Question 1

How are derivative contracts generally accounted for?

Accepted Answer

Derivative contracts are generally accounted for at fair value through profit or loss, as their value is subject to changes in market conditions. Amortized cost and historical cost are not appropriate methods for accounting for these contracts. Fair value accounting provides more relevant and reliable information to the users of financial statements.

Question 2

Assume that Barun agrees to purchase US$500,000 for C$550,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.95 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2013?

Accepted Answer

The correct answer is A because the gain on forward contract is calculated as the difference between the forward rate and the spot rate multiplied by the number of units of foreign currency contracted. In this case, the forward rate is US$1 = C$0.97 and the spot rate is US$1 = C$0.95. The gain is therefore (0.97 - 0.95) * 500,000 = $10,000.

Question 3

Assume that Signh agrees to purchase US$100,000 for C$84,745 on January 15,2013.The exchange rate at year end is US$1 = C$1.20 and the January 15,2013 exchange rate is US$1 = C$1.19.What journal entry is required at January 15,2013?

Accepted Answer

The correct answer is B because the company gains $701 from the transaction. The company purchased US$100,000 for C$84,745, which means that the company paid C$0.84745 for each US dollar. At the year-end exchange rate of US$1 = C$1.20, the company could sell the US$100,000 for C$120,000. This means that the company would gain C$35,255 (C$120,000 - C$84,745) from the transaction.

Question 4

Assume that Millan agrees to purchase US$100,000 for C$84,745 on January 15,2013.The exchange rate at year end is US$1 = C$1.20 and the January 15,2013 exchange rate is US$1 = C$1.19.What journal entry is required at year end?

Accepted Answer

To determine the gain or loss, we need to compare the exchange rate at the time of purchase (US$1 = C$1.19) to the exchange rate at year end (US$1 = C$1.20).

The calculation is: 
C$84,745 / 1.19 = US$71,218.49 (amount paid in USD at time of purchase)
US$71,218.49 x 1.20 = C$85,462.19 (value in CAD at year end)
C$85,462.19 - C$84,745 = C$717.19 loss

Therefore, the required journal entry would be to record a loss of C$711 (rounded to the nearest dollar). So, the correct answer is C.

Question 5

On December 15,a company enters into a foreign currency forward to buy €100,000 at C$I.60 per euro in 30 days.The exchange rate on the day of the company's year-end of December 31 was C$1.55: €l.
Requirement:
Record the journal entries related to this forward contract.

Accepted Answer

The answer of On December 15,a company enters into a...

Question 6

Naples Corporation issued call options on 20,000 shares of VESPUS Inc.on October 21,2012.These options give the holder the right to buy VESPUS shares at $35 per share until May 17,2013.For issuing these options,Naples received $60,000.On December 31,2012 (Naples's fiscal year-end),the options traded on the Montreal Exchange for $3.50 per option.On May 17,2013,VESPUS's share price increased to $40 and the option holders exercised their options.Naples had no holdings of VESPUS shares.
Requirement:
For Naples Corporation,record the journal entries related to these call options.

Accepted Answer

The answer of Naples Corporation issued call options on 20,000...

Question 7

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.98 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at year end?

Accepted Answer

The exchange rate changed from 0.97 to 0.98, resulting in a loss. The calculation is (50,000 * 0.98) - 52,000 = -3,000, indicating a $3,000 loss.

Question 8

Roman Corporation issued call options on 5,000 shares of POMPEI Inc.on October 21,2012.These options give the holder the right to buy POMPEI shares at $35 per share until May 17,2013.For issuing these options,Roman received $15,000.On December 31,2012 (Roman's fiscal year-end),the options traded on the Montreal Exchange for $3.50 per option.On May 17,2013,POMPEI's share price increased to $40 and the option holders exercised their options.Roman had no holdings of POMPEI shares.
Requirement:
For Roman Corporation,record the journal entries related to these call options.

Accepted Answer

The answer of Roman Corporation issued call options on 5,000...

Question 9

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

Accepted Answer

A warrant on common shares is a derivative that gives the holder the right to buy the company's own common shares at a specified price and date in the future. It is directly linked to the value of the company's underlying stock and thus can be considered a derivative on the company's own common shares. Accounts payable, commodity futures contracts, and warranty provisions are not derivatives on the company's own common shares.

Question 10

Assume that MAK agrees to purchase US$500,000 for C$550,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.95 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at year end?

Accepted Answer

The exchange rate has depreciated from C$0.97 to C$0.95, resulting in a loss for MAK. The calculation for the loss is:

US$500,000 / C$0.97 = C$515,463.92 (cost of US dollars on January 15, 2013)
US$500,000 / C$0.95 = C$526,315.79 (value of US dollars at year end)
C$526,315.79 - C$515,463.92 = C$10,851.87 loss
C$10,851.87 loss x 1.30 (exchange rate on January 15, 2013) = US$14,107.43 loss

Therefore, the journal entry at year end would be:

Loss on foreign exchange transaction       $14,107.43
  Accounts payable - foreign currency      $14,107.43

Question 11

How should employee stock options be accounted for?

Accepted Answer

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

Question 12

On December 15,a company enters into a foreign currency forward to buy €300,000 at C$I.60 per euro in 30 days.The exchange rate on the day of the company's year-end of December 31 was C$1.59: €l.
Requirement:
Record the journal entries related to this forward contract.

Accepted Answer

The answer of On December 15,a company enters into a...

Question 13

A company pays $5,000 to purchase futures contracts to buy 50 oz of silver at $40/oz.At the company's year-end,the price of silver rose and the value of the company's futures contracts increased to $6,000.
Requirement:
Record the journal entries related to these futures.

Accepted Answer

The answer of A company pays $5,000 to purchase futures...

Question 14

On August 15,2011,Madison Company issued 80,000 options on the shares of MVC (Middefield Valley Corporation).Each option gives the option holder the right to buy one share of MVC at $70 per share until March 16,2012.Madison received $800,000 for issuing these options.At the company's year-end of December 31,2011,the options contracts traded on the Montreal Exchange at $9.50 per contract.On March 16,2012,MVC shares closed at $63 per share,so none of the options was exercised.
Requirement:
Record the journal entries related to these call options.

Accepted Answer

The answer of On August 15,2011,Madison Company issued 80,000 options...

Question 15

Sorrentino Corporation issued call options on 20,000 shares of BWC Inc.on October 21,2012.These options give the holder the right to buy BWC shares at $35 per share until May 17,2013.For issuing these options,Sorrentino received $20,000.On December 31,2012 (Sorrentino's fiscal year-end),the options traded on the Montreal Exchange for $2.00 per option.On May 17,2013,BWC's share price increased to $38 and the option holders exercised their options.Sorrentino had no holdings of BWC shares.
Requirement:
For Sorrentino Corporation,record the journal entries related to these call options.

Accepted Answer

The answer of Sorrentino Corporation issued call options on 20,000...

Question 16

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

Accepted Answer

An employee stock option is a type of derivative that gives employees the right to purchase the company's common shares at a predetermined price. As such, it is a direct derivative on the company's own common shares. The other choices listed are derivatives related to interest rates, foreign exchange, and commodities, and are not directly tied to the company's own shares.

Question 17

A company pays $7,000 to purchase futures contracts to buy 200 oz of gold at $1,600/oz.At the company's year-end,the price of gold was $1,625 and the value of the company's futures contracts increased to $10,000.
Requirement:
Record the journal entries related to these futures.

Accepted Answer

The answer of A company pays $7,000 to purchase futures...

Question 18

On August 15,2011,Madison Company issued 10,000 options on the shares of MVC (Middefield Valley Corporation).Each option gives the option holder the right to buy one share of MVC at $70 per share until March 16,2012.Madison received $100,000 for issuing these options.At the company's year-end of December 31,2011,the options contracts traded on the Montreal Exchange at $9.50 per contract.On March 16,2012,MVC shares closed at $63 per share,so none of the options was exercised.
Requirement:
Record the journal entries related to these call options.

Accepted Answer

The answer of On August 15,2011,Madison Company issued 10,000 options...

Question 19

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.98 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2013?

Accepted Answer

The exchange rate on January 15, 2013, is US$1 = C$0.97. Aero agrees to purchase US$50,000 for C$52,000, which implies an exchange rate of C$52,000/US$50,000 = C$1.04 per US$. The difference between the agreed rate (C$1.04) and the market rate (C$0.97) results in a loss of C$0.07 per US$, totaling a loss of C$3,500 (US$50,000 * C$0.07). However, since the question asks for the journal entry on January 15, 2013, the immediate recognition of the loss is C$500, which is the difference between the agreed rate and the market rate at the time of the transaction.

Question 20

Assume that Ariel agrees to purchase US$500,000 for C$550,000 on January 15,2013.The exchange rate at year end is US$1=C$0.95 and the January 15,2013 exchange rate is US$1=C$0.97.What journal entry is required when the contract is initiated?

Accepted Answer

When the contract is initiated, no journal entry is required because the transaction has not yet been realized. The exchange rates at this point only set the terms of the agreement.

Quiz 14: Complex Financial Instruments

How are derivative contracts generally accounted for?

Assume that Barun agrees to purchase US$500,000 for C$550,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.95 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2013?

Assume that Signh agrees to purchase US$100,000 for C$84,745 on January 15,2013.The exchange rate at year end is US$1 = C$1.20 and the January 15,2013 exchange rate is US$1 = C$1.19.What journal entry is required at January 15,2013?

Assume that Millan agrees to purchase US$100,000 for C$84,745 on January 15,2013.The exchange rate at year end is US$1 = C$1.20 and the January 15,2013 exchange rate is US$1 = C$1.19.What journal entry is required at year end?

On December 15,a company enters into a foreign currency forward to buy €100,000 at C$I.60 per euro in 30 days.The exchange rate on the day of the company's year-end of December 31 was C$1.55: €l. Requirement: Record the journal entries related to this forward contract.

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.98 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at year end?

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

Assume that MAK agrees to purchase US$500,000 for C$550,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.95 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at year end?

How should employee stock options be accounted for?

On December 15,a company enters into a foreign currency forward to buy €300,000 at C$I.60 per euro in 30 days.The exchange rate on the day of the company's year-end of December 31 was C$1.59: €l. Requirement: Record the journal entries related to this forward contract.

A company pays $5,000 to purchase futures contracts to buy 50 oz of silver at $40/oz.At the company's year-end,the price of silver rose and the value of the company's futures contracts increased to $6,000. Requirement: Record the journal entries related to these futures.

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

A company pays $7,000 to purchase futures contracts to buy 200 oz of gold at $1,600/oz.At the company's year-end,the price of gold was $1,625 and the value of the company's futures contracts increased to $10,000. Requirement: Record the journal entries related to these futures.

Assume that Aero agrees to purchase US$50,000 for C$52,000 on January 15,2013.The exchange rate at year end is US$1 = C$0.98 and the January 15,2013 exchange rate is US$1 = C$0.97.What journal entry is required at Jan 15,2013?

Assume that Ariel agrees to purchase US$500,000 for C$550,000 on January 15,2013.The exchange rate at year end is US$1=C$0.95 and the January 15,2013 exchange rate is US$1=C$0.97.What journal entry is required when the contract is initiated?