Question 1 - Compound Instruments (10 Marks)

Transformational Airlines issued several convertible bonds with a face value of $1,000 each on January 1, 2021. Each bond is convertible into a specified number of common shares. The bonds pay interest on January 1 and July 1 of each year. On July 2, 2022, some of the bondholders decided to exercise the conversion privilege. Other information regarding the bonds follows:

Par value of convertible bonds issued $ 5,181,000

Price at which convertible bonds issued 102

Bond coupon rate 5%

Similar bonds without the conversion privilege would

have been issued at the following price: 97

Number of bondholders who converted their

bonds to common shares on July 2, 2022: 1295

Unamortized bond discount on July 2, 2022, 51,810

The market price of convertible bonds on July 2, 2022, 103

No other bondholders converted their bonds to common shares prior to July 2, 2022. Transformational Airlines follows IFRS.

Required:

1. the journal entry for the issuance of the bonds on January 1, 2021. (2.5 marks)

2. the journal entry for the conversion of the bonds on July 2, 2022. (5.5 marks)

3. . Assume that Transformational Airlines follows ASPE. Identify the 2 methods that can be used to account for the issuance of the bonds on January 1, 2021, and prepare the journal entry required for each method. (2 marks)

Question 2 - Stock Options (9 Marks)

On January 1, 2021, Red Lake Corporation issued stock options for its common shares to executive officers. The options are exercisable beginning on January 1, 2023, provided the executive officers are still employed by Red Lake at the time the options are exercised. On June 15, 2025, 3 quarters of the stock options were exercised. The remainder of the options expired on December 31, 2026. Other information pertaining to the stock option plan follows:

Total compensation according to a fair value options pricing model $ 863,084

Total number of shares that could be purchased with the stock options 68,442

The option price per share is $ 24

The market price of Red Lake common shares on January 1, 2021 $ 24

The market price of Red Lake common shares on June 15, 2025 $ 34

Assume that Red Lake Corporation follows ASPE, and opts to account for employee stock option forfeitures as they occur.

Required:

1. What type of stock option plan has been granted? Explain your rationale. (3 marks)

2. all journal entries required for the stock option plan for the 2021 year to 2026 year. Assume that Red Lake Corporation has a December 31 year-end. (6 marks)