E17.
24 (LO5) (Derivative Transaction)
On January 2, 2019, Jones Company purchases a call option for $300 on Merchant ordinary
shares. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike
price of $50 per share. The market price of a Merchant share is $50 on January 2, 2019 (the
intrinsic value is therefore $0). On March 31, 2019, the market price for Merchant shares is
$53 per share, and the time value of the option is $200. Instructions
a. Prepare the journal entry to record the purchase of the call option on January 2, 2019.
b. Prepare the journal entry(ies) to recognize the change in the fair value of the call option as
of March 31, 2019.
c. What was the effect on net income of entering into the derivative transaction for the period
January 2 to March 31, 2019? (Ignore tax effects.)
E17.25 (LO6) (Fair Value Hedge)
On January 2, 2019, MacCloud SA issued a 4-year, €100,000 note at 6% fixed interest,
interest payable semiannually. MacCloud now wants to change the note to a variable-rate
note. As a result, on January 2, 2019, MacCloud enters into an interest rate swap where it
agrees to receive 6% fixed and pay LIBOR of 5.7% for the first 6 months on €100,000. At each
6-month period, the variable rate will be reset. The variable rate is reset to 6.7% on June 30,
2019. Instructions
a. Compute the net interest expense to be reported for this note and related swap transaction
as of June 30, 2019.
b. Compute the net interest expense to be reported for this note and related swap transaction
as of December 31, 2019.
E17.28 (LO6) On August 15, 2019, Outkast Co. invested idle cash by purchasing a call option
on Counting Crows Inc. ordinary shares for $360. The notional value of the call option is 400
shares, and the option price is $40. (Market price of a Counting Crows share is $40.) (Call
Option) The option expires on January 31, 2020. The following data are available with respect
to the call option.
Date Market Price of Counting Time Value of Call Option
Crows Shares
September 30, 2019 $48 per share $180
December 31, 2019 46 per share 65
January 15, 2020 47 per share 30
Instructions: Prepare the journal entries for Outkast for the following dates
a. Investment in call option on Counting Crows shares on August 15, 2019.
b. September 30, 2019—Outkast prepares financial statements.
c. December 31, 2019—Outkast prepares financial statements.
d. January 15, 2020—Outkast settles the call option on the Counting Crows shares.
EXERCISE 17.24 (15–20 minutes)
(a) January 2, 2019
Call Option 300
Cash 300
(b) Unrealized Holding Gain or Loss—Income 100
Call Option ($300 – $200) 100
Call Option 3,000
Unrealized Holding Gain or Loss—
Income (1,000 X $3) 3,000
(c) Unrealized Holding Gain: $2,900 ($3,000 – $100)
*EXERCISE 17.25 (20–25 minutes)
(a) 6/30/19 (b) 12/31/19
Fixed-rate debt €100,000 €100,000
Fixed rate (6% ÷ 2) X3% X3%
Semiannual debt payment € 3,000 € 3,000
Swap fixed receipt (3,000) (3,000)
Net income effect € 0 € 0
Swap variable rate
5.7% X 1/2 X €100,000 € 2,850
6.7% X 1/2 X €100,000 0 € 3,350
Net interest expense € 2,850 € 3,350
*EXERCISE 17.28 (20–25 minutes)
(a) August 15, 2019
Call Option 360
Cash 360
(b) September 30, 2019
Call Option 3,200
Unrealized Holding Gain or Loss—Income
($8 X 400) 3,200
Unrealized Holding Gain or Loss—Income 180
Call Option ($360 – $180) 180
(c) December 31, 2019
Unrealized Holding Gain or Loss—Income 800
Call Option ($2 X 400) 800
Unrealized Holding Gain or Loss—Income 115
Call Option ($180 – $65) 115
(d) January 15, 2020
Call Option ($1 X 400) 400
Unrealized Holding Gain or Loss—Income 400
Unrealized Holding Gain or Loss—Income 35
Call Option ($65 – $30) 35
Cash (400 X $7) 2,800
Loss on Settlement of Call Option 30
Call Option* 2,830
*Value of Call Option at settlement:
Call Option
360 180
3,200 800
400 115
35
2,830
Homework chap 6:
Bài 1:
- Goodwill Impairment:
The goodwill impairment needs to be recognised as an expense at the group level.
The initial goodwill value was $15,000, and it was fully impaired by December 31, 20X6.
Therefore, the entire amount of goodwill ($15,000) is charged to group retained earnings.
- Fair Value Adjustment of PPE:
The fair value adjustment of PPE made during the acquisition hasn't been incorporated into
Mas Co's individual financial statements.
The excess fair value of PPE over its carrying amount was $6,000. Since the PPE has a
remaining life of 3 years, the adjustment needs to be amortized over this period.
+ The annual amortization of the PPE adjustment is calculated as follows:
Annual Amortization = Excess Fair Value/Remaining Life
Annual Amortization = $6,000/3 = $2,000
For the year 20X6, the portion of the amortization to be recognised in the group accounts is
$2,000.
Therefore, the total charged to group retained earnings at December 31, 20X6, due to these
consolidation adjustments is the sum of the goodwill impairment and the annual amortization
of the fair value adjustment of PPE:
Tota l= Goodwill Impairment + Annual Amortization of PPE =$15,000 + $2,000 = $17,000
So, the total charge to group retained earnings at December 31, 20X6, due to these
consolidation adjustments is $17,000.
2.
- Fair Value of Net Assets Acquired:
The fair value of the non-controlling interest is given as $200,000.
Since Crash Co acquired 70% of Bang Co's shares, it implies that Crash Co controls 70% of
Bang Co's net assets.
Let's calculate the fair value of the net assets controlled by Crash Co:
Fair value of net assets controlled by Crash Co = Fair value of non-controlling interest
/Ownership percentage = $200,000 / 70% = $285,714.29
- Consideration Paid:
Crash Co paid $600,000 to acquire 70% of Bang Co's shares.
- Calculation of Goodwill:
Goodwill arises when the consideration paid exceeds the fair value of net assets acquired.
Goodwill = Consideration paid - Fair value of net assets controlled by Crash Co
Goodwill = $600,000 - $285,714.29 = $314,285.71
Therefore, the goodwill arising on acquisition for Crash Co is $314,285.71.
3.
To determine the amount at which the non-controlling interest (NCI) should appear in the
consolidated statement of financial position of Titch Co at March 31, 20X9, you need to
account for the increase in the retained earnings of Bev Co and the fair value measurement of
NCI.
- Increase in Retained Earnings of Bev Co:
Retained earnings of Bev Co increased from $500,000 at acquisition (April 1, 20X8) to
$700,000 at March 31, 20X9.
- Calculation of NCI's Share of Retained Earnings:
Titch Co holds 80% of Bev Co, which means the NCI holds 20%.
Increase in retained earnings attributable to NCI = NCI percentage × Increase in Bev Co's
retained earnings = 20% × ($700,000 - $500,000) = $40,000
- Fair Value Measurement of NCI:
The fair value of NCI was determined based on the share price of Bev Co, which was $2 per
share at the date of acquisition.
The number of shares held by NCI can be calculated:
Total shares of Bev Co = 300,000
Shares held by Titch Co (80%) = 80% x 300,000 = 240,000
Shares held by NCI = Total shares - Shares held by Titch Co = 300,000 - 240,000 = 60,000
Fair value of NCI = Number of NCI shares × Market value per share = 60,000 × $2 = $120,000
- Amount to Appear for NCI in Consolidated Statement of Financial Position:
The NCI should appear at its fair value, which is $120,000, on the consolidated statement of
financial position of Titch Co at March 31, 20X9.
