Question 5 (20 marks)

1. ABC Ltd. issued an option to Mr. Wong for $2,000 on April 1, 2018. The option entitles Mr. Wong to buy 1,000 of XYZ Ltds ordinary shares at $10 per share at any time in the next 12 months. The market price of XYZs ordinary shares on April 1, 2018 was $12 per share; however, the current market price today is only $9 per share. [5 marks]

Required:

Determine the classification of ABCs financial instruments above. Justify your answer

2. On April 1, 2018, ABC Ltd. issued a financial instrument to Mr. Lee for $1,000,000. The rate of return is linked to the movement in gold price over the next twelve months. If, at any time in the next twelve months, the gold price is higher than HK$10,000 per ounce, Mr. Lee will receive 3% return on investment. Otherwise, the return on investment will be 0%. Mr. Lees investment and return on investment will be delivered to him on March 31, 2019. [5 marks]

Required:

Determine the classification of ABCs financial instruments above. Justify your answer

3. HSCC started the business and issued 10,000 ordinary shares (par value $2) at $20 per shares in 2015. The fiscal year is from January 1 to December 31 each year.

On July 1, 2018, HSCC reacquires 1,000 shares of its ordinary shares at $30 per share (par value @$2).

On October 1, 2018, HSCC issued a two-year callable financial instrument for $100,000. The rates of return for the first year and the second year are 1% and 2% respectively, payable annually at the end of each year. The rate of return for an instrument with similar credit risk but without a redemption option is 1.2%. HSCC has the right to redeem the certificate of deposit at face value at any time before maturity. If the redemption does not occur, the holder will receive the amount of initial investment back at maturity.

On November 1, 2018, the company announced and paid dividend of $1 per share.

Required: Prepare the relevant journal entries for the fiscal year 2008. In your entry, specify whether the instrument issued on Oct 1 is an equity, a liability, or a compound instrument.

[10 marks]