Chapter 16: Complex Financial Instruments Flashcards
Q 16.1: Which of the following is a major difference between convertible debt and options?
A
Upon exercise of the options, the shares involved are restricted and can only be sold by the recipient after a set period of time.
B
Upon exercise of the options, the holder has to pay a certain amount of cash to obtain the shares.
C
Upon exercise of the options, the shares are held by the company for a defined period of time before they are issued to the option holder.
D
Upon exercise of the options, no paid-in capital in excess of the strike price can be a part of the transaction.
B
Q 16.2: Which of the following is not a category of market risk?
A
interest rate risk
B
credit risk
C
exchange rate risk
D
price risk
B
Q 16.3: Which of the following statements is true?
A
Both hedgers and speculators attempt to reduce pre-existing risks.
B
Speculators take on additional risk; hedgers attempt to reduce pre-existing risks.
C
Hedgers take on additional risk; speculators attempt to reduce pre-existing risks.
D
Both hedgers and speculators take on additional risk.
B
Q 16.4: Which of the following is not a necessary characteristic of a derivative?
A
It requires little or no investment.
B
Its value depends on the value of something else.
C
It is traded on an exchange.
D
It will be settled in the future.
C
Q 16.5: How are gains and losses on derivatives recorded?
A
in contributed surplus
B
in other comprehensive income
C
in retained earnings
D
in net income
D
Q 16.6: Which of the following is one reason corporations issue convertible debt?
A
They can easily sell convertible debt even if the company has a poor credit rating.
B
They can always sell convertible bonds at a premium.
C
They can avoid issue costs associated with equity capital.
D
They can obtain financing at lower rates.
D
Q 16.7: How should the difference between the cash acquisition price of retired convertible debt and the carrying amount of the debt be recorded by the issuer?
A
It should be recorded as a prior period adjustment.
B
It should be recorded as an adjustment to contributed surplus.
C
It should be recorded currently in income.
D
It should be recorded currently in other comprehensive income.
C
Q 16.8: When recording the conversion of bonds to common shares, there will always be a debit to ________ and a credit to
A
Common Shares; Bonds Payable.
B
Discount on Bonds Payable; Contributed Surplus.
C
Bonds Payable; Common Shares.
D
Cash; Retained Earnings.
C
Q 16.9: Knutson Eyewear issued 7,000 common shares upon conversion of 7,000 preferred shares. The preferred shares initially sold for $22,400. The common shares of the company were trading for $5 on the conversion date. How much would Knutson have to debit retained earnings upon conversion?
A
$35,000
B
$21,000
C
$12,600
D
$14,000
C
Q 16.10: At the time of conversion of convertible preferred shares to common shares, if the carrying value of the common shares exceeds the carrying amount of the preferred shares, the issuer must
A
record the difference in other comprehensive income.
B
directly reduce retained earnings for the amount of the difference.
C
record the difference in income.
D
treat the difference as a prior period adjustment.
B
Q 16.11: Why are preferred shares considered a hybrid financial instrument?
A
They rank in preference to common shares when the company is wound up.
B
They allow the shareholder extra votes in the election of directors.
C
They pay a fixed dividend every year.
D
They are usually issued together with common shares.
A
Q 16.12: What feature of a preferred share would make it a compound instrument, with part of its value considered debt?
A
Mandatory redemption by the issuer, for a fixed price at a specific date
B
Cumulative dividends
C
Participating dividends
D
The option to convert it to common shares
A
Q 16.13: Which of the following companies are likely to record their employee share-purchase plan as non-compensatory?
A
Cormier Doors offered common shares to employees for $20 when the market price was $29.
B
Doran Photography offered common shares to employees for $32 when the market price was $40.
C
Thayer Greenery offered common shares to employees for $17 when the market price was $18.
D
Woodson Jewelry offered common shares to employees for $47 when the market price was $60.
C
Q 16.14: All of the following are characteristics of a non-compensatory stock option plan except
A
the plan offers no substantive option feature.
B
all full-time employees are allowed to participate on an equitable basis.
C
an unlimited time period is permitted for exercise of an option as long as the holder is still employed by the company.
D
the discount from the market price of the shares is no greater than would be reasonable in an offer of shares to shareholders or others.
C
Q 16.15: On January 1, 2019, Hobson Fencing granted compensatory stock options for 10,000 of its common shares to key employees. On the date the options were granted, the market price of each common share was $31. Using a fair value option pricing model, Hobson determined that the total compensation expense would be $32,000 for the options. The options are exercisable beginning January 1, 2021 to all employees who still work for the company. The options expire on June 30, 2023. On January 2, 2021, all options were exercised; the market price at the time was $36 per share. If the service period is for two years beginning January 1, 2019, how much compensation expense should Hobson Fencing record on December 31, 2019 if they use the fair value method?
A
$32,000.
B
$16,000.
C
$0.
D
$7,500.
B
