Floral Gardens Incorporated is a nationwide chain of garden centres that operates as a private company. In 2014, it issued three new financial instruments. All three of these instruments are new to you, and you are working on determining how they are to be accounted for under both ASPE and IFRS.
The first financial instrument was a loan. On January 1, 2014, the company borrowed $5 million from a key shareholder at a rate of 3%, at a time when the market rate of interest was 5%. In order to convince the shareholder to loan the money to the company at a rate lower than the market rate of interest, the company agreed that in five years, the shareholder would have the option of either accepting full repayment of the debt, or receiving 500,000 shares in the company.
The second financial instrument was one that you benefited from. The company gave its 10 key management employees a compensatory stock option plan for the first time. The purpose was to provide additional remuneration for key employees at a time when financial constraints were making it difficult for the company to pay additional salaries. The plan allowed the key employees to purchase 5,000 options to purchase shares for $50 each when they were generally considered to be worth $100. The options were granted on January 1, 2014, and could be exercised at the end of the year or anytime in the next two years. Total compensation expense was estimated to be $550,000, and the expected period of benefit was one year beginning on the grant date. No other management employee exercised their options during the year, but you exercised all of your options on December 31, 2014.
The final new transaction that you have to determine how to account for is a forward contract. The company had not used these before, but as the Canada/U.S. exchange rate had been very good toward the end of the year, the company decided to purchase its U.S. currency needs for 2015 in advance. The company agreed to buy $7 million in U.S. currency for $7,070,000 (U.S. $1 = Canadian $1.01) on December 15, 2014, from Foreign Currency Inc. Any changes in value of the Canadian dollar would be transferred to Floral Gardens. On December 31, 2014, the U.S. dollar strengthened in relation to the Canadian dollar, and the new value was U.S. $1 = Canadian $1.02.
Instructions
(a) Prepare all the 2014 journal entries to account for the three financial instruments under both ASPE (assuming that the company chooses to value the equity component of compound instruments at $0) and IFRS.
(b) Determine the carrying amount of each statement of financial position item at year end, December 31, 2014, under both ASPE and IFRS.