handout for class 4

handout for class 4 - a Classification issue b Measurement...

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Handout #4 for Bus321-Intermediate Accounting II Professor: Yasheng Chen Notes for BUS321 Class 4: Complex Financial Instruments Learning objectives: 1. Identify various types of compound / hybrid financial instruments. 2. Understand the criteria for classifying hybrid instruments. 3. Understand the nature of derivatives 4. Remember the accounting procedures for reporting convertible debts, including: a. Issuance b. Conversion (converted by holder or induced by issuer) c. Retirement (conversion rights not exercised) 5. Remember the accounting procedures for options, including: a. Purchased option for speculative purpose. b. Compensatory stock option plans (CSOPs) c. Employee stock option plans (ESOPs) Key learning points: 1 Criteria for classifying debt and equity instruments 2. Classification of major types of hybrid instruments: Equity Debt perpetual debt callable / redeemable preferred shares Retractable preferred shares convertible debt 3. Convertible Debts: I. Reporting at the time of issuance
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Unformatted text preview: a) Classification issue b) Measurement issue 1. Incremental method 2. Proportional method II. Reporting at the time of conversion a) Converted by the holder 1. book value approach 2. fair value approach b) Induced early conversion 1. allocate the premium to debt retirement costs and share redemption costs. III. Reporting at the time of retirement 1 Handout #4 for Bus321-Intermediate Accounting II Professor: Yasheng Chen 4. Basic Characteristics of derivatives: d. e. f. 5. Derivative reporting principles 6. Types of options 7. Accounting for options a. Purchased call option Determining gain or loss of a purchased call option Date Intrinsic Value Gain/Loss Time Value Gain/Loss Option Price Jan. 2 $0-$400-$400 Mar. 31 $20,000 $20,000 $100-$300 $20,100 April. 1 $20,000 $0 $0-$100 $20,000 Total Gain= $19,600 =$20,000-$300-$100 b. Compensatory stock option plans c. Employee stock option plans 2...
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handout for class 4 - a Classification issue b Measurement...

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