Question

1. At the beginning of 2019, the company granted options to the management to purchase 80,000 common shares. The options can be exercised any time within the next five years at a strike price of $5 per share. The company expects that the period of benefit/service for these options is three years. The fair value of the options, as determined using an option pricing model, is $900,000.

2. On July 1, 2019, the company issued 20,000 preferred shares for $10 per share to an investment bank. Each preferred share is convertible for a fixed number of common shares and has a mandatory 5% annual dividend that must be paid on December 31 of each fiscal year. These preferred shares must be redeemed by the company for cash if the market price of common shares exceeds $10 per share. Currently, the common shares are in trading range around $6 per share.

3. On September 15, 2019, the company entered into a forward contract with the Bank of Vancouver by locking the price of 600,000 kg of aluminum at $1.50/kg. Aluminum is used in the production of stereo equipment. As at December 31, the price of aluminum is trading on the Chicago Board of Trade at $1.25/kg. Question: Prepare a report on your analyses of company's accounting issues. Add complimentary calculation if need be.

Answer 1

The company issued equity option for employess so that shares to be shown as employee compensation expense for 5 years and the same to be charged to profit and loss account as shown below..

employee compensation expence A/c .............Dr 80,000

To employees stock outstanding A/c 80,000

P&L A/c ......................Dr 80,000

To Employee compemsation expense A/c 80,000

Bank A/c ........................................Dr 2,00,000

To preference share holdres A/c 2,00,000

At the end of december they are to be paid by dividend of 5% which is for half year(Because of issued on July) is 2,00,000*5%=10,000 .

Forward contract

In this forward contract the difference between contract rate and cost to be charged to P&L  

I.e 6,00,000*(1.5-1.25)=1,50,000

Thank you hope this will help to all