Beechy6eVol2 SM Ch15

Topics: Generally Accepted Accounting Principles, Bond, Balance sheet Pages: 75 (14160 words) Published: February 28, 2015
Chapter 15: Financial Instruments: Complex Debt and Equity

Case 15-1Zebo Limited
15-2On-the-Crest Ltd.
15-3Techno Wizard Ltd.
Suggested Time Technical Review
TR15-1Convertible Debt, Investor’s Option10
TR15-2Convertible Debt, Mandatory Conversion10
TR15-3Options and Warrants10
TR15-4Share-Based Compensation; Equity-Settled10
TR15-5Share-Based Compensation; Cash-Settled10

Assignment A15-1Classification; Impact of Debt versus Equity20
A15-2 Classification20
A15-3Classification (*W)15
A15-7Convertible Debt (*W)25
A15-8Convertible Debt; Investor’s Option25
A15-9Convertible Debt; Investor’s Option25
A15-10Convertible Debt; Three Cases35
A15-11Convertible Debt; Investor Option versus
Conversion Mandatory40
A15-12Convertible Debt; Mandatory Conversion20
A15-13 Convertible Debt; Mandatory Conversion25
A15-14 Share Rights—Recognition15
A15-15Share Rights—Recognition20
A15-16Share Rights and Warrants35
A15-17Share-Based Compensation; Cash-Settled30
A15-18Share-Based Compensation; Cash-Settled30
A15-19Share-Based Compensation; Cash-Settled (*W)30
A15-20 Share-Based Compensation; Equity-Settled30
A15-21Share-Based Compensation15
A15-22 Share-Based Compensation; Compound Plan30
A15-26ASPE; Classification15

Continued… A15-27ASPE; Convertible Debt20
A15-28ASPE; Share-Based Compensation, Equity-Settled20
A15-29 Statement of Cash Flows—Individual
A15-30Statement of Cash Flows—Comprehensive Equity45
A15-31Comprehensive Equity (*W)45

*WThe solution to this assignment is on the text website, Connect.
The solution is marked WEB.

15-A1 to 15-A4 Financial restructuring; based on material posted on Connect

15-A1Restructuring (Connect)35
15-A2Comprehensive revaluation (Connect) 25
15-A3Restructuring (Connect)40
15-A4Reorganization - entries and reporting


1. Historically, financial instruments were classified as debt or equity based on their legal form. The financial instrument rules require classification based on the substance of the financial instrument—liabilities carry firm commitments to pay out cash or other financial instruments and equities are residual interests in net assets.

2. A compound financial instrument is a security that has elements of both debt and equity. An example is convertible debt, convertible at the investor’s option, where the investor essentially holds an option on the company’s common shares in addition to a liability that guarantees interest and principal payments. (Other examples are acceptable.)

3. The distinguishing feature of debt is that it must be paid in cash at a certain time, or paid in cash on the investor’s demand. The company has no ability to avoid the cash payment.

4. If the instrument is classified as debt, the annual payments are classified as interest expense, which reduces earnings, and the redemption premium is recorded as a loss on retirement, also reducing earnings. (If the $6,000 excess of retirement price over par were contracted in advance, it would be accrued over the life of the liability). If the financial instrument were equity, both items would reduce retained earnings directly, by-passing earnings.

5. Retractable preferred shares are preferred shares that must be paid back with cash at a specific time, or paid in cash at the option of the shareholder. Because the agreement to pay out the redemption price is legally enforceable, such shares are...
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