Signs and Designs Inc. (SDI) is a company operating in the advertising industry. SDL provides companies with designs for new signage and company logos. The company has a profit-sharing plan whereby 25% of the company’s earnings before taxes are distributed to employees who have been with the company for the entire year. It is now late September 20X4, and Liam Zhang, the company’s CFO, is currently preparing a draft of the company’s financial statements for the year ended 31 December 20X4, to determine the amount of bonus to be paid out to the employees. It has been decided at a recent board meeting that the company will enter into four unusual transactions during the period October to December. CEO Derrick Voshart has asked for a memo on the impact of these transactions on the bonus amount available for the employees. Extracts from the recent board meeting outlining the proposed transactions are provided in Exhibit 1. The net earnings for the year ended 31 December 20X4 and 20X5 are forecasted to be $850,000 before taxes and any impact of these proposed transactions.

Required:
You, Kelly, work for the CFO, who has asked you to review the notes and prepare a memo outlining accounting and reporting issues and alternatives for each of the four transactions proposed. Liam would like you to outline the impact on the statement of financial position and net profit or loss before tax for 20X4 and 20X5. (Prepare the journal entry to be recorded at the time of issue for each transaction.) This memo will be the basis for the meeting with Derrick Voshart.

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EXHIBIT 1 EXTRACT FROM BOARD MEETING NOTES SIGNS AND DESIGNS INC. To: Kelly From: Liam Zhang Re: Potential accounting issues The following transactions are proposed for the period October 1, to 31 December 20X4. Convertible Debt On 1 October, the company will issue convertible bonds with a face value of $700,000 and receive proceeds of $700,000. The bonds pay interest at 5%, semi-annually and are due 30 September 20X9. The company currently pays interest on similar debt with no conversion options at 8%. The bonds are repayable at maturity through the issuance of a fixed number of common shares. Preferred Shares On 1 November, the company will issue 10,000 preferred shares to a private investor for $100 each. The shares have a mandatory redemption price of $100 per share, and each year 1,000 shares must be redeemed, commencing in 20X7. The shares have a monthly dividend rate of $0.85, which is cumulative and must be paid on redemption. Options Granted to a Supplier On 1 December, the company will issue 100,000 options to a design consultant that the company has used periodically since 20X1. The options are for services provided by this consultant for the work done on a recent customer's advertising campaign. The options have an exercise price of $25 per share and will expire in 10 years from the date of issue. The options are exercisable at the time of grant. The fair value of the options has been determined to be $1.25 per option. The value of the services provided are estimated to be $150,000. Exchange Rate Hedge On 1 August, SDL placed an order with a German supplier for a new machine that will cost €250,000. The order is expected to be received and paid for in February 20X5. To mitigate part of the exchange risk, the board is considering entering into a forward contract to receive €250,000 in February 20X5, when payment is due. Although the board has no idea of the value of this forward contract at the end of December, assume that the forward contract has a loss value of $35,000 at the end of 20X4 for the discussion of the impact of this transaction. Assume that the company will not apply hedge accounting to this forward contract.