QUESTION I
PRETEND you are living in the new “Tech-Era” of great developments in electronic equipment and
space living. Colonies have sprung up on several planets and people engage in inter planetary travel on a
routine basis using highly innovative high speed vehicles. You are employed by a large accounting
consultancy firm Gallactika Accountants. This morning, the partner with whom you work, Mr. Spaze
Mann, starts you off for the day by assigning you to a client, Jupp Jellies, Inc., located somewhere on
Jupiter. “Why don’t you fly to their office and settle some equity related issues?”, he suggests. And so
you don your thermo-dynamic space suit, grab the breathing apparatus and jump into the office spacecraft
headed for Jupiter. It should take you about 30 minutes to reach your destination provided the traffic
movement on Spaceway 1 is operating smoothly.
The ride to Jupiter was however somewhat bumpy due to some bad astronomic conditions. It had become
even more tense when the screen flashed the news of a software glitch and the possibility of abandoning
the spacecraft. Fortunately Earth Control was able to resolve the issue quickly and thereafter, all you
could see were some pieces of debris from an earlier exploded satellite floating by your window. You
were beginning to wonder what would be the estimated cost of cleaning this debris (considered this as a
great idea for a question on ARO on a future midterm examination you were drafting for your accounting
professor) when you arrived at your destination.
Upon arrival, you met Mr. Shakin Jell, their Financial Accounting Manager for an initial information
gathering session before beginning your work. You should note that Jupp Jellies follows IFRS which has
been adopted by all planetary business communities. Mr. Jell informs you that he would like you to assist
him in some of the more troubling issues remaining to be resolved. Following a quick snack of a
chocolate sundae and strawberry cookies, you went to work on the manager’s problems.
The company had begun their calendar fiscal year of 2018 with 799,000 common shares issued and
outstanding. Mr. Jell provided you with additional information on the company’s equity and debt
transactions for the year.
L On February 1, it had issued 48,000 shares; 840,000 shares on May 1 and 72,000 shares on
September 1, respectively.
L Further on March 1, it had acquired 12,000 shares from the market and had immediately
cancelled them.
L The company also had outstanding at the beginning of the year, 8% convertible preferred shares
capitalized at $1,560,000. The preferred shareholders were eligible to convert their shares into
64,000 common shares.
L Jupp Jellies had not declared any dividends for 2017 or for 2018.
L The company also reported convertible debt. These were bonds payable, issued at par on August
1, 2018, for $15,000,000 and paying interest annually at a 4% rate. Each $1,000 par value bond
could be converted into 8 common shares of the company.
L Companies at Jupiter are taxed at a flat rate of 35%.
L Upon inquiring further, Mr. Jell told you about the the two types of options which had been
issued in prior years and were outstanding as at the beginning of 2018. Put options had been
issued to employees which entitled holders to sell 358,000 of the company’s common shares to
the company for $15.00 each. The company had also issued call options to the management team
which enabled them to buy 230,000 common shares at $19.00 each. Jupp Jellies’ shares traded at