is retty
critical to the usiness and it isimortant to continuously in!estin it > therefore it is an ordinary,ongoing cost of doing usiness
E!en if this is seen as an asset >gi!en the rolems this yearregarding the hacking incident,might +ant to +rite off or imairany costs caitaliDed andunderstand that costs eingincurred going for+ard are only
good until there is a reach.Comuter hacking is a ig risk inthis usiness and as soon asne+ security features are inlace, someone is trying toreach them.
7ther
5ecommendation: Treat as e8enses.
Issue: @a+suit5ecogniDe 2o not
There is definitely an oligationor duty to deal +ith this rolem
It +as caused y a reach thatHay and Wen kno+ aout. 3artof the reach +as due to theiro+n +esite and e!en for the0AI rolem > Hay and Wen+ere the ones that contracted+ith 0AI
Hay and Wen ha!e uliclyaologiDed and romised tomake things right. This creates aconstructi!e oligation.
The la+yers ha!e noted that forsimilar comanies and situations
> there ha!e een significantla+suit losses so a loss is likely.
7ther
;ery difficult to measure E!en though the la+yers feel
that there are similar cases,each case is different
3lan to sue 0AI and so the netlosses may e insignificant
7ther
IC 16-1 (Continued)
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
5ecommendation: Accrue a liaility
Issue: 4I2et Euity
An oligation to deli!er cashe8ists ecause of the triggeringe!ent
This triggering e!ent is outsidethe control of the comany as it+ill deend on sales fromcustomers
The comany +ill o!iouslyha!e a goal to gro+ as large asossile and +ould not limitgro+th <ust to reclude the
triggering e!ent haening This is a more conser!ati!e !ie+and gi!en the significant gro+thand the continuing gro+th of thistye of industry > gro+th isine!itale
7ther
@egally euity since aysdi!idends and has no due date @ooks like ermanent financing
since the triggering e!ent is notlikely to haen is not genuineB.5e!enues are so huge currentlyecause of the accounting olicyto recogniDe on a gross asis. Itmakes more sense to recogniDeon a net asis and this +illdecrease re!enues significantly
and make the target moredifficult to achie!e assuming thetarget is ased on the historicallyrecogniDed gross re!enuesB
The le!el of re!enues might eseen to e +ithin the control ofthe comany > esecially sinceit deends on an accountingolicy choice and also onmanagement decisions as toho+ much they +ould like to
gro+ 7ther
5ecommendation: 2et > more conser!ati!e
Issue: 0tock otions
5ecogniDe as salary e8ense 2o not recogniDe This reresents a cost of doing
usiness Management is ro!iding a
ser!ice to the comany +hich
must e catured so that theusiness model is moretransarent > other+ise rofitsare o!erstated
7ther
2ifficult to measure since this isa ri!ate comany and alsosince it is fairly ne+ > there isnot much history
2ifficult to measure the !alue ofthe contriution and-or the !alueof the comany
7ther
IC 16-1 (Continued)
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
IC 16-; SALT"ORYS INC &SI)
O+er+ie7
3ulic comany looking to uy out, therefore I450 a constraint as uliccomany has asked for I450 to e!aluate and in case they uy it at +hichoint +ould e more useful for consolidationB. Will use the statements tomake a decision to uy or not
5ole > as accountant > +ill +ant to e transarent ut make the comanylook good so as to ma8imiDe !alue.
A$.,sis .$( reco!!e$(.#io$s
Issue: Mines 1 and " > costs incurred to uild mine
CaitaliDe costs E8ense Allo+ed to caitaliDe e8loration
and e!aluation costs under I450
&. Costs that can e caitaliDed
include studies, e8loratory
drilling, samling and those
related to estalishing technical
feasiility and commercial
!iaility.
nsure of future enefit
uncertainty as to !alue of
otential salt findB.
This is esecially the case for
mine # as not sure of uality of
salt > may not e a market.
7ther.
Continued
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
IC 16-2 (Continued)
CaitaliDe costs E8ense 2e!eloment costs must e
analyDed under IA0 #(
intangile assetsB. 4or mine "costs > more likely
de!elomental costs and may
caitaliDe if technically feasile,
intent to comlete, aility to
mine, e8isting market for outut,
a!ailaility of resources and
aility to measure costs. In this
case, not much information
ho+e!er, the comany has
certainly dislayed intent to
comlete and assuming the salt
is the same uality as mine 1 >
a market e8ists for the mine "
salt. The comany aears to
ha!e the resources to carry on
+ith the de!eloment.
If caitaliDe > then must test for
imairment.
7ther.
5ecommendation:
3roaly est to e8ense the costs for mine # as there is too much uncertainty.Costs for mine " may e caitaliDed assuming criteria for caitaliDation is met.More data may need to e gathered.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
IC 16-2 (Continued)
Issue: 5e!enue recognition > logging rights
5ecogniDe re!enues 2efer
3aid u front for access to trees. 5e!enue not deendent uonho+ many trees cut do+n.
Access immediately granted >may log the +hole thingimmediately or o!er time.
May +ant to e8ense relantingcosts against any re!enuerecogniDed so that rofits arenot o!erstated.
7ther.
Access o!er three yearstherefore recogniDe o!er threeyears.
The other comany is aying forthe right to cut do+n a certainnumer of the trees o!er athreeyear eriod. Hust ecausethey aid ufront does not meanthat the entity can recogniDe there!enues ufront.
7ther.
5ecommendation:
?etter to defer re!enues as more reflecti!e of economic reality. As trees are cutdo+n, recogniDing oligation to relant as a constructi!e oligation e8ists.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
IC 16- GREAT CANA*IAN GAMING CORPORATION
7!er!ie+
As a ulic comany, GAA3 is a constraint.
As an analyst looking to see the imact of s+itching to I450. 9ote that the usiness has not changed > <ust the asis of accounting. Will e looking to see +hich accounting is more transarent to the
usiness model.
Analysis and recommendation
There are se!eral reconciling items as follo+s:1. Imairments
3rechangeo!er GAA3 I450
5eco!erale amount is anundiscounted amount and so
is higher. This is the same as A03E.
5eco!erale amount is thehigher of !alue in use a
discounted amountB and fair
!alue less costs of disosal. This is a more realistic
measure of the current +orth
of the asset and results in
earlier recognition of
imairments. It is more transarent.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
IC 16- &Co$#i$'e()
". Contingent consideration relating to usiness cominations note that this
toic is co!ered in ad!anced accounting classes ut is included here for
comletenessB.
3rechangeo!er GAA3 I450 Contingent consideration is
recogniDed only if estimale
and the outcome
determinale. 0useuent ad<ustments are
ooked through good+ill. A03E is currently aligned
+ith I450.
Contingent consideration is
measured at fair !alue at the
acuisition date. Any
suseuent changes are
ooked through income. It is etter to attemt to
measure and record the
contingent consideration as it
forms art of +hat theacuiring comany is gi!ing
u. 0useuent ad<ustments are
ooked through income and
are not uried in good+ill.
This hels reduce otential
maniulation of suseuent
net income. More transarent.
#. AmortiDation > this ad<ustment is a result of the imairment e8ense eing
ooked under I450 the carrying !alue is lo+er and therefore amortiDation
must e recalculated.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
IC 16- &Co$#i$'e()
$. 0tockased comensation
3rechangeo!er GAA3 I450 The cost of certain share
ased a+ards is recogniDed
on a straightline asis o!er
the e8ected life of the stock
otion. In addition, forfeitures are
recogniDed as they occur. 4inally, indi!iduals are
determined to e emloyees
if certain conditions are met.Goods and ser!ices from
nonemloyees are initially
measured at the grant date
and suseuently ad<usted if
needed.
An attemt is made to
measure the fair !alue of
each additional grant of
otions and then this is
recogniDed through income
o!er the ser!ice eriod.
Assuming fair !alue is
measurale, this is more
transarent as the cost is
recogniDed as it is incurredand o!er the ser!ice life.
4or forfeitures, an attemt is
made to estimate the
forfeitures and reflect in the
cost of comensation. This is
suseuently ad<usted if
needed. This is more
transarent and it reflects the
est estimate of the costs.
Indi!iduals are considered toe emloyees under a
different definition. Goods
and ser!ices from non
emloyees are measured at
the date that the comany
recei!es the goods or
ser!ices. This is a difficult one
to assess and reuires
significant <udgement.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
TIME AN* PURPOSE OF "RITING ASSIGNMENTS&Co$#i$'e()
WA 1&$ Time "$>#/ minutesB
3uroseto ha!e the student distinguish et+een !arious treatments of deri!ati!es used as economic hedges for three different transactions. Thestudent must identify +hen hedge accounting +ould e aroriate and ho+ thisis accomlished under I450 and A03E.
WA 1&& Time "$>#/ minutesB3urose > to ha!e students e8lain +hy instruments settleale in the entity=s o+nshares cause accounting issues.
WA 1&' Time "$>#/ minutesB3uroseto ro!ide the student +ith an oortunity to understand thedifferences et+een A03E and I450 and the concetual reasons for anydifferences.
WA 1&( Time 1/>1$ minutesB3uroseto ro!ide students +ith an oortunity to e8lain the urose andaccounting for a ut otion.
WA 1&) Time 1$>"/ minutesB
3uroseto ha!e students comare seculating to hedging.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16-;
aB The ?lack0choles model is used to determine the fair !alue of otions.Conseuently, any financial instrument that is an otion or has an otionemedded in it, +ill reuire that some form of otion ricing model e used.
i. 2eri!ati!es that are otions used y comanies to manage risk hedging or seculationB +ill reuire the ?lack0choles model to determine the fair !alueFii. Con!ertile onds issued y the entity ha!e an otion to con!ert emedded inthe ond that must e searately measuredFiii. Comensatory stock otion lans C073B are lans +here emloyees aregi!en stock otions in the comany as ayment for emloyment ser!ices to ero!ided. The fair !alue of these lans must e determined using the ?lack0choles otion ricing model.
nder I450, the follo+ing standards aly:
i. 2eri!ati!es ha!e to e measured at fair !alue initially and at each suseuentreorting eriod.ii. Con!ertile onds contain oth a liaility and an euity comonent +hich areclassified searately on the initial issuance of the onds. nder I450, theresidual method is used +herey the fair !alue of the det comonent ismeasured first, and then any residual amount is allocated to the euitycomonent. The amount classified to euity is not changed during the life of theond, so does not need to e suseuently remeasured.iii. C073s are measured at fair !alue at the time of the grant of the otions tothe emloyees. The fair !alue of the otions must e determined using someotion ricing model generally the ?lack0choles otion ricing modelB. This!alue is used to measure the comensation e8ense at the time of the grant, anddoes not change throughout the life of the otions.
nder A03E, the follo+ing standards aly to each of the ao!e:
i. 2eri!ati!es generally ha!e to e measured at fair !alue initially and at eachsuseuent reorting eriod. *o+e!er, if the deri!ati!e is reuired to e settledin the comany=s shares and the fair !alue of these shares cannot e readilydetermined, then the deri!ati!e is measured at cost.ii. Con!ertile onds contain oth a liaility and an euity comonent +hichshould e classified searately. *o+e!er, under A03E, at the time of issuance,the comany has a choice to either recogniDe the euity ortion at Dero
allocating all the roceeds on issue to the liaility comonentB or determine the!alue of the comonent that is the more readily measurale first and any residualis allocated to the other comonent. The euity comonent does not change!alue throughout the life of the ond.iii. C073s are measured at fair !alue at the time of the grant. The fair !alue of the otions must e determined using some otion ricing model generally the?lack 0choles otion ricing modelB. This !alue is used to measure the
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16-; &CONTINUE*)
comensation e8ense at the time of the grant, and does not change throughoutthe life of the otions.
B The inuts into the ?lack0choles model include:i. the e8ercise riceii. the e8ected life of the otioniii. the current market rice of the underlying sharei!. the !olatility of the rice of the underlying shares!. e8ected di!idend during the life of the otion
!i. the riskfree rate of interest o!er the life of the otion.
The difficulty for ri!ate enterrises is in determining the !olatility of the shares,since the entity=s shares are not ulicly traded. *o+e!er, the ri!ate comanymust still make an attemt to estimate +hat this !olatility +ould e y looking atsimilar comany shares in the market. The other inut that is more difficult to
determine is the current market rice of the shares, since again, the shares arenot ulicly traded. 4or a ulic comany, this information +ould e readilya!ailale.
cB Assuming all other inuts remain unchanged:i. an increase in the riskfree rate +ill increase the fair !alue of the otions
granted since the time !alue of money has increasedFii. a decrease in the !olatility +ill decrease the fair !alue of the otions
granted since the likelihood of eing ale to e8ercise at higher rices isreducedF
iii. an increase in the e8ected life of the otions +ill increase the fair !alue of the otions since there is a longer time eriod efore they need to ee8ercised +hich increases the time !alue comonent of the rice.
dB The ma<or differences et+een e8changetraded otions and stock otionsgranted under emloyee enefit lans are the follo+ing:
i. emloyee stock otions ha!e a !esting eriod during +hich they cannot ee8ercised and during +hich the otions are forfeited if the emloyeelea!esF
ii. emloyee stock otions tend to ha!e much longer eriods to maturityoften u to 1/ years from the date of grantB +hich normal e8changetraded otions do notF
iii. ne+ shares are issued y the comany +hen the emloyee stock otions
are e8ercisedF this is not the case +ith e8changetraded otions +here theshares are already issued and outstanding y the comany.
As a result of these significant differences, some elie!e that the ?lack0cholesformula is not the correct model to use. *o+e!er, e!en gi!en these +eaknesses,it is still elie!ed to e the est alternati!e a!ailale to estimate the fair !alue of otions under emloyee stock otion lans.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16- &Co$#i$'e()
cB Comanies that are e8osed to financial risks might choose to reduce their e8osure to these risks. *edging is +hen deri!ati!es are used to mitigateor offset these risks. In a erfectly hedged transaction, there should e no
economic loss to the comany. In other +ords, the loss of the hedged itemis offset +ith any gain on the hedging item the deri!ati!eB. 4rom aneconomic ersecti!e, the hedge should reduce or limit the otential for loss. *edging adds !alue for a comany since it reduces the risk and!olatility of the cash flo+s for a comany.*edge accounting is an otion that is a!ailale under accounting standardsto reort and measure hedges. The key oint to note is that hedgeaccounting is otional. A comany can still e using hedging from aneconomic ersecti!e and decide not to use hedge accounting to reortand measure the hedged and hedging items. *o+e!er, hedge accountingcan only e used +hen the comany is engaged in actual hedgingractices. The comany can also aly hedge accounting to some of itshedging ractices and not to others.There is no need for hedge accounting if there is symmetry in the reortingof gains and losses on the asset or liaility that has a market risk and thederi!ati!e that is used to mitigate that risk. That is, in oth cases, the gainsand losses may oth e reorted to the earnings, and therefore areautomatically offset. Where hedge accounting is useful is +here theremight e a mismatch in the reorting of these gains and losses, or thederi!ati!e is for a future transaction that has not yet een recogniDed. Ane8amle of a mismatch in reorting of the gains and losses +ould e +herethe change in the fair !alue of an in!estment is recorded to other comrehensi!e income, and the change in the deri!ati!e used to hedge
that in!estment is reorted into current earnings. *edge accounting +ouldallo+ oth the changes in fair !alue of the asset and of the deri!ati!e to ereorted in current earnings, so the economic offset is roerly reflected inthe accounting records. 0imilarly, if a comany has hedged a futuretransaction, then the changes in the fair !alue of the deri!ati!e can erecorded into other comrehensi!e income until the transaction imacts theearnings. At this time, the cumulati!e gains and losses on the deri!ati!eused to hedge the transaction +ould also e reorted in current earnings.In this +ay the net economic gain or loss +hich should e minimalB +oulde roerly reorted in the accounting earnings for the comany. Ashedge accounting is an e8cetion to the usual rules for financialinstruments, there are strict criteria that must e met efore it can e used.
Management must identify, document, and test the effecti!eness of thosetransactions for +hich it +ishes to use hedge accounting. The criteria toachie!e hedge accounting are onerous and +ill ha!e systems imlicationsfor all entities. Therefore, management should al+ays consider the costsand enefits +hen deciding +hether to use it. Esecially for small or medium siDed comanies, the costs can e significantly higher than theenefits. Also, management should think aout the needs of its financialinformation users +hen it makes the decision aout using hedge
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16?
aB The first contract for the 3aula Mine is a sales contract to deli!er coer ata fi8ed rice and a fi8ed !olume fi8ed y the annual roduction of the
mineB. This sale commitment is not traded on an e8change and is ane8ecutory contract. 9o money has changed hands at the eginning of thecontract and cash +ill e recei!ed as deli!ery is made. This contractcannot e net settled in cash since deli!ery of the coer must e made. Inthis case, the contract is treated as an une8ecuted contract, meaning thatit does not need to e measured at fair !alue at each reorting eriod.Instead, the sale is recorded at the fi8ed committed rice +hen deli!ery of the coer is made. This is true under I450 and A03E.The e8changetraded otions for the Minera Mine are nonfinancialderi!ati!es. The remium aid for the otions is the fair !alue aid at thetime the otions are urchased. nder A03E, e!en though the otions aree8change traded, they are not futures contracts and are therefore initially
recorded at fair !alue amount aidB ut not remeasured.nder I450, these otions are a nonfinancial deri!ati!e +hich can esettled on a net asis. If the intent of the comany is to make hysicaldeli!ery of the coer, then the otion can e designated as Je8ected useand the comany need not account for the otions as a deri!ati!einstrument 4;9IB. They +ould initially record the otion at fair !alueamount aidB ut not remeasured. Alternati!ely, if the comany=s intent isto settle on a net cash asis at some time during the term of the otions,then the otion is treated as a deri!ati!e. As such, the otions +ould emeasured and reorted at fair !alue at each reorting eriod.
B If the sale commitment contract +as ale to e settled net in cash, rather than making deli!ery of the coer, it +ould still e recorded +hene8ecuted under A03E since it is not an e8changetraded futures contract.*o+e!er, under I450, the comany +ould ha!e to assess the likelihood of making deli!ery of the coer or settling on a net asis. If the comanyintends to deli!er the coer, then the contract is designated as Je8ecteduse and can e recorded +hen the deli!ery is made as a sale. If thecomany intended to settle on a net asis, then the contract +ould etreated as a deri!ati!e and +ould e measured and reorted at fair !alue ate!ery reorting eriod.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16-3
1. The in!estment in the ulicly traded shares is recorded at fair !alue under oth I450 and A03E. nder A03E, the gain or loss on the change in fair !alue is directly reorted to current earnings. The otion is a deri!ati!e,
and since it is e8change traded, it is also measured at fair !alue at eachreorting eriod +ith the changes reorted in the current earnings. Thisresults in symmetric reorting and a netting of the gains and losses on thehedged item and the hedging item in the rofit or loss for the eriod. Thereis no need to use hedge accounting under A03E in this case.
nder I450, the comany has a choice to classify the in!estment as 4;9I,or 4;7CI. The deri!ati!e must e recorded at fair !alue through rofit or loss. If the comany chooses to reort the in!estment at fair !alue throughrofit or loss, then this +ould match the treatment of the otion deri!ati!e.0imilar to A03E ao!e, there +ould e no need for hedge accounting sincethe gains and losses on the hedged item and hedging item +ould e offset
in the current earnings. *o+e!er, if the comany chooses to reort thein!estment at fair !alue through 7CI, then there is a mismatch ecausechanges in the deri!ati!e +ill e reorted in the rofit or loss for the eriod,+hereas changes in the in!estment are reorted in 7CI. Conseuently, thecomany could adot fair !alue hedge accounting and designate thein!estment as the hedged item and the otion as the hedging item. Thegains and losses on the in!estment +ould e recorded in the rofit or lossfor the eriod and +ould e offset against the gains and losses on theotion deri!ati!e. In this case, the comany might as +ell <ust use 4;9Iaccounting for the in!estment in the first lace to a!oid the comle8ities of hedge accounting.
". nder I450 and A03E, the 0 dollar recei!ale must e translated into theeui!alent Canadian dollars at each reorting eriod. Any foreigne8change gain or loss is recogniDed in the rofit or loss for the eriod. Thefor+ard contract, +hich is a deri!ati!e, also must e reorted at fair !alue+ith the gains and losses reorted to net earnings. This accountingtreatment results in symmetric reorting of the gains and losses, sho+ing anet imact in the current earnings. Therefore, no hedge accounting isreuired and any gains and losses +ill offset.
#. The for+ard contracts to uy Australian dollars are to hedge anticiatedfuture transactions. In this case, the hedged item has not yet occurred, ut
the urchase of the deri!ati!e has. The deri!ati!e +ould ha!e to ereorted at fair !alue at each reorting eriod, +ith gains and lossesreflected in the current earnings. *o+e!er, this results in a mismatch, sincethe anticiated future transaction has not yet taken lace. The comanyshould then consider hedge accounting.
nder A03E CICA #($&.A&# 3art IIB, a foreign currency for+ard contractthat meets the criteria to ualify for hedge accounting +ill e accounted for as follo+s:
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16-3 &Co$#i$'e()
The for+ard contract can e designated as a hedge only if:
• the for+ard contract is for the same amount and same currency asthe anticiated future transactionF
• the for+ard contract matures +ithin t+o +eeks of the anticiatedhedged transactionF• it is roale that the future transaction +ill occurF• the fair !alue of the for+ard contract is Dero at the time it is enteredinto.
If so, the deri!ati!e is not recogniDed until it actually matures > in si8months, and the loss on e8change is reorted in the financial statements inthe same eriod as the future transactions. @eon 3rice +ould emhasiDe tothe CE7 the strict reuirements enaling hedge accounting to e used in
this situation, and e8lain that only a true hedging arrangement can erecorded +ith hedge accounting. When the anticiated transaction actuallyoccurs, the gain or loss on the for+ard contract +ill e ad<usted to thecarrying amount of the anticiated future transaction.
nder I450, the same mismatch as descried ao!e +ould result if thefor+ard contracts +ere reorted at fair !alue at each reorting eriod.nder I450, the for+ard contract may ualify as a cash flo+ hedgeassuming all the criteria are met. The for+ard contracts are still reorted atfair !alue at each reorting eriod e8cet that the gains and losses are no+reorted in 7CI until the future transaction imacts the earnings. When thishaens, the accumulated gains and losses in 7CI related to the for+ardcontract are transferred to rofit or loss and reorted in the same accountas the anticiated transaction. In designating the deri!ati!e as a cash flo+hedge, the comany must document the hedging relationshi, the hedgeditem, and the hedging item, and test for effecti!eness at each reortingeriod. If the hedge ecomes ineffecti!e, then gains and losses on thefor+ard contract must e immediately transferred out of 7CI into rofit andloss. Again, care must e taken to ensure that the hedge accounting criteriaare met efore using hedge accounting.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16-6
The main issue that arises for instruments that reuire settlement in the entity=so+n shares is +hether the instrument should e resented as euity, a financialliaility, or a financial asset. Generally, going ack to asic rinciles is reuired
to determine the aroriate resentation. *o+e!er, there is some guidance thatI450 has noted in the standard:
• Jfi8ed for fi8ed rincile > +here the numer of shares and theconsideration reuired to settle the instrument are oth fi8ed, this +ill eresented as euity. An e8amle of this is a +ritten call otion gi!ing theholder the right to uy a fi8ed numer of shares for a fi8ed amount of consideration +ith no choice for cash settlement. 3urchased ut or callotions that gi!e the entity to right to sell or uy a fi8ed numer of sharesfor a fi8ed amount of consideration is euity, since there is no contractualoligation on the comany=s art to ay cash.
• An oligation to ay cash or other assetsB is reuired to e resented as
a liaility. A +ritten ut otion +here the holder has the right to sell a fi8ednumer of shares to the comany, or a for+ard contract to uy a fi8ednumer of shares for a fi8ed amount of cash may oligate the entity toay out cash. These +ill e recorded as financial liailities.
• A choice in settlement > Anytime there is a choice for cash settlement or other assetsB y either arty, the instrument is a financial liaility. 7nly incases +here all the ossile choices resulted in shares eing issued+ould the instrument e recorded as euity.B nder A03E, if thecomany can make a choice and a!oid settling in cash or other assets,then this instrument +ould e recorded as euity. Contracts that +ill enet settled in cash or shares are financial assets or liailities since either cash or a !ariale numer of shares +ill e used for settlement.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16- &Co$#i$'e()
fB Where the ri!ate enterrise has historically ought ack the sharesafter the emloyee has e8ercised, the C073 can e reorted as aliaility rather than euity. ?ecause there is no ready market for these
shares, the uying ack of the shares y ri!ate enterrises haensmore often so that emloyees can realiDe the !alue of these otions.nder I450, C073s are reorted as euity. In determining the fair !alue of the C073, a ri!ate enterrise +ill ha!e to estimate ameasurement of !olatility, +hereas this can e readily measured for ulicly traded entities.
gB 0A5s are reorted at fair !alue under I450 and at intrinsic !alueunder A03E. The main reason for this is the difficulty in determining thefair !alue of a 0A5 on shares that are not ulicly traded.
hB *edging under I450 is a lot more comle8, +ith a choice et+eendesignating a cash flo+ hedge or a fair !alue hedge. 2eri!ati!es arestill fair !alued, ut hedge designation +ill result in different reorting
reuirements for the gains and losses on the deri!ati!e and the hedgeditem. 4or cash flo+ hedges, the gains and losses on the hedging itemcan e reorted in 7CI. nder A03E, if the comany ualifies for hedge accounting for anticiated transactions, the deri!ati!e does notneed to e recorded until settled. This is done for t+o reasons > first of all A03E has no 7CI, so there is no mismatch for fair !alue tyehedges. And since there is no 7CI, there is no other alternati!es for reorting the income on the deri!ati!es, and so the comany does notha!e to reort them at all until settled, eliminating any mismatch.
iB 4inally, the disclosure under A03E is greatly reduced in comarisonto I450. The reason for this is the nature of the limited users for ri!atecomany reorts.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16-D
aB The ut otion contract is entered into to rotect from a otential loss onan in!estment. ?y urchasing the ut otion for 0IT @td. shares, 5IT Co.
can rotect itself against the risk of a decrease in the share rice. 5IT Co.is effecti!ely locking in the share rice at L1// er share and therefore itsin!estment cannot fall elo+ L$//,///. This is a hedge.
B 5IT Co. +ould record an asset of L1/,/// on the alance sheet for theut otion. The otion is a deri!ati!e that +ill e recorded at 4;9I.When the share rice falls to L)/ er share, 5IT Co. +ould re!alue the utotion and recogniDe a gain through net incomeB.
cB The accounting is transarent since the risk of loss in the !alue of thein!estment is offset y the otential for gain on the otion. There is a
hedge. The gains and losses on the in!estment +ill e offset ycorresonding ut oosite gains and losses on the ut through netincome if A03E is follo+edB.
nder I450, the result +ould e the same if the comany +ere to use 4;9I accounting for the in!estment. The comany has the otion of using4;7CI for the in!estment ut then might +ant to use hedge accounting toreflect the hedge. The hedge accounting +ould allo+ the gains-losses onthe in!estment to e ooked through income. *o+e!er, hedge accountingis costly and therefore if ossile, the comany +ould use 4;9Iaccounting for the in!estment right from acuisition.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
"A 16-
*edging and seculation oth in!ol!e taking a osition in a deri!ati!e +hich +illresult in fluctuating !alues deendent on future e!ents or results. *edgers +illusually undertake the deri!ati!e as an oosite osition to another deri!ate they
are trying to hedge against. The urose of hedging is to try to eliminate thefuture !olatility caused y rice fluctuation in the hedged item. In an idealscenario, any rice changes in the deri!ati!e +ill fully offset the changes in theunderlying hedged item, thus rotecting the hedger from any future ricefluctuations.
0eculation undertakes a deri!ati!e in order to gain from future marketfluctuations. The seculator +ill in!est in an asset +ith the anticiation of marketchanges and +ill rofit +hen the market mo!es in the desired direction.0eculators +ill e at risk if market conditions mo!e in the oosite direction.This is ecause the deri!ati!es they in!est in are not matched or hedged= y anoffsetting deri!ati!e in their ortfolio.
7!erall, the actions of seculators and hedgers are the same, in!esting inderi!ati!es deendent on future market conditions, ho+e!er the intent of theactions are different, seculators etting on future economic fluctuations andhedgers eliminating the risk of future fluctuations.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
RESEARCH AND FINANCIAL ANALYSIS
RA16-1 POTASH CORPORATION OFSASKATCHEWAN Inc.
aB0tock 7tion 3lans
aB Who is eligile 2esignated senior e8ecuti!es,
emloyees, and designated directors
B 5euired to uy shares to
access enefits Yes for stock ased settled lans >
comany issues ne+ shares to settle
the otions
cB What is the enefit or
comensation ased on 0hare rice
dB ;esting eriod 3erformance 7tion 3lans !est, if at
all, on the threeyear a!erage e8cess
of the comany=s consolidated cash
flo+ return on in!estment o!er the
+eighted a!erage cost of caital
2irectors, 7fficers and Emloyee
3lans one half !ested one year from
date of grant, and the other half
!esting in the follo+ing year eB E8iry eriod Term is 1/ years
fB *o+ is comensation e8ense
determined
ses ?lack0choles formula to
determine the fair !alue of the otions
gB 7ffsetting amount To contriuted surlus
hB When is comensation e8ense
recorded
7!er the !esting eriod
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
RA16-1 &Co$#i$'e()
2eferred 0hare nit 3lans
aB Who is eligile 9onemloyee directorsB 5euired to uy shares to
access enefits 9o settled in cash ased on the
common share rice at the time
cB What is the enefit or
comensation ased on
0hare rice of the units, and
erformance of shares relati!e to
market eers
dB ;esting eriod 4ully !est uon a+ard, ut not
distriuted until directors lea!e
eB E8iry eriod Cash ayale +hen directors lea!e
the ?oard
fB *o+ is comensation e8ense
determined
ses market !alue of the share units
i.e., share rice N numer of 20sB
gB 7ffsetting amount To liailities
hB When is comensation e8ense
recorded
Immediately +hen issued and
ad<usted until cash is settled
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
RA16-1 &Co$#i$'e()
3erformance nit Incenti!e lan
aB Who is eligile 0enior e8ecuti!es and other keyemloyees
B 5euired to uy shares to
access enefits 9o settled in cash ased on the
common share rice at the time
cB What is the enefit or
comensation ased on
0hare rice of the units, and some
incenti!e a+ard ased on meeting
targets
dB ;esting eriod 7ne half of the !esting of a+ards is
ased on increases in the total returnto shareholders o!er the threeyearerformance eriod ending 2ecemer#1, "/11The other half !ests to the e8tent thattotal shareholder return matches ore8ceeds that of a eer grou0hareholders= return is the caitalareciation of the share rice lusdi!idends aid.
eB E8iry eriod 3ayale in cash +hen erformance
eriod ends
fB *o+ is comensation e8ense
determined
ses market !alue of the share units
gB 7ffsetting amount To liailities
hB When is comensation e8ense
recorded
7!er the threeyear erformance
eriod and is ad<usted as reuired
ased on meeting erformance
targets
B As e8lained in 9ote "# of the financial statements, the stockased
comensation lans are reorted at fair !alues. The comensation
e8ense is charged to earnings, and the offsetting entry is either to
contriuted surlus for euity settled lans or liailities for cash settled
lans. Any consideration recei!ed on the e8ercise of otions is recorded
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to share caital, along +ith the contriuted surlus related to the otions.
As er note "#,
RA16-1 &Co$#i$'e()
L"% million +as charged to comensation e8ense for the year for all thelans. As er the Consolidated 0tatements of Changes in Euity,
contriuted surlus +as decreased y L) million due to stockased
lans. The remaining amount of L## million +ould e included in
liailities.
cB The fair !alue of stock otion lans is determined using the ?lack0choles
otion ricing model. Inuts to this otion ricing model are su<ect to
estimates and include: the e8ected di!idend, e8ected !olatility, risk
free rate, and the e8ected life of the otions. The tale elo+ outlines
ho+ these inuts ha!e changed o!er time:
"/11 "/1/ "//) "//(
E8ected
di!idend
L."( L.1# L.1# L.1#
E8ected
!olatility
$"O $/O %(O #%O
5iskfree
rate
".")O ".&1O ".$#O #.#/O
E8ected
life of the
otions
$.$ $.) $.) $.(
In 9ote "#, the comany comments that the e8ected di!idend is ased
on the annualiDed di!idend at the grant dateF the e8ected !olatility is
ased on historical data o!er the e8ected life of the otionsF the riskfreerate is ased on the imlied yield on Derocouon go!ernment onds
issued +ith a remaining term eual to the e8ected life of the otionsF and
ased on ast e8erience, the e8ected life of the otions is estimated.
*olding all other inuts constant, the follo+ing +ould e the imact on the
comensation e8ense for changes in each inut:
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RA16-; &Co$#i$'e()
dB As er note #, the deri!ati!e instruments used y the comany to hedge
its risks are interest rate s+a contracts, foreign e8change contracts,
and euity contracts.
As further e8lained in 9ote #, the comany has oth fair !alue hedges
and cash flo+ hedges. 4air !alue hedges are used for certain interest
rate s+as. Cash flo+ hedges are used for foreign currency contracts
for future urchases of in!entoryrelated items. When the in!entory is
recogniDed, the !alue of the merchandise in!entory is ad<usted y the
accumulated gains and losses on these foreign currency contracts.
Euity deri!ati!e contracts are also cash flo+ hedges used to hedge
!arious future stockased comensation. As the stockased lans
!est, the amount of accumulated gains and losses on these euity
deri!ati!es is transferred to income.
eB As e8lained in 9ote #), the comany measures the fair !alue of the
deri!ati!es using @e!el " inuts. Total deri!ati!es reresented as assets +ere
L"/." million and as liailities +ere L&.' million. These !alues are designated
as cash flo+ hedges and fair !alue hedges as follo+s:
L millions Cash flo+
hedges
4air !alue
hedges
9ot designated Total
Assets 1%.& $.& /./ "/."
@iailities 1.( %.) /./ &.'
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RA16- LOBLA" COMPANIES LIMITE*
aB 9ote 1) descries the 0econd 3referred shares as follo+s:
•
) million shares issued• 4ace !alue of L""$ million, and originally issued at L"1( million
• 9on!otingF
• $.)$O di!idend > fi8ed cumulati!e di!idend of L1.%('$ er share er
annum if declaredB ayale uarterlyF
• After Huly #1, "/1#, the comany may, at its otion, redeem the shares for
cash at the rice of L"$.'$ er share on or after Huly #1, "/1#F L"$.$/ on
or after Huly #1, "/1%F and L"$.// on or after Huly #1, "/1$.
• After Huly #1, "/1#, the comany may also con!ert, at its otion, the
referred shares into the numer of common shares determined y taking
the reuired redemtion rice di!ided y the greater of L".// and )$O of the then current market rice of the common share rice.
• The second referred shares rank after the first referred shares and rank
in riority to the common shares +ith resect to di!idends and dissolution
of the comany.
The comany has recorded these shares as a liaility since they may e
redeemed for cash. The comany has used the effecti!e interest rate
method to measure these securities.
B The shares +ere originally issued for L"1( million as er note 1). At2ecemer #1, "/11, the shares +ere measured at L""" million and are classified
as Caital 0ecurities on the statement of financial osition. Effecti!ely, the
discount is eing amortiDed until the face !alue is reached in "/1#.
cB As er note #, the di!idends aid on these caital securities +ere included
in JInterest and other financing charges. The total amount aid during the year
for the di!idends as er note 1) +as L1#.#('$ million L1.%('$ N ) million
sharesB. L1% million +as recorded in interest e8ense, +hich +ould reresent
the actual amount aid lus the amortiDation of the discount to reflect the
effecti!e interest on the referred shares.
dB As er note "/, the comany includes these referred shares as euity in its
determination of caital. As a result, in calculating its 2et to Euity, Interest
Co!erage and 9et 2et to E?IT2A ratios, the Caital 0ecurities are e8cluded
from det, and included in euity.
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RA16-? LUFTHANSA AG
aB @ufthansa AG is an international airline, headuartered in Germany. It flies
assengers and freight around the +orld. 2uring "/11, the comany fle+ 1//.&million assengers and ".1 million tonnes of freight on 1,/$/ thousand flights.
B The comany is e8osed to fuel rice risk, interest rate risk, and foreign
currency risk. The comany monitors and manages these risks in a conser!ati!e
and systematic manner. @ufthansa uses deri!ati!es to manage these risks +ith
the rimary aim to reduce earnings !olatility due to fuel rice and foreign
e8change rate fluctuations. Interest rate hedging is used to reduce and minimiDe
fluctuations in the comany=s interest e8ense. 4uel costs reresent "/.&O of
total costs. Therefore the comany hedges fuel costs for u to the ne8t "%
months, +ith ($O of the ne8t & months hedged and '/O of the "/1"=sforecasted usage eing hedged. The comany uses rimarily otion
cominations for these fuel rice hedges.
4oreign currency risk arises from international tickets sales and urchases of
fuel, aircraft, and sare arts. The comany deals in (/ different currencies of
+hich "/ are managed, rimarily eing the 0 dollar, the Haanese yen, and
?ritish sterling.
Interest rate risk is managed using s+as to ensure that ($O of the det rates
are floating.
cB 4rom 9ote %&, the follo+ing ercentages of the risks are hedged:
• Currency e8osure for oerating e8enses: 0 dollar > %/OF yen %$O and
sterling '$OF
• Currency e8osure for ne+ caital e8enditures !aries from ($O to as high
as )"O during the forecasted years for "/1" to "/1&F
• Interest rate risks are hedged to 1$OF
• 4uel rice risk is hedged '/.#O for "/1" and "%.)O for "/1#.
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RA16-? &Co$#i$'e()
dB The follo+ing tale identifies the tye of deri!ati!e and its designation as
either a cash flo+ hedge or a fair !alue hedge.
In millions of Euros 4air ;alue
hedge
Cash flo+ hedge
Interest rate s+as 11)
0read otions for fuel
hedging
1
*edging cominations for fuel
hedging
1#)
4utures contracts for foreign
currency hedging
" 1"/
0read otions for fuel
hedging
%$
The fuel hedges and foreign currency hedges are all designated as cash flo+
hedges since they relate to anticiated future transactions related to urchases
of fuel, oerating costs, oerating income and aircraft costs. The interest rate
s+as are fair !alue hedges since the s+a is on e8isting det that is
outstanding at the reort date.
eB As e8lained in the 5isks and 7ortunities 5eort, the follo+inge8lanations are ro!ided as to ho+ the market !alues of the deri!ati!es ha!e
een determined:
• All deri!ati!es are !alued at the rice an indeendent arty +ould ay or
recei!eB to take on the rights and -or oligations of the deri!ati!es.
• Interest rate s+as are measured using a discounted cash flo+.
• Currency deri!ati!es are discounted ased on their future rates and the
corresonding interest rate yield cur!es.
• 4uel rice otions are !alued using otion ricing models.
fB As er the 5isks and 7ortunities 5eort, during the year:
• E5 (// million +as mo!ed from euity to fuel costs,
• 4or the foreign currency deri!ati!es E5 %1% million +as mo!ed
from euity to other oerating income, E5 $1& million to other
oerating e8enses, and E5 &# to caital e8enditures for aircraft.
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