FA3-I Assignment 04(1).doc

LESSON 4 AssignmentQuestion 1 Fung & Jardine Limited. issued 1,200,000 of convertible bonds on April 1, 2008. The bonds mature on March 31, 2023, and bear an interest rate of 5.5%, paid each March 31. The bonds are convertible at the rate of 100 ordinary shares for every 1,000 bond.RequiredThe bonds are convertible at the investors option. The financial instrument was issued for total proceeds of 1,489,302. The bond alone was valued at 1,230,620. No value can be separately calculated to value the option.1.Calculate the portion of the bond proceeds allocated to debt versus equity. 2.What interest rate is implicit in the bond valuation? 3.Prepare a table showing the interest expense and the net bond liability over the life of the bond. 4.What would appear on the statement of financial position (indicate category), statement of income, and statement of cash flows for the year ended March 31, 2015? Do not separate the current portion of long-term debt. On the statement of cash flows, the direct method is used to disclose operating activities. 5.Prepare a journal entry to reflect the following independent events:a.Conversion of the bond to ordinary shares on March 31, 2023.b.Repayment of the bond with cash on March 31, 2023, and the lapse of rights. Question 2 On January 1, 20X9, Woollongong Stainless Steel Fabrication, Ltd. (WSSF) had retained earnings of 1,843,500. WSSF engaged in the following events during the fiscal year ended December 31, 20X9:a. WSSF retired a 100,000, 10-year, 6.5%, bond issue two years early by buying the bonds in the open market. When the bonds were issued eight years previously the market interest rate was 6.25%. WSSF received 101,818.50. At the end of year 8 when the bonds were retired the difference between face value and book value was 457. WSSF paid 98,750 to retire the bonds. b. On January 1, 20X9 WSSF issued 200,000 of 4%, 10-year, convertible bonds for 207,000. The market rate on the date of issuance is 4.75%. Each $10,000 bond is convertible into 50 ordinary shares on the annual interest payment date in years 410. The bonds are valued at 188,275; the conversion right is valued at 18,725. Interest is paid annually on December 31. The company uses the effective interest rate method to account for premium or discount amortization. c. Three years previously WSSF issued 80,000 rights that allowed shareholders to purchase ordinary shares in the current year at 15 per ordinary share, which was the market price when the rights were issued. Four rights were required to purchase each share. When the rights were issued WSSF received 10,000 for the rights. 64,000 of the rights were exercised. The remainder lapsed. d. WSSF issued 250,000 of 3%, five-year debentures. On maturity WSSF will issue a fixed number of ordinary shares. In the current market a similar bond without the conversion feature would carry an interest rate of 4.5%. WSSF received 258,500 for the debentures. e. On December 31, 20X9 WSSF issued a 15-year 1,500,000 bond, convertible at the companys option into ordinary shares. At conversion the bond will be converted into 1,500,000 of ordinary shares. WSSF received proceeds of 1,513,200.f. Employees exercised 7,100 ordinary stock options that permitted them to purchase one share for every three options held at a price of 14.75 per share. Market value of the ordinary shares was 21.00 per share when the options were exercised. A further 4,733 stock options are outstanding and will expire in 20X0 (next year). g. At its option WSSF converted one-third of the 75,000 outstanding 10 no-par preference shares. One no-par preference share can be converted for 3 ordinary shares. The balance in the preference share account prior to conversion was 3,600,000 h. WSSF declared a dividend on the 10, no-par preference shares i. The December 31, 20X8 statement of financial position reported 9,000 shares held in treasury, with an account balance of 189,000. Five thousand of the shares were re-sold when the market value was 22.00 per share. j. WSSF issues 150,000 rights allowing shareholders to purchase ordinary shares in three years at 25 per ordinary share. Six rights are required to purchase each share. A total of $20,000 was received for the rights. The shares were trading at 25 per share when the rights were issued. k. WSSF acquired a factory located on leased land by issuing options. The factory is appraised at 325,000. The lease is at market rent with provision for market rate adjustments over the term of the lease. The options allow purchase of 175,000 shares at 20 each in five years. The market value of the shares was 22 on this date. The option was valued at 308,000 using the Black-Scholes option pricing model. (Justify the value used in your entry.) l. Interest payment was made on the 200,000 of 4%, 10-year, convertible bonds (described in (b) above). m. Profit before taxes was 948,214. WSSFs tax rate is 30%.Required1.Provide the journal entries for the events listed. 2.Calculate the closing balances in each of the equity accounts as of December 31, 20X9.Question 3 Multiple choicea) Harbour Sales and Equipment (HSE) sold equipment to Byron Bay Ventures (BBV); BBV and HSE have been doing business for more than 20 years. In payment HSE accepted a 100,000 receivable that BBV may settle by providing HSE with 35,600 BBV ordinary shares one year from today. How would this instrument be classified by BBV? 1)It is a non-monetary financial asset.2)It is a non-monetary financial liability3)It is a monetary financial asset.4)It is a monetary financial liabilityb) Taylor Automotive issued no-par-value preference shares, with a cumulative 3 dividend, which are redeemable for 72 per share one year after Taylor Automotives outstanding 15-year bond issue matures. How would the preference shares be classified? 1) As equity2) As a hybrid3) As a financial asset4)As a financial liabilityc) Ling & Wong issued 500,000 of convertible bonds. The bonds pay interest semi-annually at 7%. The market rate is 7.25%. Each 1,000 bond is convertible into 5 of Ling & Wongs ordinary shares. Proceeds of the bond issue were 512,900. Which of the following would Ling & Wong record? 1) A Credit to Bond Premium and a Credit to Conversion rights on ordinary shares2) A Debit to Bond Discount and a Credit to Conversion rights