Beechy6eVol2 SM Ch15

14147 words 57 pages
Chapter 15: Financial Instruments: Complex Debt and Equity Case 15-1 Zebo Limited 15-2 On-the-Crest Ltd. 15-3 Techno Wizard Ltd. Suggested Time
Technical Review TR15-1 Convertible Debt, Investor’s Option 10 TR15-2 Convertible Debt, Mandatory Conversion 10 TR15-3 Options and Warrants 10 TR15-4 Share-Based Compensation; Equity-Settled 10 TR15-5 Share-Based Compensation; Cash-Settled 10

Assignment A15-1 Classification; Impact of Debt versus Equity 20 A15-2 Classification 20 A15-3 Classification (*W) 15 A15-4 Classification 25 A15-5 Classification 25 A15-6 Classification 20 A15-7
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12. If stock rights are recognized on issuance, the stock rights account is transferred into the common stock account on exercise and into a different contributed capital account if options are allowed to lapse. This is identical to the treatment given to the common share conversion option account for convertible bonds.

13. A share-based compensation contract would result in recognition of an equity account if the contract is share-settled, or required issuance of shares. The contract would result in recognition of a liability element if the contract was cash-settled, meaning that compensation is required to be paid in cash. Both a liability and an equity component are recognized if settlement is in cash or shares at the employee’s (or employer’s) option.

14. At the end of year 2, a total of $70,000 is recorded ($175,000 x 2/5). The required accrual by the end of year 3 is $240,000 ($400,000 x 3/5). Compensation expense is $170,000 ($240,000 - $70,000).

15. At the end of year 2, a total of $52,500 is recorded ($175,000 x 2/5 x 75%). The required accrual by the end of year 3 is $144,000 ($400,000 x 3/5 x 60%). Compensation expense is $91,500 ($144,000 - $52,500).

16. A cash-settled plan is trued up to the cash paid out (fair value) and the retention rate. An equity-settled plan is trued up only to the retention rate; the fair value is estimated on initial grant date and is not adjusted to the value that employees receive.

17. A SARs program involves a payment