Suppose that you are part of the Management team at Porsche. Suppose that it is the end of December

2019 and a novel coronavirus that causes a respiratory illness was identified in Wuhan City, Hubei

Province, China. The illness was reported to the World Health Organization and there is heightened

uncertainty around the Globe.

You (as part of the management team) are reviewing Porsche’s hedging strategy for the cash flows it

expects to obtain from vehicle sales in North America during the calendar year 2020. Assume that

Porsche’s management entertains three scenarios:

Scenario 1 (Expected): The expected volume of North American sales in 2020 is 35,000 vehicles.

Scenario 2 (Pandemic): The low-sales scenario is 50% lower than the expected sales volume.

Scenario 3 (High Growth): The high-sales scenario is 20% higher than the expected sales volume.

Assume, in each scenario, that the average sales price per vehicle is $85,000 and that all sales are

realised at the end of December 2020. All variable costs incurred by producing an additional vehicle to

be sold in North America in 2020 are billed in euros (€) and amount to €55,000 per vehicle. Shipping

an additional vehicle to be sold in North America in 2020 are billed in € and amount to €3,000 per

vehicle.

The current spot exchange rate is (bid-ask) $1.11/€ - $1.12/€ and forward bid-ask is $1.18/€ - $1.185/€.

The option premium is 2.5% of US$ strike price, and option strike price is $1.085/€. Your finance team

made the following forecasts about the exchange rates at the end of December 2020:

• bid-ask will be $1.45/€ - $1.465/€ if the investors (and speculators) consider the euro (€) a safe

haven currency during the pandemic.

• bid-ask will be $0.88/€-$0.90/€ if the investors (and speculators) consider the U.S. dollar ($) a

safe haven currency during the pandemic

1. As the CFO, you decided to hedge using option contracts. Assuming expected final sales

volume is 35,000, what are your total revenue and the percentage revenue from hedging

(compared to no hedging) (do not use any variable costs to calculate in this question)

a) if the exchange rate (bid-ask) remains at $1.11/€ - $1.12/€?

b) if the investors consider the U.S. dollar a safe haven currency during the pandemic?

2. Assume that the Scenario 2 (Pandemic) took place in 2020 and the euro became a safe haven

currency during the pandemic. What are your euro cash flows if you did not hedge, hedged

using forward contracts, and hedged using option contracts?

A company began work in 2020 on a contract for $7,800. Other data are as follows:

If the company uses the percentage-of-completion method, for the journal entry that records construction revenue, construction expense, and gross profit for 2020, how much will be recorded for Construction in Process?

A company began work in 2020 on a contract for $7,800. Other data are as follows:

                                                   2020                         2021

Costs incurred to date                 $3,000 $5,600

Estimated costs to complete         2,000       —

Billings to date    4,400                   7,800

Collections to date                       2,000                      4,800

If the company uses the percentage-of-completion method, for the journal entry that records construction revenue, construction expense, and gross profit for 2020, how much will be recorded for Construction in Process?

1.

On January 1, 2020, Ginseng Inc. entered into a forward contract to purchase U.S. $6,000 for $6,336 Canadian in 30 days. On January 15, the fair value of the contract was $40 (reflecting the present value of the future cash flows under the contract). Assume that the company would like to update its records on January 15. (a) Prepare only the necessary journal entries on January 1 and 15, 2020.

2.

(Derivative Transaction) On April 1, 2020, Petey Ltd. paid $175 for a call to buy 700 shares of NorthernTel at a strike price of $27 per share any time during the next six months. The market price of NorthernTel's shares was $27 per share on April 1, 2020. On June 30, 2020, the market price for NorthernTel's stock was $38 per share, and the fair value of the option was $10,000.

Instructions

a. Prepare the journal entry to record the purchase of the call option on April 1, 2020.

b. Prepare the journal entry(ies) to recognize the change in the call option's fair value as at June 30, 2020.

c. Prepare the journal entry that would be required if Petey Ltd. exercised the call option and took delivery of the shares as soon as the market opened on July 1, 2020.

3.

(Issuance and Conversion of Bonds) The following are unrelated transactions.

1. On March 1, 2020, Loma Corporation issued $300,000 of 8% non-convertible bonds at 104, which are due on February 28, 2040. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase one of Loma's no par value common shares for $50. The bonds without the warrants would normally sell at 95. Loma prepares its financial statements in accordance with IFRS.
2. Grand Corp. issued $10 million of par value, 9% convertible bonds at 97. If the bonds had not been convertible, the company's investment banker estimates they would have been sold at 93. Grand Corp. has adopted ASPE, and would like to explore all options available to report the convertible bond.
3. Hussein Limited issued $20 million of par value, 7% bonds at 98. One detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $6. Hussein Limited has adopted ASPE.
4. On July 1, 2020, Tien Limited called its 9% convertible bonds for conversion. The $10 million of par value bonds were converted into 1 million common shares. On July 1, there was $75,000 of unamortized discount applicable to the bonds, and the company paid an additional $65,000 to the bondholders to induce conversion of all the bonds. At the time of conversion, the balance in the account Contributed Surplus—Conversion Rights was $270,000, and the bond's fair value (ignoring the conversion feature) was $9,955,000. The company records conversion using the book value method.
5. On December 1, 2020, Horton Company issued 500 of its $1,000, 9% bonds at 103. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 of Horton's common shares. On December 1, 2020, the fair value of the bonds, without the stock warrants, was 95. Horton Company prepares its financial statements in accordance with IFRS.

Instructions

Present the required entry(ies) to record each of the above transactions. For transaction 4, prepare the journal entries if Tien Limited prepares its financial statements using IFRS and if it uses ASPE.

4.

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2020, Waldorf Corporation granted 40,000 options to key executives. Each option allows the executive to purchase one share of Waldorf's common shares at a price of $30 per share. The options were exercisable within a two-year period beginning January 1, 2022, if the grantee was still employed by the company at the time of the exercise. On the grant date, Waldorf's shares were trading at $25 per share, and a fair value options pricing model determined total compensation to be $1,680,000. Management has assumed that there will be no forfeitures because they do not expect any of the key executives to leave.

On May 1, 2022, 12,000 options were exercised when the market price of Waldorf's shares was $34 per share. The remaining options lapsed in 2023 because executives decided not to exercise them. Management was indeed correct in their assumption regarding forfeitures in that all executives remained with the company. Assume that Waldorf follows IFRS.

Instructions

a. Prepare the necessary journal entries related to the stock option plan for the years ended December 31, 2020 through 2023.

b. What is the significance of the $25 market price of the Waldorf shares at the date of grant? Would the exercise price normally be higher or lower than the market price of the shares on the date of grant?

c. What is the significance of the $34 market price of the Waldorf shares at May 1, 2022, the date of the exercise of the stock options?

d. What likely happened to the market price of the shares in 2023?

5.

(Share Appreciation Rights) Parsons Limited established a share appreciation rights program that entitled its new president, Brandon Sutton, to receive cash for the difference between the shares' fair value and a pre-established price of $32 (also fair value on December 31, 2019), on 50,000 SARs. The date of grant is December 31, 2019, and the required employment (service) period is four years. The president exercised all of the SARs on December 31, 2024. The shares' fair value fluctuated as follows: December 31, 2020, $36; December 31, 2021, $39; December 31, 2022, $45; December 31, 2023, $36; and December 31, 2024, $48. The company recognizes the SARs in its financial statements. Assume that Parsons follows ASPE.

Instructions

a. show a five-year (2020 to 2024) schedule of compensation expense pertaining to the 50,000 SARs granted to Brandon Sutton.

b. Prepare the journal entry for compensation expense in 2020, 2023, and 2024 relative to the 50,000 SARs.

c. From the perspective of the employee, contrast the features of a share appreciation right to the features of a compensatory stock option.

Surat Limited paid cash to acquire an aircraft on January 1, 2017, at a cost of 31,480,000 rupees. The aircraft has an estimated useful life of 50 years and no salvage value. The company has determined that the aircraft is composed of three significant components with the following original costs (in rupees) and estimated useful lives:

The U.S. parent of Surat does not depreciate assets on a component basis, but instead depreciates assets over their estimated useful life as a whole.

Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes.

Required:

1. a. Prepare journal entries for this aircraft for the years ending December 31, 2017, and December 31, 2018, under (1) IFRS and (2) U.S. GAAP.

2. b. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert IFRS balances to U.S. GAAP.

Surat Limited paid cash to acquire an aircraft on January 1, 2017, at a cost of 33,050,000 rupees. The aircraft has an estimated useful life of 40 years and no salvage value. The company has determined that the aircraft is composed of three significant components with the following original costs (in rupees) and estimated useful lives:

The U.S. parent of Surat does not depreciate assets on a component basis, but instead depreciates assets over their estimated useful life as a whole.

Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes.

Required:

1. a. Prepare journal entries for this aircraft for the years ending December 31, 2017, and December 31, 2018, under (1) IFRS and (2) U.S. GAAP.

2. b. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017, and December 31, 2018, conversion worksheets to convert IFRS balances to U.S. GAAP.

Lessee Company enters into a 6-year finance lease of non-specialized equipment with Lessor Company on January 1, 2020. Lessee has agreed to pay $44,800 annually beginning immediately on January 1, 2020. The lease includes an option for the lessee to purchase the equipment at $4,800, which is $3,200 below the estimated fair value at lease end. Lessee Company is reasonably certain that it will exercise the purchase option. The economic life of the asset is 7 years. The lessee’s incremental borrowing rate is 7% and the lessor’s implicit rate is not readily determinable by the lessee. Record Lessee Company’s journal entries on (a) January 1, 2020, and (b) December 31, 2020, assuming that the lease is properly classified as a finance lease.

Blossom Company sells goods that cost $325,000 to Pina Colada Company for $415,000 on January 2, 2020. The sales price includes an installation fee, which is valued at $44,200. The fair value of the goods is $380,800. The goods were delivered on March 1, 2020. Installation is considered a separate performance obligation and was completed on June 18, 2020. Under the terms of the contract, Pina Colada Company pays Blossom $275,000 upon delivery of the goods and the balance at the completion of the installation.

Using the five-step process for revenue recognition, determine when and how much revenue would be recognized by Blossom. Assume IFRS is followed.

Prepare the journal entries for Blossom on January 2, March 1, and June 18, 2020.

Cairns owns 80 percent of the voting stock of Hamilton, Inc. The parent’s interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition. Cairns uses the equity method in its internal records to account for its investment in Hamilton.

On January 1, 2017, Hamilton sold $1,500,000 in 10-year bonds to the public at 105. The bonds had a cash interest rate of 8 percent payable every December 31. Cairns acquired 45 percent of these bonds at 96 percent of face value on January 1, 2019. Both companies utilize the straight-line method of amortization.

Prepare the consolidation worksheet entries to recognize the effects of the intra-entity bonds at each of the following dates. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1. December 31, 2019

2. December 31, 2020

3. December 31, 2021

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3 In what way can founder effect lead to genetic drift in a population?