Intermediate accounting: 3 questions. Mostly classification and presentation based on IFRS. As attached :)

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ACCT 3352.2 Sections A&B Major Assignment #3 - Revised Question 1 Sondheim Corporation (SC) - an IFRS reporting corporation - manufactures an industrial product used in the oil and gas industry that requires a raw material with a purchase price that varies considerably depending on world supply and demand. In late November 2016, the cost of the material is $100 per kilogram, its lowest price for the past eight months. In an attempt to benefit from the low prices, SC enters into a swap covering the purchase of 800 kilograms per month for December 2016 to May 2017 inclusive, in effect fixing the cost of these future volumes at $100 per kilogram. The counterparties settle with each other on a net cash basis at the end of each month. The average price per kilogram over the period of the swap (and at each month end) was as follows: December January February $ 97 104 105 March April May $ 117 92 101 Assume that the swap's fair value at any month end is based on the outstanding undelivered (i.e.,unsettled) quantities under the contract and the price differential under the swap at that date. For example, at December 31, 2016, the fair value of the swap is determined as follows: Total volume under contract = 6 months X 800 kg per month Less December volume settled = 1 month X 800 kg Volume remaining under contract, Dec. 31 = 5 months X 800 kg SC pays fixed SC receives variable (Dec. 31 variable) Price differential, Dec. 31, 2016 = 4,800 kg = ( 800) kg = 4,000 kg $100/kg 97/kg $ 3/kg Fair value of swap, December 31, 2016: $3 X 4,000 kg = $12,000 Required: (a) Identify the financial risks that SC was exposed to relative to the purchase of raw material before entering into the swap. Explain each exposure briefly. (b) Identify the financial risks that changed, and any new risks the company is exposed to as a result of entering into the swap, explaining each briefly. (c) Assume that SC does not designate this hedging relationship and therefore, does not use hedge accounting. Prepare all entries made by SC in December 2016 and January 2017 to record the monthly purchases of the material, and any entries required related to the swap. Assume all quantities of material purchased are sold in the same month as purchased. (d) Now assume that SC has documented the relationship as a cash flow hedge and uses hedge accounting. Prepare all entries made by the company in December 2016 and January 2017 to record the purchase of the material, and any entries required related to the swap. (e) Would SC's management be motivated to use the special hedge accounting standards? Explain your answer. (f) Explain briefly how SC would account for the situation in (d) if the company reported under private enterprise accounting standards. Question 2 It is late December, 2016 and Smithie Corp. is considering the issue of one of the two financial instruments described below: a) Series B 5% cumulative preferred shares, redeemable at the company's option at $10.50 per share. b) Series C 6% preferred shares, redeemable in five years' time. The company retains the option of redeeming the preferred shares by issuing Smithie Corp. common shares, with the number of common shares dependent on the market value of the common shares at the redemption date of the preferred. Required: For the two series of preferred shares described above, indicate how Smithie Corp. would have to present each of the two types of financial instruments on its financial statements: as debt or as equity. Explain your rationale for your decisions for each of the Series B and Series C preferred shares. Question 3 Yello Inc. (YI), whose shares are traded on the Toronto Venture Exchange, was just beginning to expand in 2016, but knew the company was under financed. To remedy this, on July 2, 2016, YI issued $500,000 convertible bonds paying 6% annual interest (each July 2 beginning in 2017) for proceeds of $538,607. The underwriters advised the company that without the conversion option (exercisable at the investor's option in exchange for a fixed number of common shares), the bonds likely would have been issued to yield 7%. YI has a December 31 fiscal year end. On July 2, 2017 (after the annual interest payment), holders of $100,000 face value of bonds converted their bonds into common shares, and with rising share prices in the market, the remainder of the bonds were converted one year later on July 2, 2018. Required: a) Prepare the entry to record the issue of the convertible bonds on July 2, 2016. b) Explain why the accounting standard that applies in this case makes sense; that is, why is this accounting required? c) Prepare all other entries YI would need to make in 2016, 2017 and 2018. d) If Yello Inc. had been a private company that applied ASPE, explain how the convertible bonds could have been accounted for. e) As a financial advisor to Yello Inc. (the private company), what advice would you provide relative to the accounting for the bonds? Explain any advice you give