Compound Financial Instruments
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There must be a contract between at least two parties where one party takes on a financial liability or equity and the other a financial asset. Bonds can be issued with warrants or conversion privileges that affect their market value and accounting. Equity transactions like share dividends are accounted for by charges to retained earnings and treasury shares. Non-distributable reserves typically include appropriation, share premium, asset revaluation, and other comprehensive income reserves. Retained earnings are adjusted for corrections, accounting policy changes, net income/loss, dividends declared, and appropriations.
Compound Financial Instruments
- 2. There must be a contract. There are at least two parties to the contract. The contract shall give rise to a financial asset of one party and financial liability or equity instrument of another party.
- 3. Market Value of Bonds with warrants Share Warrants Outstanding Less: Face Value of Bonds = Discount/Premium of Bonds Payable Bonds payable issued w/ share warrantsBonds payable issued w/ share warrants
- 4. Cash xx Disc. on Bonds xx Bonds Payable xx Share warrants outs. xx Cash xx Premiums on B/P xx Disc. on Bonds xx Share warrants outs. xx Cash xx Share warrants outs. xx Share Capital (# of shares x par val.) xx Share Premium (balancing figure) xx
- 5. Market Value of Bonds w/o Conversion Privilege Share Premium – Conversion Privilege Less: Face Value of Bonds = Discount/Premium of Bonds Payable Convertible BondsConvertible Bonds
- 6. Cash xx Disc. on Bonds xx Bonds Payable xx Sh.Prem-conv.priv. xx Cash xx Premiums on B/P xx Disc. on Bonds xx Sh.Prem-conv.priv. xx Bonds Payable (@ Face Value) xx Sh.Prem-conv.priv. xx Premium on B/P (unamortized) xx Share Capital (# of shares x par val.) xx Share Premium (balancing figure) xx
- 9. •Retained Earnings xx Share Dividends Payable xx * Charged at cost of treasury shares •Share Dividends Payable xx Treasury Share xx
- 10. •Retained Earnings-free xx R/E appropriate for T/S xx •R/E appropriate for T/S xx Retained Earnings-free xx
- 11. Non-distributable equity reserves usually include theNon-distributable equity reserves usually include the following:following: Appropriaton reserve Share premium reserve Asset revaluation reserve Other comprehensive income reserve
- 12. Retained Earnings, Beg. xx Less: Correction of owners/prior period errors (xx) Add: Change in accounting policy xx_ = Corrected beginning balance xx +/- Net Income/(Net Loss) xx - Dividends Declared during the year (xx) - Appropriated for contingencies (xx)_ = Retained Earnings – free xx