Chapter 16 Review

Derivatives should be valued at

• historical cost.

• fair value or historical cost.

• fair value.

• discounted cost.

A call option is a right to

• force another party to buy the underlying security.

• repurchase a previously sold underlying security.

• sell the underlying security.

• buy the underlying security.

When convertible debt is converted to common shares, IFRS requires that this is recorded by the

• book value method.

• relative fair value method

• market value method.

• residual method.

On October 5, 2017, Kappa Cloth Ltd. enters into a forward contract to purchase 10,000 metres of cotton fabric at $1 per metre, good until February 1, 2018. At December 31, 2017, the forward price for February 2018 delivery of cotton fabric has increased to $1.04 per metre. The adjusting entry at December 31, 2017 would be

• No entry required.

• Derivatives—Financial Assets/Liabilities............... 400

  Unrealized Gain (OCI)................................................400

• Derivatives—Financial Assets/Liabilities.................400

  Gain..............................................................................400

• Loss ................................................................... 400

  Derivatives—Financial Assets/Liabilities........................... 400

On December 1, 2017, Cairo Ltd. issued 500 of its 9%, $1,000 bonds at 103. Attached to each bond was one detachable warrant entitling the holder to purchase ten of Cairo's common shares. At this time, the market value of the bonds, without the warrants, was 95, and the market value of each warrant was $50. Using the residual method, the amount of the proceeds from the issuance that should be credited to Bonds Payable would be

• $475,000.

• $489,250.

• $500,000

• $515,000.

On May 1, 2017, Durban Ltd. issued $500,000, 10 year, 7% bonds at 103. Twenty detachable warrants were attached to each $1,000 bond, which entitled the holder to purchase one of Durban’s no par value common shares for $40. At this time, similar bonds without warrants were selling at 96. It was determined that the fair value of Durban’s common shares was $35, but the value of the warrants was NOT determinable. Durban is a private corporation that follows ASPE, but does NOT use the residual method (i.e. assign zero to equity component).

On May 1, 2017, Durban should credit Bonds Payable for:

• $515,000.

• $500,000.

• $480,000.

• cannot be determined from the information given.