Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
CHAPTER 9
INVESTMENTS
Learning Objectives
1. Understand the nature of and basic accounting for
investments, including which types of companies have
significant investments.
2. Explain and apply the cost/amortized cost model of
accounting for investments.
3. Explain and apply the fair value through net income model of
accounting for investments.
4. Explain and apply the fair value through other comprehensive
income model of accounting for investments.
5. Explain and apply the incurred loss, expected loss, and fair
value loss impairment models.
6. Explain the concept of significant influence and apply the
equity method.
7. Explain the concept of control and when consolidation is
appropriate.
8. Explain how investments are presented and disclosed in the
financial statements, noting how this facilitates analysis.
9. Identify differences in accounting between IFRS and ASPE,
and what changes are expected in the near future.
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
Item
LO
BT Item
LO
BT Item LO
BT Item LO
BT Item LO BT
Brief Exercises
1.
2.
3.
4.
5
6.
1
1
2
2
2
2
C 7.
C 8.
AP 9.
AP 10.
AP .11.
AP 12.
2
2
3
3
3
4
AP
AP
AP
AP
AP
AP
13.
4
14.
4
15.
4
16.
4
17. 2,3,4,9
18.
5
AP
AP
AP
AP
AP
C
19.
20.
21.
22.
23.
24.
5
5
5
5
6
6
C 25.
AP 26.
AP 27.
AP
AP
AP
AP
AP
AP
AP
AP
AP
19.
5
AP
20. 2,3,5 AP
21. 2,3,4,5 AP
22. 2,3,6 AP
23.
6
AP
24. 4,6,8 AP
AP
AP
AP
AP
13.
14.
15.
16.
6 AP
6,7 AP
8
C
Exercises
1. 1,2,3,4 AP 7.
3
AP
2.
2
AP 8.
3
AP
3.
2
AP 9.
3
AP
4.
2
AP 10. 3,4 AP
5
3
AP .11. 3,4,8 AP
6.
2,3 AP 12.
2
AP
13.
4
14.
4
15.
4,8
16.
4
17.
4
18. 2,3,4,8,9
25.
26.
27.
28.
3,5,8
4,6,8
5,6,8
6,8,9
AP
AP
AP
AP
Problems
1.
2.
3.
4.
3
3
2,3
4,8
AP
AP
AP
AP
5. 2,4,8,9 AP 9.
2,4
6.
2,3 AP 10.
4,8
7.
4
AP 11. 2,3,4,9
8.
4
AP 12. 2,3,6,9
4,8
3,4,6
2,6,8
3,4,8
AP 17. 2,3,4,8 AP
AP
AP
AP
Cases and Integrated Case
1.
3,4,6 AN
2.
3,4,6 AN
3.
6,7,8,9 AN IC 1 2,6,7,8,9
Research and Analysis
1. 6,7,8,9 AP 3.
7
AP 4.
5,6,7,8 AP 5.
5
AN 6.
8
2. 2,6,7,8,9 AP
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C
Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
Legend: The following abbreviations will appear throughout the solutions
manual file.
LO
BT
Difficulty:
Time:
AACSB
CPA CM
Learning objective
Bloom's
Taxonomy
K
Knowledge
C
Comprehension
AP Application
AN Analysis
S
Synthesis
E
Evaluation
Level of difficulty
S
Simple
M
Moderate
C
Complex
Estimated time to complete in minutes
Association to Advance Collegiate Schools of Business
Communication
Communication
Ethics
Ethics
Analytic
Analytic
Tech.
Technology
Diversity
Diversity
Reflec. Thinking
Reflective Thinking
CPA Canada Competency Map
Ethics
Professional and Ethical Behaviour
PS and DM
Problem-Solving and Decision-Making
Comm.
Communication
Self-Mgt.
Self-Management
Team & Lead
Teamwork and Leadership
Reporting
Financial Reporting
Stat. & Gov.
Strategy and Governance
Mgt. Accounting
Management Accounting
Audit
Audit and Assurance
Finance
Finance
Tax
Taxation
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
ASSIGNMENT CLASSIFICATION TABLE
Brief
Exercises
Topics
1.
Understanding investments
1, 2
2.
Debt/equity securities:
a. cost/amortized cost model
- equity securities
17
-
Exercises
Problems
1, 26
1, 8, 9, 10, 11,
13, 16, 17
3
18, 20
5, 11
4, 5, 6, 7, 8
2, 3, 4, 6
3, 6, 10, 11, 17
b. fair value through net income
(FV-NI) model
- equity securities
8, 9
7, 9, 10, 11, 18, 1, 2, 11, 12, 14,
20, 22
15, 17
-
10, 11
5, 6, 8, 15, 16,
20
2, 3, 6, 10, 11,
17
c. fair value through other
comprehensive income (FVOCI) model
12, 13, 14, 15,
16
10, 11, 12, 13,
14, 15, 16, 17,
18, 21, 23
4, 5, 7, 8, 9, 10,
11, 12, 13, 14,
15, 16, 17
3.
Impairments
18, 19, 20, 21,
22
19, 20, 21, 23,
25, 27
4.
Investments in associates
(a) equity method
23, 24, 26
22, 23, 24, 25,
26, 27, 28
12, 14, 15, 17
25
22
4, 12
14, 16, 26, 28
1, 4, 5, 9, 10,
11, 12, 13, 14,
15, 16, 17
debt securities
debt securities
(b) other
5.
Investments in subsidiaries
26
6.
Analysis, disclosures, reporting,
and statement presentation
17, 27
7.
IFRS and ASPE comparison
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE
Item
E9.1
E9.2
E9.3
E9.4
E9.5
E9.6
E9.7
E9.8
E9.9
E9.10
E9.11
E9.12
E9.13
E9.14
E9.15
E9.16
E9.17
E9.18
E9.19
E9.20
E9.21
E9.22
E9.23
E9.24
E9.25
Description
Investment classifications
Entries for cost/amortized cost investments
Entries for cost/amortized cost investments
Cost/amortized cost investments
FV-NI investments in bonds
Amortized cost and FV-NI investments in
bonds purchased between interest payment
dates
FV-NI equity investments
Investment in debt instruments held for trading
purposes, accounted for using FV-NI
FV-NI equity investment entries
Entries for FV-NI and FV-OCI equity
investments
Equity investment entries – FV-NI and FV-OCI
Debt investment entries – amortized cost
Debt investment entries – FV-OCI
Debt investment entries FV-OCI
Debt investment entries – FV-OCI financial
statements
FV-OCI investment entries and financial
statement presentation
FV-OCI investments – Entries
Entry and financial statement comparison of
cost, FV-NI, and FV-OCI
Impairment of debt investment and
subsequent recovery in value
Impairment of FV-NI investment and
subsequent recovery in value
Investment in shares, impairment, and
subsequent recovery
Accounting methods with and without
significant influence under ASPE
Equity method
Fair value-OCI and equity method compared
Long-term equity investments, equity method,
and impairment
Level of
Time
Difficulty (minutes)
Complex
Simple
Moderate
Moderate
Simple
Moderate
30-40
10-15
25-30
20-25
20-25
35-40
Simple
Moderate
10-15
25-30
Simple
Simple
15-20
10-15
Moderate
Simple
Moderate
Moderate
Moderate
45-50
15-20
15-20
25-30
25-30
Complex
30-35
Simple
Moderate
15-20
30-35
Moderate
20-25
Moderate
30-35
Complex
35-40
Simple
20-25
Simple
Simple
Moderate
10-15
15-20
35-45
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED)
Item
E9.26
E9.27
E9.28
P9.1
P9.2
P9.3
P9.4
P9.5
P9.6
P9.7
P9.8
P9.9
P9.10
P9.11
P9.12
P9.13
P9.14
P9.15
P9.16
P9.17
Level of
Difficulty
Time
(minutes)
Proper income reporting
Equity method with cost in excess of carrying
amount, impairment
ASPE, significant influence, equity method
with cost in excess of carrying amount,
alternative methods
Moderate
Moderate
25-30
25-30
Moderate
25-30
FV-NI entries and reporting for equity
investment
FV-NI entries for equity and debt investments
FV-NI and amortized cost bond investment
entries
Purchase and sale of FV-OCI equity
investments, and presentation
FV-OCI entries and reporting, comparison to
cost method
Amortized cost and FV-NI entries for bond
investment
FV-OCI debt securities – bond amortization
and fair value adjustments
FV-OCI debt securities – fair value
adjustments
Entries for amortized cost and FV-OCI
Entries for FV-OCI debt investment; disposal
and all financial statements for three years.
Entries for amortized cost, FV-NI, and FV-OCI
investments; calculate interest between
interest dates
Fair value adjustments and presentation of
FV-NI, FV-OCI, and equity method
investments; choice under ASPE if significant
influence
Financial statement presentation of FV-OCI
investments
Entries for FV-NI and FV-OCI investments, as
well as equity method investments
FV-OCI and equity method entries under
IFRS, choices and entries under ASPE
Deduce financial statements from limited
information using FV-OCI; compare to FV-NI
FV-NI, amortized cost, FV-OCI and equity
method entries and preparation of partial
financial statements
Moderate
20-25
Moderate
Moderate
40-45
40-45
Moderate
35-40
Complex
60-70
Moderate
30-35
Simple
30-40
Simple
15-20
Simple
Complex
25-35
45-50
Moderate
35-40
Moderate
35-40
Moderate
25-35
Complex
45-50
Moderate
35-45
Complex
50-60
Complex
75-80
Description
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9.1
(a) The investment in Company A is an investment in a debt
security, and the investment in Company B is in an equity
security.
(b) Bali Corp. is a creditor of Company A because A has a
contractual obligation or liability to repay the $10,000
borrowed, as well as interest on the borrowed funds. Therefore,
Bali has invested in another company’s debt.
Company B, on the other hand, neither has an obligation (and
therefore does not have a liability) to repay the funds Bali
invested, nor to provide a return to Bali on those funds. Instead,
Bali has taken on the risk of a residual shareholder by profiting
if Company B does well and losing if B does not do well. This
is an equity interest in Company B.
LO 1 BT: C Difficulty: C Time: 15 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance
BRIEF EXERCISE 9.2
(a) It would not be unusual for all of these entities to have some
level of investments on their statements of financial position,
but those most likely to report a significant proportion of their
assets as investments are the university, the insurance
company, and the pension plan. In each case, knowing the
business model of the type of organization is useful in making
this determination.
An old established university is very likely to have built up
considerable endowment funds over a period of many years.
These donations and bequests are invested, and the university
uses the investment income to pay for scholarships, for
example.
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.2 (CONTINUED)
(a) (continued)
The insurance company collects insurance premiums in
advance from its policyholders, and it invests the monies
received to increase the funds it has available to pay out when
claims are paid as a result of insured losses.
The pension plan usually receives cash from employers and
employees as the employees provide services to an
organization—many years ahead of when the employees retire
and pensions have to be paid out. To increase the funds
available for payout in the future, pension plans invest the
contributions as they are received.
(b) All three of these organizations typically invest in a mix of debt
and equity securities with the proportion of each depending on
the level of risk each is required or willing to assume. Some
pension funds, for example, are so large that they have been
expanding into mortgages and other asset-backed securities,
real estate investments, shopping centres, toll roads, etc.
looking to diversify their holdings and to increase the rate of
return they earn.
LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.3
(a)
Other Investments1 .........................................
Cash........................................................
1
[$13,200 + ($13,200 X 0.01)]
13,332
13,332
(b)
Cash ................................................................
Dividend Revenue2 ................................
2
(400 shares X $1.50)
600
600
(c)
Cash 3 ...............................................................
Gain on Disposal of Investments
- Cost/Amortized Cost……………..
Other Investments ................................
3
$15,100 – ($15,100 X 0.01) = $14,949
14,949
1,617
13,332
LO 2 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.4
(a)
Bond Discount Amortization Table
8% Bonds Sold to Yield a 10% Return
Date
Cash
Received
(8%)
Interest
Income
(10%)
Bond
Discount
Amortization
Amortized
Cost of
Bond
Day 1
1
$ 95.03
End Year 1
$8.00
$9.501
$1.50
96.53
End Year 2
8.00
9.65
1.65
98.18
End Year 3
8.00
9.82
1.82
100.00
$24.00
$28.97
$4.97
$95.03 X .10
(b) Bond Investment at Amortized Cost………...
Cash………………………………………….
95.03
End of Year 1
Cash………………………………………………..
Bond Investment at Amortized Cost…………
Interest Income…………………………….
8.00
1.50
End of Year 2
Cash………………………………………………..
Bond Investment at Amortized Cost…………
Interest Income…………………………….
8.00
1.65
End of Year 3
Cash………………………………………………..
Bond Investment at Amortized Cost…………
Interest Income…………………………….
To record interest collected
95.03
9.50
9.65
8.00
1.82
9.82
Cash………………………………………………. 100.00
Bond Investment at Amortized Cost……
100.00
To record maturity of bond investment
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.4 (CONTINUED)
(c) Discount on bond when purchased:
$100.00 – $95.03 = $4.97
Straight line discount amortization each year:
$4.97 ÷ 3 years = $1.66 each year
(d)
Bond Investment at Amortized Cost………
Cash………………………………………….
End of Year 1
Cash………………………………………………...
Bond Investment at Amortized Cost…………
Interest Income…………………………….
End of Year 2
Cash………………………………………………...
Bond Investment at Amortized Cost…………
Interest Income…………………………….
End of Year 3
Cash………………………………………………...
Bond Investment at Amortized Cost…………
Interest Income…………………………….
To record interest collected
95.03
95.03
8.00
1.66
9.66
8.00
1.66
9.66
8.00
1.65
9.65
Cash………………………………………………. 100.00
Bond Investment at Amortized Cost……
100.00
To record maturity of bond investment
(e) Total interest income:
Effective interest method $9.50 + $9.65 + $9.82 = $28.97
Straight-line method $9.66 + $9.66 + $9.65 = $28.97
That is, they are the same in total.
LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.5
(a)
Bond Premium Amortization Table
6% Bonds Sold to Yield a 4% Return
Date
Cash
Received
(6%)
Interest
Income
(4%)
Bond
Amortized
Premium
Cost of
Amortization
Bond
Day 1
1
$ 105.55
End Year 1
$6.00
$4.221
$1.78
103.77
End Year 2
6.00
4.15
1.85
101.92
End Year 3
6.00
4.08
1.92
100.00
$18.00
$12.45
$5.55
$105.55 X .04
(b) Bond Investment at Amortized Cost………... 105.55
Cash………………………………………….
105.55
End of Year 1
Cash………………………………………………..
6.00
Bond Investment at Amortized Cost…………
1.78
Interest Income…………………………….
4.22
End of Year 2
Cash………………………………………………..
6.00
Bond Investment at Amortized Cost…………
1.85
Interest Income…………………………….
4.15
End of Year 3
Cash………………………………………………..
6.00
Bond Investment at Amortized Cost…………
1.92
Interest Income…………………………….
4.08
To record interest collected
Cash………………………………………………. 100.00
Bond Investment at Amortized Cost……
100.00
To record maturity of bond investment
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.5 (CONTINUED)
(c) Premium on bond when purchased:
$105.55 – $100.00 = $5.55
Straight line premium amortization each year:
$5.55 ÷ 3 years = $1.85 each year
(d) Bond Investment at Amortized Cost………... 105.55
Cash………………………………………….
105.55
End of Year 1
Cash………………………………………………...
Bond Investment at Amortized Cost……
Interest Income…………………………….
End of Year 2
Cash………………………………………………...
Bond Investment at Amortized Cost……
Interest Income…………………………….
6.00
1.85
4.15
6.00
1.85
4.15
End of Year 3
Cash………………………………………………...
6.00
Bond Investment at Amortized Cost……
1.85
Interest Income…………………………….
4.15
To record interest collected
Cash………………………………………………. 100.00
Bond Investment at Amortized Cost……
100.00
To record maturity of bond investment
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.5 (CONTINUED)
(e) Total interest income:
Effective interest method $4.22 + $4.15 + $4.08 = $12.45
Straight-line method $4.15 + $4.15 + $4.15 = $12.45
That is, they are the same in total.
LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.6
(a) Bond Investment at Amortized Cost ............. 55,133
Cash .........................................................
55,133
To record purchase of bond investment
Cash ($60,000 X 6% X 6/12) ............................
Bond Investment at Amortized Cost .............
Interest Income1 ......................................
1
($55,133 X 8% X 6/12 = $2,205)
To record collection of semi-annual interest
1,800
405
Cash ($60,000 X 6% X 6/12) ............................
Bond Investment at Amortized Cost .............
Interest Income2 ......................................
2
([$55,133 + $405] X 8% X 6/12 = $2,222)
To record collection of semi-annual interest
1,800
422
2,205
2,222
(b) Discount on bond when purchased:
$60,000 - $55,133 = $4,867
Interest periods to maturity: 5 years X 2 = 10
Amortization each interest period: $4,867 ÷ 10 = $487
Bond Investment at Amortized Cost ............. 55,133
Cash .........................................................
55,133
To record purchase of bond investment
Cash ($60,000 X 6% X 6/12) ............................
Bond Investment at Amortized Cost .............
Interest Income .......................................
To record collection of semi-annual interest
1,800
487
2,287
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.6 (CONTINUED)
(b) (Continued)
Cash ($60,000 X 6% X 6/12) ............................
Bond Investment at Amortized Cost .............
Interest Income .......................................
To record collection of semi-annual interest
1,800
487
2,287
LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.7
(a) September 1
Bond Investment at Amortized Cost ...............
Cash..........................................................
(b) December 31
Interest Receivable ($80,000 X 9% X 4/12) ......
Bond Investment at Amortized Cost………..
Interest Income1……………………...
1
($74,086 X 11% X 4/12 = $2,716)
(c) March 1
Cash ($80,000 X 9% X 6/12) ..............................
Bond Investment at Amortized Cost………..
Interest Receivable……………………...
Interest Income2 .......................................
2
($74,086 X 11% X 2/12 = $1,358)
(d) March 1
Cash………………………………………………
Gain on Disposal of Investments –
Cost/Amortized Cost………..………..
Bond Investment at Amortized Cost3...
3
($74,086 + $316 + $158 = $74,560)
74,086
74,086
2,400
316
2,716
3,600
158
2,400
1,358
75,100
540
74,560
LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting
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Chapter 9
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.8
December 15, 2020
Note Investment at Amortized Cost ................
Cash........................................................
99,509
99,509
December 31, 2020
Note Investment at Amortized Cost ..................
131
1
Interest Income .......................................
($99,509 x .03 x 16/365) or ($100,000 - $99,509) / 60 x 16
131
February 13, 2021
Cash .................................................................... 100,000
Interest
Income2 ...............................................................
Note Investment at Amortized Cost .........
($99,509 x .03 x 44/365) or ($100,000 - $99,509 – $131)
360
99,640
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.9
(a) September 8
FV-NI Investments ..........................................
Cash........................................................
(b)
Cash ................................................................
Dividend Revenue1 ................................
1
(400 shares X $1.75)
(c)
FV-NI Investments ..........................................
Investment Income or Loss2 .................
2
(400 X $35.50 - $13,200)
13,200
13,200
700
700
1,000
(d)
Cash ($34.95 X 400 shares) ..........................................
13,980
Loss on Disposal of Investments – FV-NI….
220
FV-NI Investments ……………………….
1,000
700
700
14,200
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Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.10
(a)
FV-NI Investments……………………………….
Cash ($1,000 X 1.044)…………………..….
(b)
Interest Receivable1 …………………………...
FV-NI Investments………………………..
Interest Income (6% X $1,044 X 3/12) …
1
17.50
1.84
15.66
12.84
12.84
$1,055 – ($1,044 – $1.84)
(d)
Interest Receivable (7% X $1,000 X 3/12) ……
FV-NI Investments …………………………
Interest Income (6% X $1,044 X 3/12) …..
(e)
FV-NI Investments ………………………………
Investment Income or Loss3 ……………
3
1,044.00
(7% X $1,000 X 3/12)
(c)
FV-NI Investments …………………………
Investment Income or Loss3 …………
2
1,044.00
17.50
1.84
15.66
12.84
12.84
$1,055 – ($1,044 – $1.84)
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Chapter 9
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Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.11
(a)
FV-NI Investments ………………………………
Interest Receivable……………………………...
Cash………………………………………….
970
10
(b)
Interest Receivable……………………………...
Interest Income1……………...……….......
45
1
45
$1,000 X 6% X 9/12
Investment Income or Loss2……………………
FV-NI Investments…………………………
2
980
7
7
($970 - $963)
(c)
Cash ($1,000 X 6% X 12/12)……………………
Interest Receivable ($10 + $45) …………
Interest Income…………………………….
(d)
Cash ……………………………………………….
Investment Income or Loss……………………
FV-NI Investments ………………………...
60
55
5
961
2
963
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Chapter 9
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Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.12
(a) FV-OCI Investments......................................... 23,400
Cash ..........................................................
23,400
(b) Cash ($3.25 per share X 300 shares) ..............
Dividend Revenue ....................................
975
(c) Unrealized Gain or Loss – OCI1 ......................
FV-OCI Investments ..............................
1
($74.50 X 300 shares) - $23,400
= $22,350 – $23,400 = $1,050
1,050
975
1,050
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BRIEF EXERCISE 9.13
FV-OCI Investments …………………………
Unrealized Gain or Loss – OCI ………
To adjust to fair value at date of disposal
($73,000 - $72,500)
500
Cash ……………………………………………
FV-OCI Investments ……………………
To record disposal
73,000
Accumulated Other Comprehensive
Income 1…………….…………….…………
Retained Earnings ……………………
1
($73,000 - $70,000) or $2,500 + $500
To reclassify holding gain
500
73,000
3,000
3,000
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BRIEF EXERCISE 9.14
Unrealized Gain or Loss – OCI …………
FV-OCI Investments…….……………
To adjust to fair value at date of disposal
($72,000 - $72,500)
Cash ……………………………………………
FV-OCI Investments ……………………
To record disposal
500
500
72,000
Loss on Disposal of Investments FV-OCI1…
2,000
Unrealized Gain or Loss – OCI………
1
($1,500 unrealized loss + $500 unrealized loss)
To reclassify holding loss
72,000
2,000
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Chapter 9
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Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.15
(a)
FV-OCI Investments1 ....................................
Cash......................................................
1
(10,000 X $26.18) + $1,800
(b)
Cash ($1.02 X 10,000)………………………..
Dividend Revenue ………………………
(c)
FV-OCI Investments ………………………….
Unrealized Gain or Loss – OCI2 ……….
2
($271,500 - $263,600)
(d)
Gross selling price: 10,000 X $28.10 =
Less brokerage costs
Proceeds from sale
Carrying amount of shares
Additional holding gain on shares
263,600
263,600
10,200
10,200
7,900
7,900
$281,000
(1,925)
279,075
(271,500)
$ 7,575
FV-OCI Investments …………………………
Unrealized Gain or Loss – OCI ………
To adjust to fair value at date of disposal
7,575
Cash ……………………………………………
FV-OCI Investments ……………………
To record disposal
279,075
7,575
279,075
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Chapter 9
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BRIEF EXERCISE 9.15 (CONTINUED)
(d) (Continued)
Accumulated Other Comprehensive
Income 3…………….…………….…………
Retained Earnings ……………………
3
($7,900 + $7,575)
To reclassify holding gain
15,475
15,475
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BRIEF EXERCISE 9.16
(a)
Other comprehensive income (loss) for 2020: $(20,830)
(b) Comprehensive income for 2020: $651,853 or ($672,683 –
$20,830)
(c)
Accumulated other comprehensive income, December 31,
2020: $16,443 or ($37,273 – $20,830)
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BRIEF EXERCISE 9.17
(a) ASPE:
(b) IFRS:
1, 2
1, 2, 3, 4
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BRIEF EXERCISE 9.18
(a)
ASPE:
(b) IFRS:
Incurred loss model – for all investments
measured using the cost/amortized cost method.
Fair value model – for equity investments with
active market prices and derivatives.
Expected loss model – for all investments
measured using the cost/amortized cost method
and for debt securities accounted for using FVOCI.
Fair value model – likely for all investments
measured at fair value. Note that for equity
investments measured using FV-OCI – impairment
losses would be booked through OCI.
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BRIEF EXERCISE 9.19
Under the expected loss model, if an entity determines that there
has been a significant increase in credit risk, the entity must
consider the risk of default over the life of the investment. This
requires the entity to estimate lifetime credit losses considering the
probability of default over the life of the investment along with the
expected cash shortfall.
Conversely, if the entity determines that there has not been a
significant increase in credit risk, the entity must consider risk of
default in the next 12-month period. The entity would estimate the
lifetime credit losses considering the probability of default over the
next 12-month period and the expected cash shortfall.
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BRIEF EXERCISE 9.20
If the company determines there is no significant increase in risk,
the risk of default is considered for the next 12 months.
Therefore, the loss allowance is calculated based on the 12-month
expected credit losses as follows:
0.01 X .20 X $55,000 = $110
The journal entry is as follows:
Loss on Impairment……………………………
Bond Investment at Amortized Cost…
110
110
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BRIEF EXERCISE 9.21
If the company determines there has been a significant increase in
credit risk, the risk of default must be considered over the life of the
investment.
Therefore, the loss allowance is calculated based on the probability
of default over the life of the investment and the expected cash
shortfall as follows:
0.05 X .50 X $55,000 = $1,375
The journal entry is as follows:
Loss on Impairment……………………………
Bond Investment at Amortized Cost…
1,375
1,375
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Chapter 9
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Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.22
2020
2021
Loss on Impairment .....................................
Bond Investment at Amortized Cost ..
$100 minus higher of the discounted cash
flow using current market rate and its
NRV: $100 - $91 = $9
9
Bond Investment at Amortized Cost…..
Recovery of Loss from Impairment
9
9
9
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BRIEF EXERCISE 9.23
Investment in Associate. .......................................
Cash ................................................................
To record investment purchase
100
Investment in Associate. .......................................
Investment Income or Loss1 ..........................
1
(40% X $15)
To record investment income
6
Cash2 .......................................................................
Investment in Associate. ................................
2
(40% X $5)
To record collection of dividend
2
100
6
2
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.24
January 2
Investment in Associate ........................................
Cash. ...............................................................
To record investment purchase
1,000
1,000
Cost of 25% investment in Krov Corp. shares ......
25% of Krov Corp.’s carrying amount (25% X $3,600)
Payment in excess of book value of Krov Corp. ...
Fair value allocation to unrecorded intangibles ...
Goodwill (unexplained excess) ..............................
$1,000
900
100
(100)
$
0
Annual amortization of excess payment for unrecorded
intangibles:
$100 ÷ 20-year remaining life = $5 per year
Dividend received from associate:
Cash ($12 X 25%) ....................................................
Investment in Associate ..................................
To record collection of dividend
Julip’s share of associate’s net income:
Investment in Associate……………………………..
Investment Income or Loss ($60 X 25%) ……
To record investment income
3
3
15
Amortization of Krov’s unrecognized intangible assets:
Investment Income or Loss …………………………
5
Investment in Associate ………………………
To record amortization of fair value difference
15
5
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Chapter 9
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BRIEF EXERCISE 9.25
(a) FV-NI Investments .........................................
Cash .........................................................
To record investment purchase
1,000
Cash ($12 X 25%) ............................................
Dividend Revenue ...................................
To record collection of dividend
3
FV-NI Investments ..........................................
Unrealized Gain or Loss1 ........................
1
($1,020 - $1,000)
To record fair value adjustment
20
1,000
3
20
(b) Other Investments .........................................
Cash ………………………………………...
To record investment purchase
1,000
Cash ($12 X 25%) ............................................
Dividend Revenue ...................................
To record collection of dividend
3
1,000
3
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Chapter 9
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Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.26
(a)
If Beckett acquires 40% of Kyla Corp.’s shares for $1.6 million cash,
and can exercise significant influence over Kyla’s policies,
Beckett’s statement of financial position will be affected as follows:
A
+1.6M Invest. in
Associate
-1.6M Cash
-0No net
effect
L
-0-
No effect
SE
-0-
No effect
(b)
If Beckett acquires 60% of Kyla Corp.’s shares for $2.4 million cash,
and now controls Kyla’s operations (Kyla is a subsidiary company),
Beckett’s consolidated statement of financial position will be
affected as follows:
A
+10.0M Due to
Kyla’s
assets
L
+6.0M Due to
Kyla’s
liabilities
- 2.4M Cash
+ 7.6M
_____
+6.0M
+1.6M
SE
40% noncontrolling
interest in
Kyla’s net
assets
_____
+1.6M1
1
Non-controlling interest is computed as follows: 40% of $4.0M
(net assets) = $1.6M
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Chapter 9
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Kieso, Weygandt, Warfield, Wiecek, McConomy
Intermediate Accounting, Twelfth Canadian Edition
BRIEF EXERCISE 9.27
The requirement to disclose both the carrying amount of each type
of investment on the statement of financial position and the income
statement amounts classified in a similar way allows the reader to
assess how significant the financial asset investments are to an
entity’s financial position (total assets, net assets) and to its
performance (net income, comprehensive income). In some
enterprises (pension plans, insurance companies, etc.) these
investments are very significant, whereas in others (most
manufacturers, retail outlets, etc.) they do not contribute very much
to the economic resource base of the entity or to its profitability.
Once the significance is known, a better risk assessment of the
entity can be performed because financial asset investments tend
to expose entities to specific types of financial risks.
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Intermediate Accounting, Twelfth Canadian Edition
SOLUTIONS TO EXERCISES
EXERCISE 9.1
Parts a. and b.
(i) ASPE
1 Amortized cost, unless the company
chooses the fair value option (FV-NI).
For cost / amortized cost, no income
statement impact other than for sale of
the bond and for interest income.
Classify as a FV-NI security since the
company’s intent is to manage the
changing fair values and sell the bond
as soon as the value increases. Gains
and losses on remeasurement will
affect net income and therefore may
introduce volatility.
2 If no active market prices are available
for Farm Corp., then at cost; if active
market prices are available, then at FVNI. This will be reassessed if and when
a more significant holding is achieved.
If accounted for at cost – no impact on
net income except for dividends. If
accounted for using FV-NI – this will
introduce volatility since gains and
losses are booked through net income.
3 Amortized cost, unless the company
chooses the fair value option (FV-NI).
With such a short maturity, its cost
plus accrued interest will be
representative of FV in any case under
the amortized cost method.
For cost / amortized cost, no income
statement impact other than for sale of
the bond ahead of maturity date and
for interest income.
(ii) IFRS
FV-NI or FV-OCI.
It looks as though the company’s
business model is to either hold
(and collect principal and interest)
or sell these types of securities.
Therefore, FV-OCI might make the
most sense.
The FV-OCI method will not
increase volatility since
remeasurement gains and losses
are booked through OCI.
FV-NI or FV-OCI (if the company
elects to use this method).
When the company acquires 20%
or more, the investment will be
reclassified to an equity
investment if significant influence
over Farm Corp. exists.
If FV-NI is used, it will introduce
volatility into net income.
Amortized cost, FV-NI, or FV-OCI
depending on the company’s
business model (which is not
noted in the question).
The only method that will
introduce volatility is the FV-NI
method. With such a short
maturity, its cost plus accrued
interest will be representative of
FV in any case under the amortized
cost method.
Gains and losses on remeasurement
will affect net income and therefore
may introduce volatility if FV-NI used.
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EXERCISE 9.1 (CONTINUED)
a. & b. (continued)
(i) ASPE
4 Amortized cost should be used
unless the FV option is elected (FVNI).
For cost / amortized cost, no income
statement impact other than for sale
of the bond and for interest income.
Gains and losses on remeasurement
will affect net income and therefore
may introduce volatility if FV-NI used.
5 Amortized cost should be used
unless the FV option is elected (FVNI).
Amortized cost appears to be the
best choice here based on the
purpose of the investment.
(ii) IFRS
Amortized cost or FV-OCI. The
business model appears to be to
hold the bond and collect
principal and interest (amortized
cost method). Having said that –
it looks as though the company
now intends to perhaps sell the
securities. Therefore, the FV-OCI
might make the most sense.
Neither method will introduce
volatility.
Amortized cost method as the
company’s intent is to collect
principal and interest and hold
the bonds until maturity.
This will not introduce any
volatility.
For cost / amortized cost, no income
statement impact other than for sale
of the bond (although not intended)
and for interest income.
6 Cost should be used unless the FV
option is elected (FV-NI). If the shares
are traded in an active market – FV-NI
is required.
Use of FV-NI will introduce volatility.
Given the intent (to hold for the longterm) it makes sense to use the cost
method as long as the shares do not
trade in an active market.
FV-NI unless the company
chooses to use FV-OCI (which
they are allowed to do as an
accounting policy choice). The
FV-OCI method might make sense
given the fact that the company
intends to hold for a longer
period (and therefore short-term
gains and losses are not as
relevant)
The FV-OCI method will not
introduce any volatility.
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EXERCISE 9.1 (CONTINUED)
a. & b. (continued)
(i) ASPE
7 Cost should be used unless the FV
option is elected (FV-NI). If the shares
are traded in an active market – FV-NI
is required.
Use of FV-NI will introduce volatility.
Given the nature of the investment
(long-term) – the cost method may be
the best as long as the shares do not
trade in an active market. Short-term
fluctuations in market price are not as
relevant since the investment is a
long-term one.
(ii) IFRS
FV-NI or FV-OCI (which they are
allowed to do as an accounting
policy choice). Since they are
held for longer term strategic
purposes, the entity would
probably choose the FV-OCI
approach.
This would not introduce any
volatility.
Part c.
Financial statement preparers are allowed to select among
accounting options provided that the selection does not
violate any of the accounting standards. In addition, the policy
that is the most transparent as to the company’s business
model would be the optimal choice. The company should not
select accounting options based on a desired outcome.
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EXERCISE 9.2
a.
January 1, 2020
Bond Investment at Amortized Cost .......... 300,000
Cash ......................................................
300,000
b.
December 31, 2020
Cash .............................................................
Interest Income1 ...................................
1
($300,000 x 10%)
c.
d.
December 31, 2021
Cash .............................................................
Interest Income ....................................
30,000
30,000
30,000
30,000
January 1, 2025
Cash ............................................................. 300,000
Bond Investment at Amortized Cost ...
300,000
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EXERCISE 9.3
a.
January 1, 2020
Bond Investment at Amortized Cost ..... 537,907.40
Cash .................................................
537,907.40
b.
Schedule of Interest Income
and Bond Premium Amortization
Effective Interest Method
12% Bonds Sold to Yield 10%
Cash
Interest
Date
Received
Income
01/01/20
—
—
12/31/20
$60,000 $53,790.74
12/31/21
60,000
53,169.81
12/31/22
60,000
52,486.80
12/31/23
60,000
51,735.48
12/31/24
60,000
50,909.771
$300,000 $262,092.60
1
Adjusted due to rounding.
Premium
Amortization
—
$6,209.26
6,830.19
7,513.20
8,264.52
9,090.231
$37,907.40
Carrying
Amount
of Bonds
$537,907.40
531,698.14
524,867.95
517,354.75
509,090.23
500,000.00
c.
December 31, 2020
Cash ............................................................. 60,000.00
Bond Investment at Amortized Cost ...
6,209.26
Interest Income ....................................
53,790.74
d.
December 31, 2021
Cash ............................................................. 60,000.00
Bond Investment at Amortized Cost ...
6,830.19
Interest Income ....................................
53,169.81
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Intermediate Accounting, Twelfth Canadian Edition
EXERCISE 9.3 (CONTINUED)
e.
f.
January 1, 2025
Cash ........................................................ 500,000.00
Bond Investment at Amortized Cost
500,000.00
Cost of bond when acquired
Face value of bond (maturity value)
Premium to be amortized
Number of interest periods = 5
Premium to be amortized each year:
$37,907.40 ÷ 5 = $7,581.48
$537,907.40
500,000.00
$ 37,907.40
Cash ............................................................. 60,000.00
Bond Investment at Amortized Cost ...
7,581.48
Interest Income ....................................
52,418.52
g.
Total interest income,
Part b. above:
Part f. above:
$52,418.52 X 5 =
$262,092.60
$262,092.60
Conclusion: the two methods result in the same amount of
total interest income because the cash flows and the premium
amount are the same in both cases. The two methods differ
only in the timing of interest income recognition.
h.
Under the effective interest method, the interest income
reported when compared with the investment’s carrying
amount always corresponds to the rate the bond was
purchased to yield, and it is the same rate and relationship
each year. This is what an investor would expect to see – as
the investment carrying amount is reduced, so is the amount
of interest income.
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EXERCISE 9.3 (CONTINUED)
h. (continued)
Under the straight-line method, the interest income reported
each year stays the same, even though the investment’s
carrying amount changes (in this case, the carrying amount is
reduced each period). This makes it appear that the interest
income is at a higher yield each period. This is not the
economic reality.
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EXERCISE 9.4
Schedule of Interest Income
and Bond Discount Amortization
Effective Interest Method
9% Bond Purchased to Yield 12%
Bond
Cash
Interest
Discount
Date
Received
Income
Amortization
01/01/20
—
—
—
1
12/31/20
$27,000
$33,406
$6,406
12/31/21
27,000
34,175
7,175
2
12/31/22
27,000
35,035
8,035
11
11 $278,384 X .12 = $33,406
2
Adjusted due to rounding
b.
c.
December 31, 2021
Cash .......................................................
Bond Investment at Amortized Cost ....
Interest Income ..............................
December 31, 2022
Cash .......................................................
Bond Investment at Amortized Cost ....
Interest Income ..............................
To record collection of interest
Carrying
Amount
of Bonds
$278,384
284,790
291,965
300,000
27,000
7,175
34,175
27,000
8,035
Cash .......................................................
300,000
Bond Investment at Amortized Cost
To record maturity of bond investment
35,035
300,000
Alternatively, the entries could be combined in one
compound entry:
Cash .......................................................
327,000
Interest Income .................................
Bond Investment at Amortized Cost
35,035
291,965
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EXERCISE 9.4 (CONTINUED)
d.
Cash ………………………………………
285,270
Loss on Disposal of Investments –
Cost/Amortized Cost………... ...........
6,695
Bond Investment at Amortized Cost
291,965
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EXERCISE 9.5
a.
FV-NI Investments ……………………..
Cash ………………………………..
537,907.40
537,907.40
b.
December 31, 2020
Cash ……………………………………..
FV-NI Investments ……………….
Interest Income …………………..
To record interest collected
FV-NI Investments …………………….
Investment Income or Loss1 …..
1
$534,200 – ($537,907.40 - $6,209.26)
= $534,200 - $531,698.14 = $2,501.86
To record fair value adjustment
December 31, 2021
Cash ………………………………………
FV-NI Investments ………………..
Interest Income ……………………
To record interest collected
Investment income or Loss2…………..
FV-NI Investments ……………….
2
($534,200 – $6,830.19) - $515,000
= $527,369.81 - $515,000 = $12,369.81
To record fair value adjustment
60,000.00
6,209.26
53,790.74
2,501.86
2,501.86
60,000.00
6,830.19
53,169.81
12,369.81
12,369.81
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EXERCISE 9.5 (CONTINUED)
b. (continued)
December 31, 2022
Cash ……………………………………..
FV-NI Investments ………………
Interest Income ………………….
To record interest collected
FV-NI Investments …………………….
Investment income or Loss3……..
3
$513,000 – ($515,000 - $7,513.20)
= $513,000 - $507,486.80 = $5,513.20
60,000.00
7,513.20
52,486.80
5,513.20
5,513.20
c.
Assuming no change in the credit rating of the company that issued
the bond, it appears that market rates increased rather than
decreased. Market prices of bonds fall when interest rates rise, and
prices of bonds rise when interest rates fall. However, part of the
decrease in fair value of this bond is due to the reduction in time to
maturity.
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EXERCISE 9.6
a.
February 1
FV-NI Investments .................................
Interest Receivable 1…………………….
Cash ………………………………..
1
$300,000 X 10% X 4/12 = $10,000
April 1
Cash 2 ......................................................
Interest Receivable ……………….
Investment Income or Loss …….
2
$300,000 X 10% X 6/12 = $15,000
June 15
FV-NI Investments ……………………...
Interest Receivable3 …………………….
Cash ………………………………..
3
$200,000 X 9% X ½ /12 = $750
August 31
Cash 6………………………………………
Loss on Disposal of Investments –
FV-NI4………..…………………………
Investment Income or Loss5…....
FV-NI Investments ……………….
4
$60,000 – ($60,000 X .99)
5
($60,000 X 10% X 5/12)
6
Cash = ($60,000 X .99) + $2,500
October 1
Cash ………………………………………
Investment Income or Loss7…….
7
($300,000 - $60,000) X 10% X 6/12
300,000
10,000
310,000
15,000
10,000
5,000
200,000
750
200,750
61,900
600
2,500
60,000
12,000
12,000
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EXERCISE 9.6 (CONTINUED)
a. (continued)
December 1
Cash ……………………………………..
Interest Receivable ………………
Investment Income or Loss ……
8
$200,000 X 9% X 6/12 = $9,000
To record interest collected
8
December 31
Interest Receivable ……………………
Investment Income or Loss …….
To accrue interest
Accrued interest to Dec. 31:
Gibbons: $240,000 X 10% X 3/12 =
Sampson: $200,000 X 9% X 1/12 =
December 31
Gibbons bonds
Sampson bonds
Investment Income or Loss9 ………….
FV-NI Investments ……………….
9
($440,000 - $438,400)
To record fair value adjustment
b.
February 1
Bond Investment at Amortized Cost ..
Interest Receivable10 …………………….
Cash ………………………………..
10
$300,000 X 10% X 4/12 = $10,000
9,000
750
8,250
7,500
7,500
$6,000
1,500
$7,500
Carrying
Amount
$240,000
200,000
$440,000
Fair
Value
$236,400
202,000
$438,400
1,600
1,600
300,000
10,000
310,000
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EXERCISE 9.6 (CONTINUED)
b. (continued)
April 1
Cash .........................................................
Interest Receivable ……………….
Interest Income ……………..…….
11
$300,000 X 10% X 6/12 = $15,000
11
June 15
Bond Investment at Amortized Cost...
Interest Receivable 12…………………….
Cash ………………………………..
12
$200,000 X 9% X ½ /12 = $750
August 31
Cash ………………………………………
Loss on Disposal of Investments –
Amortized Cost13….………………………
Interest Income14 ……………..…….
Bond Investment at Amortized Cost
13
Loss = $60,000 – ($60,000 X .99)
14
($60,000 X 10% X 5/12)
15
Cash = ($60,000 X .99) + $2,500
15
October 1
Cash ………………………………………
Interest Income16……………..…….
16
($300,000 - $60,000) X 10% X 6/12
December 1
Cash ……………………………………..
Interest Receivable ………………
Interest Income ……………..……
17
$200,000 X 9% X 6/12 = $9,000
17
15,000
10,000
5,000
200,000
750
200,750
61,900
600
2,500
60,000
12,000
12,000
9,000
750
8,250
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EXERCISE 9.6 (CONTINUED)
b. (continued)
December 31
Interest Receivable ……………………
Interest Income 8…………………..
18
Accrued interest to Dec. 31:
Gibbons: $240,000 X 10% X 3/12 =
Sampson: $200,000 X 9% X 1/12 =
7,500
7,500
$6,000
1,500
$7,500
c.
When an entity manages its investments on the basis of yield to
maturity, it means management intends to hold the bonds until they
mature. Their business plans include the cash flows from interest
receipts and the principal when the bond matures.
The bonds are acquired at a price to yield a specific rate and it is
this rate of interest that management expects to report on the
income statement each period.
Because management does not intend to trade these bonds in the
market, remeasuring them to their fair value at each reporting date
is not relevant information to users of the financial statements.
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EXERCISE 9.7
a.
Investment Income or Loss1 ...............
FV-NI Investments ......................
1
($50,000 – $48,600)
b.
Cash .....................................................
Investment Income or Loss .......
FV-NI Investments ......................
1,400
1,400
9,500
500
9,000
c.
Securities
Moonstar Corp. shares
Radius Ltd. shares
Total of portfolio
Adjustment needed to bring portfolio
to fair value
Carrying
Amount2
$19,000
20,600
$39,600
Fair Value
$19,300
20,500
$39,800
$200 Dr
2
Carrying amount for 2020 reflects the FV adjustments as at
December 31, 2019
FV-NI Investments ...............................
Investment Income or Loss .......
200
200
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EXERCISE 9.8
a.
August 31, 2019
FV-NI Investments ..........................................
Interest Receivable ($100,000 X 9% X 10/12)
Cash........................................................
November 1, 2019
Cash ($100,000 X 9%) ......................................
Interest Receivable ................................
Interest Income ......................................
December 31, 2019
Interest Receivable ($100,000 X 9% X 2/12) ..
Interest Income ......................................
To accrue interest
Investment Income or Loss1 ..........................
FV-NI Investments .................................
1
($104,490 – $103,200)
To record fair value adjustment
January 15, 2020
Cash ...............................................................
Investment Income or Loss2 .........................
Interest Income3 .....................................
Interest Receivable ................................
FV-NI Investments .................................
1
1
Selling price of bonds
Interest since last interest payment
($100,000 X 9% X 2.5/12)
Cash received from purchaser
104,490
7,500
111,990
9,000
7,500
1,500
1,500
1,500
1,290
1,290
104,775
300
375
1,500
103,200
$102,900
1,875
$104,775
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EXERCISE 9.8 (CONTINUED)
a. (continued)
2
$102,900
103,200
$ 300
3
$1,875
1,500
$ 375
Selling price of bonds
Carrying amount of bonds
Change in fair value of bond
Interest since last interest payment
Interest accrued at December 31
Additional interest accrued to date of sale
b.
For 2019, the number of months the bond was held is: August
31 to December 31= 4 months. The amount of interest earned
and reported on the income statement should be $100,000 X
9% X 4/12 = $3,000.
The amount actually reported is ($1,500 + $1,500 – $1,290 =
$1,710). The difference is caused by the fair value adjustment
of $1,290 at year end. The Investment Income or Loss account
includes both interest income and fair value adjustments.
c.
The overall income earned from the investment was $1,785
calculated as follows:
Interest purchased Aug. 31, 2019
Interest received Nov. 1, 2019
Interest accrued Dec. 31, 2019
Interest Income to Jan. 15, 2020
Total interest income
Unrealized loss at Dec. 31, 2019
Realized loss recorded Jan. 2020
Net income overall
$(7,500)
9,000
1,500
375
3,375
1,290
300
1,590
$1,785
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EXERCISE 9.8 (CONTINUED)
c. (continued)
Alternatively:
Cash out:
August 31, 2019
Cash in:
November 1, 2019
January 15, 2020
Net positive return
$111,990
$ 9,000
104,775
113,775
$
1,785
This return represents a 4.56% annual return on the
investment [($1,785/ 4.5 months X 12) / $104,490]. The
company earns a return on excess funds if the return on the
bond investment exceeds the interest rate on its savings
account. The actual return of 4.56% is lower than the bond’s
stated rate of 9% since the company purchased the bond at a
premium and incurred a loss on the market value of the bond
at resale that offset some of the interest earned while the bond
as held.
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EXERCISE 9.9
a.
Investment Income or Loss1 ...............
FV-NI Investments ............................
1
($311,500 – $305,600)
b.
Cash 2 ....................................................
Investment Income or Loss.................
FV-NI Investments ……………….
2
(1,500 X $45) – $500
c.
FV-NI Investments (700 X $75) ............
Investment Income or Loss.................
Cash.............................................
(d.
Securities
Hearn Corp., common
Oberto Ltd., common
Alessandro Inc., preferred
Total portfolio
Adjustment needed - credit
5,900
5,900
67,000
2,000
69,000
52,500
1,300
53,800
Carrying
Amount3
Fair
Value
$175,000
52,500
61,600
$289,100
$175,000
50,400
58,000
$283,400
$5,700 Cr
3
Reflects the fair value of two of the investments at December 31,
2019
Investment Income or Loss.................
FV-NI Investments ...........................
5,700
5,700
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EXERCISE 9.10
a.
b.
c.
FV-NI Investments .....................................
Investment Income or Loss ...............
3,000
3,000
FV-OCI Investments...................................
3,000
Unrealized Gain or Loss- OCI ............
3,000
Note: Each investment could also be adjusted separately.
The amounts are the same; however, the reporting is different
under both models. Specifically, the holding gain on the
investments accounted for using the fair value through net
income (FV-NI) model is reported as part of investment
income/loss in the income statement under Other Revenues
and Gains, and this account is subsequently closed out to
Retained Earnings at the end of the period. The holding gain
or loss for investments accounted for using the fair value
through other comprehensive income (FV-OCI) model is
reported as a part of other comprehensive income and is
closed out to Accumulated Other Comprehensive Income
(AOCI) at the end of the period. The holding gain or loss is
never recycled to income under FV-OCI for equity
investments. Both the FV-OCI and FV-NI securities are
reported at fair value on the SFP.
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EXERCISE 9.11
a.
January 15, 2020
FV-NI Investments (9,000 X $33.50) ............. 301,500
Investment Income or Loss .........................
1,980
Cash .......................................................
303,480
April 1, 2020
FV-NI Investments (5,000 X $52.00) ............. 260,000
Investment Income or Loss .........................
3,370
Cash .......................................................
263,370
September 10, 2020
FV-NI Investments (7,000 X $26.50) ............. 185,500
Investment Income or Loss .........................
2,910
Cash .......................................................
188,410
b.
May 20, 2020
Cash [(3,000 X $35) – $2,850] ....................... 102,150
FV-NI Investments1 ...............................
100,500
Gain on Disposal of Investments –
FV-NI 2 ...............................................
1,650
1
(3,000/9,000 X $301,500)
2
Gain on disposal: (3,000 X $35) - $100,500 =
$4,500
Transaction costs expensed
(2,850)
Net investment income
$1,650
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EXERCISE 9.11 (CONTINUED)
c.
Shares
Nirmala Corp. (6,0003 shares)
Oxana Corp. (5,000 shares)
WTA Corp. (7,000 shares)
Total portfolio
3
Cost
$201,000
260,000
185,500
$646,500
Of the 9,000 shares purchased on January 15, 2020, 3,000
were sold May 20, 2020.
December 31, 2020
FV-NI Investments ........................................
Investment Income or Loss ..................
d.
Fair
Value
$180,000
275,000
196,000
$651,000
4,500
4,500
The total purchase price of these investments is:
Nirmala:
(9,000 X $33.50) + $1,980 = $303,480
Oxana:
(5,000 X $52.00) + $3,370 = $263,370
WTA:
(7,000 X $26.50) + $2,910 = $188,410
The purchase entries will be:
January 15, 2020
FV-OCI Investments...................................... 303,480
Cash .......................................................
303,480
April 1, 2020
FV-OCI Investments...................................... 263,370
Cash .......................................................
263,370
September 10, 2020
FV-OCI Investments...................................... 188,410
Cash .......................................................
188,410
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EXERCISE 9.11 (CONTINUED)
d. (continued)
May 20, 2020
FV-OCI Investments ....................................
Unrealized Gain or Loss - OCI ..............
To adjust to fair value at date of disposal
4
990
990
Cash [(3,000 X $35) – $2,850] ....................... 102,150
FV-OCI Investments ..............................
102,150
To record disposal
Accumulated Other Comprehensive Income
Retained Earnings.................................
To reclassify holding gain
4
Gross selling price of 3,000 shares at $35
Less: Brokerage commissions
Net proceeds from sale
Carrying amount of 3,000 shares
($303,480 X 3,000/9,000)
Gain on disposal of shares
990
990
$105,000
(2,850)
102,150
(101,160)
$
990
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EXERCISE 9.11 (CONTINUED)
d. (continued)
December 31, 2020
Unrealized Gain or Loss - OCI .....................
FV-OCI Investments ..............................
3,100
3,100
Note: It would also be appropriate to make separate entries
for each investment.
Shares
Nirmala Corp., 6,000 shs
Oxana Corp., 5,000 shs
WTA Corp., 7,000 shs
Total portfolio
5
Carrying
Amount
*$202,3205
263,370
188,410
$654,100
Fair
Value
$180,000
275,000
196,000
$651,000
Unrealized
Gain
(Loss)
$(22,320)
(11,630)
7,590)
(3,100)
$303,480 + $990 – $102,150 = $202,320
e. Other comprehensive income
Items that may not be reclassified subsequently
to net income:
Holding losses arising during the year ................... $ 2,110
Fair value adjustment May 20
On Nirmala Corp. shares sold .................................. $ 990
Year-end fair value adjustment for portfolio ........... (3,100)
Total ........................................................................ $(2,110)
f.
Balance of Accumulated Other Comprehensive Income:
Beginning balance ....................................................
$0
Other comprehensive income for 2020 (part e.)...... (2,110)
Less Reclassification adjustment ............................
(990)
Ending balance December 31, 2020 ......................... $(3,100)
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EXERCISE 9.12
a.
January 1, 2019
Bond Investment at Amortized Cost .......
Cash ...................................................
b.
Schedule of Interest Revenue and
Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%
Date
1/1/19
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
c.
322,744.72
322,744.72
Cash
Received
—
$36,000
36,000
36,000
36,000
36,000
Interest
Revenue
—
$32,274.47
31,901.92
31,492.11
31,041.32
30,545.46
Premium
Amortized
—
$3,725.53
4,098.08
4,507.89
4,958.68
*5,454.54
Carrying Amount
of Bonds
$322,744.72
319,019.19
314,921.11
310,413.22
305,454.54
300,000.00
December 31, 2019
Cash ............................................................. 36,000.00
Bond Investment at Amortized Cost ...
3,725.53
Interest Income ....................................
32,274.47
d.
December 31, 2020
Cash ............................................................. 36,000.00
Bond Investment at Amortized Cost ...
4,098.08
Interest Income ....................................
31,901.92
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EXERCISE 9.13
a.
b.
December 31, 2019
Cash .............................................................
FV-OCI Investments .............................
Interest Income ($322,744.72 X .10) ....
To record collection of interest
36,000.00
FV-OCI Investments.....................................
Unrealized Gain or Loss—OCI1 ...........
1
($320,500.00 – $319,019.19 CV)
To record fair value adjustment
1,480.81
3,725.53
32,274.47
1,480.81
December 31, 2020
Unrealized Gain or Loss—OCI2................... 7,401.92
FV-OCI Investments .............................
7,401.92
2
($320,500.00 – $4,098.08 amortization - $309,000.00)
To adjust to fair value at date of disposal
Amortized
Cost
FV-OCI Investment
Previous fair value adjustment
in 2019—Dr.
Fair value adjustment—Cr.
Fair Value
$314,921.11 $309,000.00
Cash .............................................................
FV-OCI Investments .........................
To record disposal
Loss on Disposal of Investments – FV-OCI3
Unrealized Gain or Loss – OCI ............
3
($309,000.00 - $314,921.11)
To reclassify holding loss
Unrealized
Gain (Loss)
$(5,921.11)
(1,480.81)
$(7,401.92)
309,000.00
309,000.00
5,921.11
5,921.11
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EXERCISE 9.14
a.
July 1, 2020
FV-OCI Investments..................................
Cash ...................................................
b.
103,585
Schedule of Interest Revenue and
Bond Premium Amortization
Effective-Interest Method
6% Bonds Sold to Yield 5%
Date
July 1, 2020
Dec. 31, 2020
June30, 2021
Dec. 31, 2021
c.
103,585
Cash
Received
Interest
Revenue
Premium
Amortized
—
—
—
$3,000
3,000
3,000
$2,590
2,579
2,569
Amortized
Cost of
Bonds
$103,585
$410
421
431
103,175
102,754
102,323
December 31, 2020
Cash .............................................................
FV-OCI Investments .............................
Interest Income ....................................
To record collection of interest
December 31, 2020
FV-OCI Investments.....................................
Unrealized Gain or Loss – OCI ............
To record fair value adjustment
($103,400 - $103,175)
3,000
410
2,590
225
225
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EXERCISE 9.14 (CONTINUED)
c. (Continued)
June 30, 2021
Cash .............................................................
FV-OCI Investments .............................
Interest Income ....................................
To record collection of interest
3,000
421
2,579
December 31, 2021
Cash .............................................................
FV-OCI Investments .............................
Interest Income ....................................
To record collection of interest
d.
3,000
431
2,569
December 31, 2021
Unrealized Gain or Loss – OCI ...................
348
FV-OCI Investments .............................
To record fair value adjustment to date of disposal
[$102,200 - ($103,400 - $421 - $431)]
December 31, 2021
Cash .............................................................
FV-OCI Investments .............................
To record disposal of the bond
348
102,200
December 31, 2021
Loss on Disposal of Investments – FV-OCI
123
Unrealized Gain or Loss – OCI ...........
To reclassify accumulated unrealized gains
and losses from OCI to net income
($225 - $348) = $(123)
102,200
123
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EXERCISE 9.15
a.
Miron Aggregates Ltd.
Statement of Financial Position
December 31
2021
2020
Non-current Assets:
Investments in equity securities, FV-OCI ......
$
0 $103,400
Shareholders’ Equity:
Accumulated Other Comprehensive Income
Unrealized gains on FV-OCI investments ....
$
0
$225
2021
2020
$5,148
123
$5,025
$2,590
_____
$2,590
Statement of Comprehensive Income
years ended December 31,
2021
2020
Net income ............................................................ $5,025
$2,590
Other Comprehensive Income
Item that will be reclassified to net income:
Unrealized loss on FV-OCI investments2 (348)
Less: reclassified to net income
123 (225)
Comprehensive Income
$4,800
225
b.
Statement of Income
years ended December 31,
Other revenues and gains
Interest income1 ............................................
Loss on disposal of bonds ..........................
Net income............................................................
1
amortization table and entries E9-14:
$2,579 + $2,569 = $5,148 for 2021
c.
2
$2,815
(Unrealized gain $225 in 2020 – unrealized loss $348 in 2021)
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EXERCISE 9.15 (CONTINUED)
d.
Miron Aggregates Ltd.
Statement of Changes in Shareholders’ Equity (Partial)
For the Years Ended December 31, 2020 and 2021
Accumulated
Other
Retained
Comprehensive
Earnings
Income
Balance January 1, 2020
$200,000
$ 0
Comprehensive income
Net income
Other comprehensive Income
Balance December 31, 2020
2,590
________
225
$202,590
$225
Comprehensive income
Net income
Other comprehensive Income
Balance December 31, 2021
5,025
_______
(225)
$207,615
$ 0
e.
Interest revenue – Taken from E9.14 amortization table part b.
Six months period to Dec. 31, 2020
Six months period to July 1, 2021
Six months period to Dec. 31, 2021
Total interest revenue
$2,590
2,579
2,569
$7,738
Loss on sale of bond
Carrying amount of bond at date of sale
$102,323
Proceeds from sale
(102,200)
(123)
Net increase in retained earnings ($207,615 - $200,000) $7,615
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EXERCISE 9.16
a.
December 31, 2020
Unrealized Gain or Loss - OCI ...........
3,600
FV-OCI Investments ....................
3,600
(It is also acceptable to prepare a separate entry for each
investment.)
b.
Wang Inc.
Statement of Financial Position
December 31, 2020
Non-current Assets:
Investments in equity securities, FV-OCI .........
$366,100
Shareholders’ Equity:
Accumulated Other Comprehensive Income
Unrealized losses on FV-OCI investments ............. (3,600)
c.
Statement of Comprehensive Income
Net income
(including dividend income on equity investments) $ xxx
Other Comprehensive Income
Item that will not be reclassified to net income:
Unrealized net loss on FV-OCI investments
(3,600)
Comprehensive Income
$xxx – 3,600
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EXERCISE 9.16 (CONTINUED)
d.
January 20, 2021
FV-OCI Investments.......................................
Unrealized Gain or Loss – OCI1.........
1
($150,000 - $153,300)
To adjust to fair value at date of disposal
3,300
3,300
Cash ............................................................... 153,300
FV-OCI Investments ..............................
153,300
To record disposal
Retained Earnings. ........................................
Accumulated Other Comprehensive
Income2 ................................................
2
($25,200 from 2020 - $3,300)
To reclassify holding loss
June 2021
Cash. ..............................................................
Dividend Revenue ..................................
e.
21,900
21,900
1,300
1,300
December 31, 2021
Investments
Burnham Corp. shares
Chi Ltd. shares
Total of portfolio
Carrying
Amount
$140,600
75,500
$216,100
Fair Value
$153,750
72,600
$226,350
Holding
Gain (Loss)
$13,150
(2,900))
$10,250
FV-OCI Investments................................... 10,250
Unrealized Gain or Loss - OCI ...........
10,250
(Note: it would be equally correct to make a separate entry for
each investment.)
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EXERCISE 9.17
a.
December 31, 2020
FV-OCI Investments.......................................
Unrealized Gain or Loss – OCI1.........
1,850
1,850
December 31, 2021
Unrealized Gain or Loss – OCI2 ....................
FV-OCI Investments ..............................
9,550
December 31, 2022
FV-OCI Investments.......................................
Unrealized Gain or Loss – OCI3.............
4,200
9,550
4,200
b.
Dec. 31/20
Fair value of FV-OCI
investments
Original cost of FV-OCI
investments
Balance in accumulated
other comprehensive
income
Dec. 31/21
Dec. 31/22
$41,750
$32,200
$36,400
39,900
39,900
39,900
$ 1,850
$(7,700)
$(3,500)
Proof of balance:
Entry, Dec. 31/201
Entry, Dec. 31/212
Entry, Dec. 31/223
$ 1,850
-0-0-
$ 1,850
(9,550)
-0-
$ 1,850
(9,550)
4,200
Balance at year end
$ 1,850
$(7,700)
$(3,500)
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EXERCISE 9.17 (CONTINUED)
c.
February 13, 2023
FV-OCI Investments..........................................
Unrealized Gain or Loss – OCI4................
4
($38,000 - $36,400)
To adjust to fair value at date of disposal
1,600
1,600
Cash .................................................................. 38,000
FV-OCI Investments ..................................
38,000
To record disposal
Retained Earnings ............................................ 1,900
Accumulated Other Comprehensive
Income 5 ..................................................
5
($39,900 - $38,000) or ($3,500 loss + $1,600 gain)
To reclassify holding loss
d.
Balance AOCI December 31, 2022 (from b.)
Fair value adjustment to date of disposal
Reclassification entry to Retained Earnings
Balance AOCI December 31, 2023
1,900
$(3,500)
1,600
1,900
$ 0
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EXERCISE 9.18
a.
Cost
(1) Cash
Dividend Revenue
(5,000 X $0.90)
(4) $17 X 5,000 - $77,500
FV-NI Investments
Investment Income or Loss
FV-OCI Investments
Unrealized Gain or Loss - OCI
FV-OCI
Debit Credit Debit Credit Debit Credit
4,500
4,500
4,500
4,500
4,500
4,500
(2) $15.50 X 5,000 - $68,750
FV-NI Investments
Investment Income or Loss
FV-OCI Investments
Unrealized Gain or Loss - OCI
(3) Cash
Dividend Revenue
FV-NI
8,750
8,750
8,750
8,750
4,500
4,500
4,500
4,500
4,500
4,500
7,500
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7,500
7,500
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EXERCISE 9.18 (CONTINUED)
b.
Cost
(1) Effect on total assets, Dec. 31, 2020
Investments
Cash
(2) Effect on 2020 net income
$4,500 + $8,750
(3) Effect on total assets, Dec. 31, 2021
Investments
Cash ($9,000 on an accumulated basis)
(4) Effect on 2021 net income
$4,500 + $7,500
+ $ 68,750
+4,500
FV-NI
FV-OCI
$ 77,500
+4,500
+ $ 77,500
+4,500
+ $4,500
+ $ 4,500
+ $ 13,250
+ $ 68,750
+4,500
+ $ 85,000
+4,500
+ $ 4,500
+ $ 85,000
+4,500
+ $ 4,500
+ $ 12,000
c.
Cost
$17 X 5,000 shares = $85,000
Gain reported in net income:
$85,000 - $68,750
$85,000 - $85,000
FV-NI
FV-OCI
+$16,250
$ -0No effect – realized gain is
transferred directly to R/E
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EXERCISE 9.18 (CONTINUED)
c. (continued)
Note that the difference between the cost and FV-NI methods is one
of timing. Under FV-NI measurement, the $16,250 increase in value
since acquisition was reported in net income in 2020 and 2021.
Under the cost method, recognition of the increase in value is
deferred until it is realized in 2022. Under the FV-OCI approach
without recycling, the gain is recognized only in comprehensive
income, never in net income.
d.
Under ASPE, the company would have to choose between the cost
method and the FV-NI method.
The FV-NI method must be used for equity instruments that trade in
an active market and therefore have an active market price (as is
the case here), and for derivatives. The cost/amortized cost method
is used for all other investments and would not be used here.
e.
The method that would show higher income earlier on would
be the FV-NI measurement. More specifically, the increase in value
of $16,250 was reported in income in 2020 and 2021 unlike the cost
method which reports it in 2022 (See part d. above). Management
is allowed to select a policy choice that best meets its objectives
provided that it is in accordance with the accounting standards.
Management should choose a policy that best reflects the
substance of the investment and the company’s business model. It
would be unethical to base the decision on wanting to report a
higher income.
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EXERCISE 9.19
a.
(1) December 31, 2020 entry:
Loss on Impairment1 ....................................... 50,500
Bond Investment at Amortized Cost .........
50,500
1
($788,000 – $737,500)
Under ASPE, the carrying amount is reduced to the higher of
the discounted cash flow using a current market rate or the
bond’s net realizable value. This latter amount is not provided
in this situation. Rather than reducing the investment account
directly, an allowance account may be used.
(2) December 31, 2021 entry:
Bond Investment at Amortized Cost ……….. 18,500
Recovery of Loss from Impairment2..........
18,500
2
($760,000 – $741,500)
b.
(1) December 31, 2020 entry:
Loss on Impairment3 ....................................... 54,000
Bond Investment at Amortized Cost .........
54,000
3
($788,000 – $734,000)
Under IFRS, the carrying amount is reduced to the discounted
remaining estimated cash flows using the historic discount
rate.
(2) December 31, 2021 entry:
Bond Investment at Amortized Cost ……….. 18,500
Recovery of Loss from Impairment4..........
4
($760,000 – $741,500)
18,500
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EXERCISE 9.19 (CONTINUED)
c.
(1) December 31, 2020 entry:
Loss on Impairment5 ....................................... 50,500
Allowance for Investment Impairment ......
50,500
5
($788,000 – $737,500)
The investment account remains at its current carrying amount
and it is offset by the credit balance in the Allowance account.
(2) December 31, 2021 entry:
Allowance for Investment Impairment ……… 18,500
Recovery of Loss from Impairment6..........
18,500
6
($760,000 – $741,500)
d.
The expected loss model would recognize losses earlier than
the incurred loss model. The expected loss model reflects both
incurred losses to date and future expected credit loss.
Therefore, it results in earlier recognition of these losses in net
income. The incurred loss model only recognizes losses when
there are significant adverse changes in the expected future
amount and timing of cash flows. Therefore, an impairment
loss under the incurred loss model would be computed only if
there are trigger or loss events.
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EXERCISE 9.20
a.
Bond Amortization Table
Date
01/01/18
12/31/18
12/31/19
12/31/20
12/31/21
(12%)
Cash
Received
—
$36,000
36,000
36,000
36,000
(10%)
Interest
Income
—
$32,274.44
31,901.89
31,492.08
31,041.29
Premium
Amortization
–
$3,725.56
4,098.11
4,507.92
4,958.71
Carrying
Amount
of Bonds
$322,744.44
319,018.88
314,920.77
310,412.85
305,454.14
b.
January 1, 2018
FV-NI Investments ...............................
Cash ..............................................
322,744.44
322,744.44
December 31, 2018
Cash (12% X $300,000) .......................
36,000.00
FV-NI Investments .........................
Interest Income .............................
To record collection of interest
FV-NI Investments ...............................
Investment Income or Loss ...........
To record fair value adjustment
3,725.56
32,274.44
1,681.12
1,681.12
Carrying amount – refer to Table in a.:
$322,744.44 - $3,725.56 = $319,018.88
FV at December 31
= 320,700.00
FV adjustment, Dec. 31 = $ 1,681.12
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EXERCISE 9.20 (CONTINUED)
c.
December 31, 2019
Cash .....................................................
FV-NI Investments.........................
Interest Income .............................
To record collection of interest
Investment Income or Loss.................
FV-NI Investments..........................
To record fair value adjustment
36,000.00
4,098.11
31,901.89
60,101.89
60,101.89
Carrying amount:
$320,700.00 - $4,098.11 = $316,601.89
FV at December 31:
$300,000 X .855
= 256,500.00
Loss on impairment
$ 60,101.89
December 31, 2020
Cash .....................................................
FV-NI Investments.........................
Interest Income .............................
FV-NI Investments ...............................
Investment Income or Loss.............
To record fair value adjustment
Carrying amount:
$256,500 - $4,507.92 =
FV at December 31:
$300,000 X .87 =
FV adjustment, Dec. 31 =
36,000.00
4,507.92
31,492.08
9,007.92
9,007.92
$251,992.08
261,000.00
$ 9,007.92
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EXERCISE 9.20 (CONTINUED)
d.
December 31, 2021
Cash .....................................................
36,000.00
FV-NI Investments..........................
Interest Income ..............................
To record collection of interest
FV-NI Investments ...............................
Investment Income or Loss ...........
To record fair value adjustment
Carrying amount:
$261,000 - $4,958.71
FV at December 31:
$300,000 X .995
FV adjustment, Dec. 31
4,958.71
31,041.29
42,458.71
42,458.71
= $256,041.29
= 298,500.00
= $ 42,458.71
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EXERCISE 9.20 (CONTINUED)
e.
Parts a. to d. use a fair value impairment model. That is, because
the investments are re-measured to their FV at each year end when
using FV-NI model, there is no need to calculate a separate
impairment loss or recovery.
If Mamood had accounted for this investment at amortized cost, the
impairment model would change to an incurred loss model under
ASPE. When there is objective evidence that the expected future
cash flows have been significantly reduced (triggering event), an
impairment loss is measured and recognized.
Under IFRS, the company reports an impairment loss by the first
reporting date and assesses whether the credit risk on the
investment has increased significantly since the investment was
first recognized.
If the company determines that the default risk has not significantly
increased then it considers the 12 month expected credit losses.
If, however, the company determines that the default risk on the
investment has significantly increased, then the company must
look at lifetime expected credited losses. Therefore, the company
would consider all possible default events over the life of the
instrument.
The loss is then computed as the difference between the carrying
amount and the present value of the revised expected cash flows,
discounted at the historic discount rate.
Should the investment value subsequently increase,
impairment losses may be reversed and a recovery recorded.
the
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EXERCISE 9.21
a.
Situation 1 would use the fair value impairment model.
Situation 2 would use the fair value model. However, since there
is no recycling under IFRS for equity investments, the
investment would simply be revalued to fair value with the loss
booked to OCI and never recycled to income. Therefore, there is
no need to perform any impairment testing.
b.
Situation 1 December 31, 2019
Investment Income or Loss 1 ............................. 2,500
FV-NI Investments ......................................
1
($29.00 - $26.50) X 1,000 shares
December 31, 2020
Investment Income or Loss 2 ............................. 15,400
FV-NI Investments ......................................
2
($26.50 – $11.10) X 1,000 shares = $15,400
Situation 2 December 31, 2019
Unrealized Gain or Loss – OCI3 ......................... 1,000
FV-OCI Investments....................................
3
($27,000 - $26,000)
December 31, 2020
Unrealized Gain or Loss – OCI4 ......................... 13,600
FV-OCI Investments....................................
4
($26,000 - $12,400)
2,500
15,400
1,000
13,600
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EXERCISE 9.21 (CONTINUED)
c.
ASPE: Situation 1 – fair value impairment model
December 31, 2019
Investment Income or Loss 5 ............................. 2,500
FV-NI Investments ......................................
5
($29.00 - $26.50) X 1,000 shares
December 31, 2020
Investment Income or Loss 6 ............................. 15,400
FV-NI Investments ......................................
6
($26.50 – $11.10) X 1,000 shares = $15,400
2,500
15,400
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EXERCISE 9.22
a.
If Nadal Corporation’s shares are quoted in an active market,
Holmes is required to apply the FV-NI method to account for its
investment. If Nadal’s shares are not quoted in an active market, the
cost method may be used. However, in this case, Holmes could
elect to use the FV-NI method.
FV-NI method:
January 3, 2020
FV-NI Investments ............................................. 135,000
Cash ............................................................
1
(30,000 X 30%) = 9,000 shares X $15
To record investment purchase
1
September 21, 2020
Cash ($39,000 X 30%) ........................................
Dividend Revenue ......................................
To record collection of dividend
December 31, 2020
Unrealized Gain or Loss2 ...................................
FV-NI Investments ......................................
2
FV = (9,000 shares X $14.75) = $132,750
Carrying amount =
135,000
Adjustment required =
$( 2,250)
To record fair value adjustment
135,000
11,700
11,700
2,250
2,250
Cost method:
January 3, 2020
Other Investments ............................................ 135,000
Cash ............................................................
3
(30,000 X 30%) = 9,000 shares X $15
To record investment purchase
September 21, 2020
Cash ($39,000 X 30%) ........................................ 11,700
Dividend Revenue ......................................
To record collection of dividend
3
135,000
11,700
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EXERCISE 9.22 (CONTINUED)
a. (continued)
December 31, 2020
No entry required.
b.
Equity method:
January 3, 2020
Investment in Associate ................................... 135,000
Cash ............................................................
4
(30,000 X 30%) = 9,000 shares X $15
To record investment purchase
4
September 21, 2020
Cash ($39,000 X 30%) ........................................
Investment in Associate .............................
To record collection of dividend
135,000
11,700
December 31, 2020
Investment in Associate ................................... 25,500
Investment Income or Loss5 ......................
5
($85,000 X 30%)
To record investment income
11,700
25,500
c.
Even though Holmes has significant influence over the operations
of Nadal Corporation, ASPE allows the investor to choose the cost
method instead of the equity method. However, if Nadal’s shares
are actively traded in the market, the cost method cannot be used
and the FV-NI method is the only option to the equity method.
d.
A financial analyst is interested in assessing the current
performance of the investor company management and what the
company’s prospects are for the future. The analyst is interested in
the ability of the investor company to generate cash flows that will
be replicated in future periods.
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EXERCISE 9.22 (CONTINUED)
d. (continued)
Under the equity method, the investor reports all increases
(decreases) in the net assets of the associate as an increase
(decrease) in the carrying amount of the investment account on its
SFP. In addition, the investor recognizes its share of the income
(loss) earned by the associate. Therefore, the investor’s financial
statements reflect the performance of investor company
management, including its performance as it influences the
associate’s operations. This is relevant information for the financial
analyst because the financial statements portray the economic
substance of management’s results for the period (as well as the
investor’s legal entitlement to its share of the changing net assets
of the associate) and this provides a basis for predicting future
performance and cash flows.
Under the FV-NI method, the shares in the investee are adjusted to
their current market value, but the investor has made a decision to
hold the shares. They are not “for trading.” In addition, the
investor’s share of the dividends paid by the investee increase the
investor’s income even though the investee may have incurred
losses. Alternatively, the investee could be profitable, but not pay
any dividends to the investor, so what is reported on the investor’s
income statement does not correspond to the influence the investor
has had on investee company operations. The FV-NI method,
however, does recognize in the income statement and the SFP
through the FV adjustment, the market’s assessment of how the
investee’s current operations affect its value to the investor.
The cost method is the least informative, as it has the downsides of
the FV-NI method without the benefit of the FV adjustment each
year.
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EXERCISE 9.23
a.
$110,000, the increase to the Investment account.
b.
If the payout ratio is 35%, then 35% of their portion of the net
income is their share of dividends: $110,000 X 35% = $38,500,
the credit to the investment account.
c.
Annual depreciation of excess payment for capital assets =
$14,000, the remaining credit to the investment account.
d.
Fox’s share is 25%, so, Total Net Income x 25% = $110,000.
Total Net Income of Gloven = $110,000 ÷ 25% = $440,000.
e.
$38,500 ÷ 25% = $154,000 or Total Net Income of $440,000
(from d.) x 35% = $154,000
f.
Cost of 25% of investment in Gloven Corp.
$1,000,000
25% of carrying amount of Gloven Corp.
25% X $3,200,000
(800,000)
Payment in excess of share of carrying amount
200,000
Fair value allocated to depreciable assets
$14,000 X 10
(140,000)
Unexplained excess assigned to goodwill
$ 60,000
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EXERCISE 9.24
a.
December 31, 2019
FV-OCI Investments.................................. 1,250,000
Cash ...................................................
1,250,000
June 15, 2020
Cash ($0.75 X 62,500 shares) ...................
Dividend Revenue .............................
46,875
46,875
December 15, 2020
Cash ..........................................................
Dividend Revenue .............................
46,875
46,875
December 31, 2020
FV-OCI Investments ..................................
Unrealized Gain or Loss – OCI1 ........
1
$21 X 62,500 shares = $1,312,500
$1,312,500 – $1,250,000 = $62,500
62,500
62,500
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EXERCISE 9.24 (CONTINUED)
b.
December 31, 2019
Investment in Associate....................... 1,250,000
Cash ...............................................
1,250,000
June 15, 2020
Cash (62,500 X $.75) .............................
Investment in Associate ...............
46,875
46,875
December 15, 2020
Cash ......................................................
Investment in Associate ...............
46,875
46,875
December 31,2020
Investment in Associate.......................
Investment Income or Loss2.........
2
(25% X $520,000)
To record investment income
c.
130,000
Fair Value
Method
Statement of Financial
Position:
Investment amount
$1,312,500
3
$1,250,000 + $130,000 – $46,875 – $46,875
130,000
Equity
Method
$1,286,2503
The Investment accounts under both a. and b. are likely to
be included in non-current assets. That is, the investment
was not acquired for short-term trading profits, in which
case it would have been accounted for at FV-NI and been
reported in current assets.
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EXERCISE 9.24 (CONTINUED)
d.
Statement of Comprehensive Income:
Fair Value
Method
Dividend revenue
$93,750
Investment income
______
Included in net income
93,750
Other comprehensive income:
Unrealized gain on FV-OCI
investment during the year
62,500
Effect on comprehensive
income for 2020
$156,250
Equity
Method
$130,000
130,000
_______
$130,000
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EXERCISE 9.25
a.
2020:
FV-NI Investments .......................................... 196,000
Cash .........................................................
196,000
To record investment purchase
Cash ($15,000 X .30) ....................................... 4,500
Dividend Revenue ...................................
To record collection of dividend
FV-NI Investments ..........................................
Investment Income or Loss1…….………
1
$201,000 – $196,000 = $5,000
To record fair value adjustment
4,500
5,000
5,000
Statement of Comprehensive Income, 2020
Net income (includes the dividend revenue of $4,500
and the unrealized gain of $5,000) ..............
Other comprehensive income ........................
Comprehensive income ..................................
2021:
Investment Income or Loss1 .......................... 61,000
FV-NI Investments ...................................
1
Carrying amount of $201,000 - $140,000 FV
$ xxx
-0$ xxx
61,000
Statement of Comprehensive Income, 2021
Net income (includes a deduction for the unrealized
holding loss of $61,000)...............................
Other comprehensive income ........................
Comprehensive income ..................................
$ xxx
-0$ xxx
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EXERCISE 9.25 (CONTINUED)
b.
2020:
Investment in Associate................................. 196,000
Cash .........................................................
196,000
To record investment purchase
Cash ($15,000 X .30) .......................................
Investment in Associate .........................
To record collection of dividend
4,500
4,500
Investment in Associate................................. 22,500
Investment Income or Loss3...................
22,500
3
($75,000 X .30)
To record investment income
Investment Income or Loss4 .......................... 2,000
Investment in Associate .........................
To record amortization of fair value difference
4
Purchase price.....................................
Carrying amount (30% X $520,000) .....
Excess - unrecorded intangible...........
Amortization (over 20 years)................
2,000
$196,000
(156,000 )
40,000
$2,000
Statement of Comprehensive Income, 2020
Net income (includes investment income from
the associate of $22,500 - $2,000 = $20,500)
Other comprehensive income ........................
Comprehensive income ..................................
$ xxx
-0$ xxx
There is no entry to adjust the investment to its fair value under
the equity method.
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EXERCISE 9.25 (CONTINUED)
b. (continued)
2021:
Investment Income or Loss5 ..........................
Investment in Associate .........................
5
($80,000 X .30)
To record investment income
24,000
24,000
Investment Income or Loss ...........................
2,000
Investment in Associate .........................
To record amortization of fair value difference
2,000
Carrying amount of the investment in Martz Limited:
Cost
$196,000
Dividend received in 2020
(4,500 )
Income earned in 2020 ($22,500 – $2,000)
20,500
Loss incurred in 2021 ($24,000 + $2,000)
(26,000 )
Carrying amount at December 31, 2021
$186,000
Fair value of investment at December 31, 2021
$140,000
Just because the fair value has dropped does not automatically
mean that the investment is impaired. Perhaps there has been a
general market decline and the decrease in value is considered
temporary. If this is the case, no entries are needed to recognize the
decline.
However, on the stated assumption that the drop in value of the
investment does represent an impairment, recognition is required.
The loss is equal to the difference between the investment’s
carrying amount and its recoverable amount – the higher of its
value in use and fair value less costs to sell. Therefore, the
impairment loss is $186,000 - $149,000 = $37,000.
Loss on Impairment ...............................................
Investment in Associate .........................
To record loss on impairment
37,000
37,000
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EXERCISE 9.25 (CONTINUED)
b. (continued)
Statement of Comprehensive Income, 2021
Net income (includes investment loss on the
associate of $26,000 and the impairment
loss of $37,000) ............................................
Other comprehensive income ........................
Comprehensive income ..................................
c.
$ xxx
-0$ xxx
All entries would stay the same except for the entry recording
the 2020 share of income. This entry would change to reflect
the investor’s share of the loss from discontinued operations
separately from its share of the loss from continuing
operations, as follows:
2020:
Investment in Associate................................. 20,500
Loss on Discontinued Operations6 ............... 6,000
Investment Income or Loss ....................
26,500
6
($20,000 X .30)
To record investment income
Martz Limited Income Statement reports:
Income from Continuing Operations
Loss from Discontinued Operations
Net Income
30% X $95,000 =
Amortization of excess =
30% X $20,000 loss
=
$95,000
(20,000)
$75,000
$28,500
(2,000)
$26,500 - ordinary
$(6,000)- discontinued operations
The 2020 net income of Rae Corporation will be the same as
in part b.
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EXERCISE 9.26
a.
(1) Peel Corp - $12,250, dividend income.
(2) Vonna Corp - None reported—reduction of investment
account (equity method).
(3) Express Inc - None reported—the dividend is eliminated
as an intercompany transaction on consolidation.
Total dividend income reported is therefore $12,250.
b.
Sale price ($94 X 6,000 shares)
Previous carrying amount ($81 X 6,000 shares)
Holding gain in 2021
$564,000
486,000
$ 78,000
The $78,000 increase in value while held in 2021 is reported in
OCI on the 2021 Statement of Comprehensive Income.
Since there is no recycling by Chad Corp., the total
accumulated change in value since the investment was first
acquired is transferred out of OCI directly to retained earnings.
Proceeds on sale ($94 X 6,000 shares)
Purchase cost ($76 X 6,000 shares)
Realized gain on sale of investment
$564,000
456,000
$108,000
Net income is not affected in 2020 or 2021 relative to the
investment transactions. The Other Comprehensive Income
portion of the Statement of Comprehensive Income in 2021
appears as follows:
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EXERCISE 9.26 (CONTINUED)
b. (continued)
Other Comprehensive Income:
Item that will not be reclassified to net incomeHolding gain on investment
$ 78,000
Because the Roddy Ltd. shares were the only investment
accounted for at FV-OCI, no balance remains in AOCI.
c.
FV-OCI Investments.......................................... 78,000
Unrealized Gain or Loss – OCI1................
78,000
1
($564,000 - $486,000)
To adjust to fair value at date of disposal
Cash .................................................................. 564,000
FV-OCI Investments ..................................
564,000
To record disposal
Accumulated Other Comprehensive
Income .......................................................... 108,000
Retained Earnings 5 ...............................
108,000
5
Refer to b.
To reclassify holding gain
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EXERCISE 9.27
a.
Investment in Associate ................................ 438,000
Cash .........................................................
438,000
b.
Cost of investment
Carrying amount
Assets
Liabilities
$438,000
$1,310,000
110,000
1,200,000
X
30%
Cost in excess of
share of carrying amount
Allocated
Assets subject to depreciation
[($880,000 – $760,000) X 30%]
Goodwill
360,000
$ 78,000
$36,000
42,000
$78,000
Cash ($110,000 X .30) ..................................... 33,000
Investment in Associate .........................
33,000
To record dividends collected
Investment in Associate................................. 45,000
Loss on Discontinued Operations 1 .............. 15,000
Investment Income or Loss2...................
60,000*
1
2 22
$50,000 X .30 2 $200,000 X .30
To record investment income or loss
Investment Income or Loss3 ..........................
3,600
Investment in Associate .........................
3,600
To record amortization of fair value difference
Amortization of undervalued depreciable assets:
3
($36,000 ÷ 10) = $3,600
Goodwill is not amortized, but rather is tested on an annual
basis for impairment.
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EXERCISE 9.27 (CONTINUED)
c.
Because the associate’s long-term prospects have deteriorated,
this situation is likely one of impairment rather than a temporary
decline.
In this case, the impairment loss should be measured and
recognized at December 31, 2020 as follows:
Investment recoverable amount = $115 X 3,000 shs. = $345,000
Carrying amount of investment:
$438,000 - $33,000 + $45,000 - $3,600
= 446,400
Impairment loss
= $101,400
Entry:
Loss on Impairment ................................ 101,400
Investment in Associate ………….
101,400
In the future, if the associate’s fair value recovers, the impairment
loss can be reversed.
d.
Given that senior management obtains a bonus based on net
income, it would appear that management’s motivation is to inflate
the share value such that no impairment would be warranted.
Management’s argument is that the initial assessment was overly
pessimistic; however, this argument is likely due to management’s
desire to obtain a bonus.
Unless management is able to substantiate the higher share price,
an impairment loss must be recorded for $101,400 as in c.
Although we may feel pressure to appease our boss, we cannot act
unethically by not recording an impairment where one exists.
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EXERCISE 9.28
a.
Investment in Associate............................. 410,000
Cash .....................................................
410,000
b.
Cost of 40% investment
$410,000
Washi Corp. carrying amounts:
Assets
$825,000
Liabilities
115,000
710,000
X 40%
284,000
Excess paid over share of book value $126,000
Excess allocated to:
Assets subject to depreciation
[($750,000 – $620,000) X 40%]3
Residual to goodwill
$52,000
74,000
$126,000
Cash .............................................................. 44,800
Investment in Associate1 ......................
1
($112,000 X .40)
To record collection of dividend
Investment in Associate............................... 65,200
Investment Income or Loss2.................
2
($163,000 X .40)
To record investment income
Investment Income or Loss4 ........................ 5,200
Investment in Associate .......................
4
($52,0003 ÷ 10)
To record depreciation of fair value difference
c.
In 2020, Washi reports:
Income from continuing operations
Loss from discontinued operations
Net income
44,800
65,200
5,200
$201,000
(38,000)
$163,000
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EXERCISE 9.28 (CONTINUED)
c. (continued)
Loss on Discontinued Operations5 ............. 15,200
Investment in Associate 6 ............................ 65,200
Investment Income or Loss7.................
80,400
5
$38,000 X 40% = $15,200
$163,000 X 40% = $65,200
7
$201,000 X 40% = $80,400
To record investment income and loss
6
Investment Income or Loss8 ........................ 5,200
Investment in Associate .......................
8
($52,000 ÷ 10)
To record depreciation of fair value difference
5,200
In 2020, Chi Inc. will include investment income in continuing
operations of $80,400 - $5,200 = $75,200 and an investment loss of
$15,200 in discontinued operations for a total of $75,200 - $15,200 =
$60,000 in net income. Note that this is the same total amount as
reported in part b., but it is presented in two different places within
net income.
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EXERCISE 9.28 (CONTINUED)
d.
Chi’s share of the unrealized gain on investments reported in OCI
by Washi will be recorded by Chi as follows:
Investment in Associate............................... 18,000
Investment Income or Loss – OCI9 .......
9
($45,000 X .40)
18,000
Chi Inc.
Statement of Comprehensive Income
Year ended December 31, 2020
Net income ($172,400 + $65,200 - $5,200)
$232,400
Other comprehensive income:
Items that will not be reclassified subsequently
to net income Unrealized gain on investment
$10,000
Unrealized gain on associate’s investment 18,000
28,000
Comprehensive income
$260,400
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Intermediate Accounting, Twelfth Canadian Edition
TIME AND PURPOSE OF PROBLEMS
Problem 9.1
Purpose— the student is required to prepare during-the-year and year-end entries
for equity trading securities and to provide the presentation on the statement of
financial position at the end of the fiscal year.
Problem 9.2
Purpose— the student is required to prepare during-the-year and year-end entries
for debt and equity trading securities. Entries are required both for separate tracking
and for without separate tracking and reporting.
Problem 9.3
Purpose—the student is required to prepare journal entries and adjusting entries for
debt securities accounted for using the amortized cost model and then accounted for
using the FV-NI model. Bond premium amortization is also involved.
Problem 9.4
Purpose—the student is required to prepare journal entries for the sale and purchase
of equity securities accounted for under the FV-OCI model along with the year-end
adjusting entry for unrealized gains and losses. They are also asked to indicate how
all balances are to be reported on each major financial statement.
Problem 9.5
Purpose—to provide the student with an understanding of the reporting problems
associated with equity securities accounted for under the FV-OCI model. The
problem includes purchases, dividends, sales, and year-end adjustments to fair
values. Statement presentation is required, including the reclassification adjustment
out of other comprehensive income. Students are asked to determine how the net
income in two years would differ if the entity applied ASPE and used the cost method.
Problem 9.6
Purpose—from successive SFP carrying amounts, the student is required to prepare
entries for a bond investment accounted for using the amortized cost method and
then the FV-NI model.
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TIME AND PURPOSE OF PROBLEMS (CONTINUED)
Problem 9.7
Purpose—the student is required to prepare journal entries and adjusting entries for
FV-OCI debt investments, along with an amortization schedule and a sale of the
investment.
Problem 9.8
Purpose—the student is required to distinguish between the existence of a bond
premium or discount. The student is also required to prepare the adjusting entries at
two year-ends for FV-OCI debt investments.
Problem 9.9
Purpose—the student is required to prepare during-the-year and year-end entries for
FV-OCI debt investments and to explain how the entries would differ if the securities
were classified at cost / amortized cost.
Problem 9.10
Purpose—to provide the student with an opportunity to record interest and
amortization on a debt investment over three fiscal years as well as record fair value
adjustments using the FV-OCI method. The problem also includes the disposal of
the debt investment. Comprehensive financial statement preparation for the threeyear period is included as a requirement to the problem. Finally, the student must
summarize the overall results of the investment.
Problem 9.11
Purpose—to provide the student with an opportunity to record interest and
amortization of a bond premium for a bond purchased between interest dates as well
as a non-interest-bearing note. The cost of the bond must first be adjusted for the
portion of interest accrued between interest dates. The student must determine the
proper accounting and reporting for each investment. The student must also record
the year-end adjustment for fair value and the disposal of the bond and note.
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TIME AND PURPOSE OF PROBLEMS (CONTINUED)
Problem 9.12
Purpose—to provide the student with an opportunity to prepare journal entries for
equity investments accounted for under the FV-NI and FV-OCI methods as well as
the equity method, and choices available under ASPE. The student is required to
record fair value adjustments and describe how they would be reflected in the body
and notes to the financial statements.
Problem 9.13
Purpose—to provide the student with an understanding of the proper accounting
treatment for equity securities accounted for using the FV-OCI model and the
resulting effect of a sale of an investment and the reclassification of realized gains
and losses to retained earnings. The student is required to discuss the descriptions
and amounts that would be reported on the statement of financial position and
statement of comprehensive income with regard to these investments, plus prepare
any necessary note disclosures.
Problem 9.14
Purpose—the student is required to review entries made by an employee to
determine if they are in accordance with GAAP. If incorrect, correct entries are
required to be made. The student is also required to explain when the equity method
may or may not be appropriate.
Problem 9.15
Purpose—the student is asked to prepare entries for a company’s equity investment
in a 30% held company on the basis that there is significant influence and that there
isn’t significant influence. The alternative method to be applied is the FV-OCI under
IFRS. They must also discuss and make entries for the accounting method(s) that
could be used under ASPE. The student must also consider how the entries would
be affected by a partial year ownership period for the investment.
Problem 9.16
Purpose—students are required to work through their understanding of how the FVOCI method works and affects the statement of financial position and the statement
of comprehensive income. Critical thinking is needed here as students must
understand what each account represents in order to go back and prepare the entries
that must have been made. The student is then asked to explain how the financial
statements would differ if the investment had been accounted for at FV-NI.
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TIME AND PURPOSE OF PROBLEMS (CONTINUED)
Problem 9.17
Purpose—students are provided with an opportunity to work their way through a
situation that requires them to apply their knowledge of all methods of accounting for
investments introduced in the chapter. They begin with the presentation of
investments on the statement of financial position at the end of the preceding year
and work through the transaction and valuation entries through the year and are
required to determine what is reported on the year-end financial statements. Finally,
they are asked to explain to non-accountants what the balance in AOCI represents.
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SOLUTIONS TO PROBLEMS
PROBLEM 9.1
a.
October 8, 2020
Cash .............................................................
Gain on Disposal of Investment – FV-NI .
FV-NI Investments ..................................
(50,000 shares X $4.30 X 99%= $212,850)
November 16, 2020
FV-NI Investments ..........................................
Investment Income or Loss .............................
Cash........................................................
(3,000 shares X $44.50 = $133,500)
212,850
12,850
200,000
133,500
1,335
134,835
At December 31, 2020, MacAskill Corp. had the following fair value
adjustment:
Trading Investment Portfolio — December 31, 2020
Carrying
Fair
Amount
Value
Monty Ltd. preferred
$140,000
$106,000
Oakwood Inc. common
179,000
203,000
Patriot Corp. common
133,500
122,000
Total of portfolio
$452,500
$431,000
Adjustment needed to the portfolio = ($452,500 – $431,000) =
$21,500.
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PROBLEM 9.1 (CONTINUED)
a. (continued)
The entry on December 31, 2020 is therefore as follows:
Investment Income or Loss .............................
FV-NI Investments .....................................
21,500
21,500
b. Current Assets:
Trading Equity Investments, FV-NI
$431,000
Trading investments are generally current assets.
c.
To be classified as a current asset under IFRS, a FV-NI investment only
has to meet one of the following three criteria: 1. It is expected to be
realized within 12 months from the reporting date; 2. It is held primarily
for trading purposes; or 3. It is a cash equivalent. As long as any one is
met, the investment is included in current assets.
Examples of situations where FV-NI investments would be excluded from
current assets:
 The entity does not classify its assets and liabilities according to
current and non-current categories.
 The investments are held in a portfolio of investments (such as a
sinking fund) held for long-term purposes, such as to retire a bond
issue when it matures, or to be held specifically for a plant
expansion planned for the future.
 The investment does not meet any one of the required criteria for
classification as current, such as an equity investment that is
acquired for the longer term. Management may want to use the
accounting method whereby changes in its fair value are
recognized and flow through net income.
LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: CPA: cpa-t001 Reporting
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PROBLEM 9.2
a.
Williams Corp. bonds
February 1, 2020
FV-NI Investments ..........................................
Interest Receivable1 ........................................
Cash ......................................................
1
($500,000 X 12% X 4/12)
April 1, 2020
Cash 2 .............................................................
Interest Receivable ................................
Interest Income ......................................
2
($500,000 X 12% X 6/12)
September 1, 2020
Cash ($100,000 X 104%) + $5,000..................
Interest Income3 .....................................
Gain on Disposal of Investments - FV-NI
FV-NI Investments ($500,000 X 1/5) ......
3
($100,000 X 12% X 5/12 = $5,000)
October 1, 2020
Cash ...............................................................
Interest Income4 .....................................
4
($400,000 X 12% X 6/12)
December 31, 2020
Interest Receivable ..........................................
Interest Income5 .....................................
5
($400,000 X 12% X 3/12 = $12,000)
To accrue interest
500,000
20,000
520,000
30,000
20,000
10,000
109,000
5,000
4,000
100,000
24,000
24,000
12,000
12,000
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PROBLEM 9.2 (CONTINUED)
a. (continued)
FV-NI Investments ............................................
Investment Income or Loss6 ..................
6
($500,000 - $100,000) – ($400,000 x 101.75)
= $400,000 - $407,000 FV = $7,000
To record fair value adjustment
7,000
7,000
b.
Saint Inc. bonds
July 1, 2020
FV-NI Investments ..........................................
Interest Receivable7 ........................................
Cash ......................................................
7
($200,000 X 9% X 1/12)
December 1, 2020
Cash ..............................................................
Interest Receivable .................................
Interest Income 9 ....................................
8
($200,000 X 9% X 6/12)
9
($200,000 X 9% X 5/12)
December 31, 2020
Interest Receivable ..........................................
Interest Income 10 ...................................
10
($200,000 X 9% X 1/12 = $1,500)
To accrue interest
8
Investment Income or Loss11 ..........................
FV-NI Investments ....................................
11
$200,000 – ($200,000 x .97)
($200,000 - $194,000) = $6,000
To record fair value adjustment
200,000
1,500
201,500
9,000
1,500
7,500
1,500
1,500
6,000
19,000
6,000
19,000
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PROBLEM 9.2 (CONTINUED)
c.
Scotia Corp. shares
August 12, 2020
FV-NI Investments (3,000 shares X $59) ........
Investment Income or Loss .............................
Cash ......................................................
September 28, 2020
Cash ..............................................................
Dividend Revenue12 ...............................
12
(3,000 X $.50)
December 28, 2020
Cash ..............................................................
Dividend Revenue13 ...............................
13
(3,000 X $.52)
December 31, 2020
FV-NI Investments ..........................................
Investment Income or Loss14...................
14
(3,000 x $60.50) FV - $177,000
($181,500 – $177,000) = $4,500
177,000
1,770
178,770
1,500
1,500
1,560
1,560
4,500
4,500
(Note to instructor: Some students may debit Interest Income at the date
of purchase of the bonds instead of Interest Receivable. This procedure
is correct, assuming that, when the cash is received for the interest, an
appropriate credit to Interest Income is recorded.
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PROBLEM 9.2 (CONTINUED)
d.
At December 31, 2019, the trading investment (FV-NI) would have been
adjusted to its fair value of $390,000. The sale in 2020 for $400,000
would trigger a Gain on Disposal of Investments – FV-NI of $10,000
($400,000 – $390,000).
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PROBLEM 9.3
a.
December 31, 2019
Bond Investment at Amortized Cost .............. 108,660
Cash.......................................................
108,660
b.
December 31, 2020
Cash ..............................................................
Bond Investment at Amortized Cost .......
Interest Income ......................................
c.
December 31, 2022
Cash ..............................................................
Bond Investment at Amortized Cost .......
Interest Income ......................................
7,000
1,567
5,433
7,000
1,728
5,272
d.
December 31, 2019
FV-NI Investments ......................................... 108,660
Cash.......................................................
108,660
e.
December 31, 2021
Cash ..............................................................
FV-NI Investments..................................
Interest Income ………… .......................
To record collection of interest
FV-NI Investments .........................................
Investment Income or Loss1 ...................
1
[$107,500 – ($106,5002 - $1,646)]
($107,500 - $104,854) = $2,646
2
Carrying amount Dec. 31,2020
To record fair value adjustment
7,000
1,646
5,354
2,646
2,646
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PROBLEM 9.3 (CONTINUED)
f.
December 31, 2023
Cash ..............................................................
FV-NI Investments..................................
Interest Income ......................................
To record collection of interest
Investment Income or Loss3 ..........................
FV-NI Investments ……………………… .
3
[$103,000 – ($105,6502 - $1,814)]
($103,000 - $103,836) = $836
2
Carrying amount Dec. 31,2022
To record fair value adjustment
7,000
1,814
5,186
836
836
g.
As a member of management, I would want the accounting information
and reporting system to be consistent with how various parts of the
organization are managed.
If we invest in short-term trading securities with the objective of quickly
recovering more from our investments than we paid for them, the
important information to be reported is how much more (or less!) we
received from these investments than the amount of cash we expended
on them. This is exactly what the investment income/loss account
measures and reports when interest and dividends are not reported
separately from the other components of investment income.
However, if we acquire longer term investments with the objective of
earning a specific yield on them to maturity, the yield (or interest income)
should be reported separately from other types of investment income.
Capital gains and losses provide additional information to management
over and above the yield they committed to earn when the investments
were acquired. Short-term variations in fair value are of little interest.
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PROBLEM 9.3 (CONTINUED)
g. (continued)
If information for tax purposes is important for management, the
accounting information and reporting system should differentiate
between the various types of income according to how each is taxed;
e.g., dividend income is taxed differently than capital gains and losses
(realized gains and losses on disposal).
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PROBLEM 9.4
a.
Investments (FV-OCI)—December 31, 2020
Securities
Anderson Corp.
Munter Ltd.
King Corp.
Total of portfolio
2,500 sh.
10,000 sh.
6,000 sh.
Cost
$48,750
580,000
255,000
$883,750
Fair
Value
$49,580
569,500
254,400
$873,480
Note: Balance in AOCI, December 31, 2020 = $10,270 debit
($873,480 – $883,750) since all securities were purchased in 2020.
The Anderson shares make up $49,580 - $48,750 = $830 credit of
this.
Sale of Anderson shares, January 15, 2021:
Gross selling price of 2,500 shares at $21
Less fees
Net proceeds from sale
Cost of 2,500 shares
Total gain on disposal of shares
$52,500
(2,150)
50,350
(48,750)
$ 1,600
The investment had a carrying amount of $49,580 at December 31,
2020. The holding gain since December 31, 2020 = $50,350 –
$49,580 = $770.
January 15, 2021
FV-OCI Investments .......................................
Unrealized Gain or Loss - OCI ................
To adjust to fair value at date of disposal
770
Cash ............................................................... 50,350
FV-OCI Investments................................
To record disposal
Accumulated Other Comprehensive Income... 1,600
Retained Earnings ..................................
To reclassify holding gain
(Proof of reclassification amount: $830 + $770 = $1,600)
770
50,350
1,600
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PROBLEM 9.4 (CONTINUED)
b.
April 17, 2021
FV-OCI Investments ...................................... 35,480
Cash .......................................................
1
(1,000 X $33.50) + $1,980 = $35,480
1
c.
35,480
Investments (FV-OCI)—December 31, 2021
Securities
Munter Ltd. (10,000 shs)
King Corp. (6,000 shs)
Castle Ltd. (1,000 shs)
Total of portfolio
Cost
$580,000
255,000
35,480
$870,480
Carrying
Amount
$569,500
254,400
35,480
$859,380
Fair
Value
$610,0003
240,0004
29,0005
$879,000
Gain
(Loss)
$40,500
(14,400)
(6,480)
$19,620
3
(10,000 x $61)
(6,000 x $40)
5
(1,000 x $29)
4
December 31, 2021
FV-OCI Investments .................................... 19,620
Unrealized Gain or Loss - OCI .............
19,620
Note: It would be equally correct to prepare a separate entry to adjust
each different security, or one combined entry adjusting each security
separately.
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PROBLEM 9.4 (CONTINUED)
d.
Reporting of FV-OCI Investments
Statement of Financial Position, December 31, 2021
Long-term Investments (assumed)
Investments, at fair value with gains and losses in OCI
$ 879,000
Shareholders’ Equity
Accumulated other comprehensive income (credit)6
$8,520
6($10,270 dr. from 2020 - $770 cr. + $1,600 dr. reclass - $19,620 cr.)
Statement of Comprehensive Income, Year Ended Dec. 31, 2021
Net income (including any dividend income on shares)
$
Other comprehensive income- items that will
not be reclassified to net income:
Holding gains on FV-OCI
investments during year ($770 + $19,620)
Comprehensive income
x
$20,390
$ x + 20,390
Statement of Changes in Shareholders’ Equity (Excerpt)
Accumulated Other
Comprehensive Income, Year Ended Dec. 31, 2021
Accumulated other comprehensive income (loss),
January 1, 2021
Reclassification to retained earnings
Other comprehensive income, 2021
Accumulated other comprehensive income (loss),
December 31, 20217
$(10,270)
(1,600)
20,390
$8,520
Proof: Dec. 31/21 FV of $879,000 – original cost of $870,480 = $8,520
7
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PROBLEM 9.5
a.
2020
1. Mar. 1
2. Apr. 30
Cash ................................................. 1,800
Dividend Revenue1 ...................
1
(900 X $2)
FV-OCI Investments ..........................
840
2
Unrealized Gain or Loss – OCI
2
[300 X ($10 – $7.20)]
To adjust to fair value at date of disposal
Cash 3 ................................................ 3,000
FV-OCI Investments. .................
3
[300 X $10]
To record disposal
Accumulated Other Comprehensive
Income4 .........................................
Retained Earnings ...................
4
[300 X ($10 – $9)]
To reclassify holding gain
3. May 15
1,800
840
3,000
300
FV-OCI Investments5......................... 3,200
Cash .......................................
5
(200 X $16)
300
3,200
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PROBLEM 9.5 (CONTINUED)
a. (continued)
4. Dec. 31
Security
Earl Corp. 6
Josie Corp. 7
Asher Corp. 8
Total of Portfolio
FV-OCI Investments. ..................... 8,110
Unrealized Gain or Loss – OCI .
Quantity
1,200
900
200
Carrying
Amount
$14,700
14,850
1,440
$30,990
Fair Value
$ 20,4009
17,10010
1,60011
$39,100
8,110
Gain
(Loss)
$ 5,700
2,250
160
$ 8,110
Carrying amounts at Dec. 31, 2020:
6
Earl Corp. = (1,000 shares X $11.50) + (200 shares X $16)
7
Josie Corp. = 900 shares X $16.50
8
Asher Corp. = (500 shares X $7.20) – 3,000 + 840 or (200 sh.X $7.20)
Fair values at Dec. 31,2020:
9
(1,200 x $17)
10
(900 x $19)
11
(200 x $8)
Note: It is equally correct to adjust each investment to fair value
individually.
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PROBLEM 9.5 (Continued)
a. (continued)
2021
5. Feb. 1
Unrealized Gain or Loss – OCI12 .......
200
FV-OCI Investments. ................
12
[200 X ($7 – $8)]
To adjust to fair value at date of disposal
Cash13 ............................................... 1,400
FV-OCI Investments. ................
13
(200 X $7)
To record disposal
6. Mar. 1
7. Dec. 21
or
Dec. 31
200
1,400
Retained Earnings. ............................
400
Accumulated Other Comprehensive
Income 14 ..................................
14
[200 X ($7 – $9)]
To reclassify holding loss
400
Cash ................................................. 1,800
Dividend Revenue15 .................
15
(900 x $2)
1,800
Dividend Receivable.......................... 3,600
Dividend Revenue16 .................
16
(1,200 X $3)
3,600
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PROBLEM 9.5 (Continued)
a. (continued)
8. Dec. 31
FV-OCI Investments. ......................... 4,200
Unrealized Gain or Loss – OCI .
Security
Earl Corp.
Josie Corp.
Total of Portfolio
Quantity
1,200
900
Carrying
Amount
$20,400
17,100
$37,500
4,200
Fair Value
$ 22,80017
18,90018
$ 41,700
Gain
(Loss)
$ 2,400
1,800
$ 4,200
Fair values at Dec. 31,2021:
17
(1,200 x $19)
18
(900 x $21)
Note: It is equally correct to adjust each investment to fair value
individually.
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PROBLEM 9.5 (CONTINUED)
b.
Reporting of FV-OCI Investments
Statement of Financial Position, December 31
Long-term Investments (assumed)
Investments, at fair value with gains and
losses in OCI (ref. 4. and 8.)
Shareholders’ Equity
Retained earnings (ref. 2. and 5) entries not balances
Accumulated other comprehensive income bal. (below)
2020
2021
$ 39,100
$41,700
x + 300
$1,100
x + (400)
$5,500
Statement of Comprehensive Income
Net income (includes dividend revenue)
Other comprehensive income – items that may not be
reclassified subsequently to net income:
Holding gains on FV-OCI
investments during year
Comprehensive income
19
$
x
$
x
$8,95019 $4,00020
$x + 8,950 $x + 4,000
(Item 2 $840 + Item 4 $8,110)
5 - $200 + Item 8 $4,200)
20 (Item
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PROBLEM 9.5 (Continued)
b. (continued)
Statement of Changes in Shareholders’ Equity
Changes in Accumulated Other Comprehensive Income
2020
Accumulated other comprehensive income (loss),
January 1,
Reclassification to retained earnings of (gain) and losses
Other comprehensive income for the year
Accumulated other comprehensive income December 31
2021
$(7,550)21
$1,10022
(300)
400
8,950
4,000
$1,100 $5,500
21The
opening balance can be calculated as the difference between the portfolio at
cost and at fair value at Dec. 31, 2019. ($29,950 - $37,500) = $(7,550) below:
22 from end of 2020
Earl Corp.
Josie Corp.
Asher Corp.
Total
Units
1,000
900
500
15.00
20.00
9.00
Cost
$15,000
18,000
4,500
$37,500
Market
11.50
$11,500
16.50
14,850
7.20
3,600
$29,950
Income Statement
2020
Other revenues and gains
Dividend revenue
23
24
$1,80023
2021
$5,40024
(Item 1)
(Item 6 $1,800 + Item 7 $3,600)
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PROBLEM 9.5 (CONTINUED)
c.
If Castlegar Ltd. applied the cost method in accounting for these
investments instead of the FV-OCI method, the net income would be as
follows:
Entry
item No.
Dividend Revenue
1
Gain on sale of 300 Asher shares
2
(cost $9 sold for $10)
Loss on sale of 200 Asher shares
5
(cost $9 sold for $7)
Dividend Revenue
6
Dividend Revenue
7
2020
$1,800
300
$2,100
2021
$(400)
1,800
3,600
$5,000
Why is this?
1. Dividends are recognized in income under both approaches, and
2. Under the cost method, the full amount of any realized gains or
losses are recognized in net income when the investments are
sold. Under the FV-OCI approach, the full amount of the realized
gains or losses may be transferred to retained earnings when the
investments are sold (no recycling).
d.
An investor is interested in assessing the prospects for future cash flows.
Under the FV-OCI approach, the investments are reported at their fair
value which is much more relevant information than the amount paid for
the investments when they were acquired, as under the cost method.
In addition, the unrealized gains and losses reported in OCI tell the
investor how well the enterprise managed its portfolio of investments
during the period i.e., whether management increased the potential for
future cash flows or reduced that potential. The FV-OCI approach reports
in OCI the unrealized gains and losses on the investments as they occur
rather than waiting until they are sold and reporting the total and final
change in value only at that point.
LO 2,4,8,9 BT: AP Difficulty: C Time: 70 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance
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PROBLEM 9.6
a.
Bond Amortization Schedule
Effective Interest Method
10% Bonds Sold to Yield 15%
Cash
Interest
Date
Received
Income
12/31/19
—
—
12/31/20
$55,000
$73,082
12/31/21
55,000
75,794
12/31/22
55,000
78,9101
1
Adjusted due to rounding.
Discount
Amortization
–
$18,082
20,794
23,9101
Carrying
Amount
of Bonds
$487,214
505,296
526,090
550,000
Dec. 31, 2019
Bond Investment at Amortized Cost ........................ 487,214
Cash .............................................................
487,214
Dec. 31, 2020
Cash ........................................................................ 55,000
Bond Investment at Amortized Cost ......................... 18,082
Interest Income ……………………………… ..
73,082
Dec. 31, 2021
Cash ....................................................................... 55,000
Bond Investment at Amortized Cost ......................... 20,794
Interest Income..............................................
75,794
Dec. 31, 2022
Cash …………………………………………………... 55,000
Bond Investment at Amortized Cost ........................ 23,910
Interest Income..............................................
78,910
To record collection of interest
Cash ....................................................................... 550,000
Bond Investment at Amortized Cost ..............
550,000
To record maturity of bond investment
(these two entries could be combined into one)
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PROBLEM 9.6 (CONTINUED)
b.
Dec. 31, 2019
FV-NI Investments ................................................... 487,214
Cash .............................................................
487,214
Dec. 31, 2020
Cash ........................................................................ 55,000
FV-NI Investments ................................................... 18,082
Interest Income .............................................
73,082
To record collection of interest
Investment Income or Loss2 ....................................
FV-NI Investments ........................................
2
[$499,000 – ($487,214 + $18,082)]
To record fair value adjustment
6,296
6,296
Dec. 31, 2021
Cash ........................................................................ 55,000
FV-NI Investments ................................................... 20,794
Interest Income .............................................
75,794
To record collection of interest
FV-NI Investments ...................................................
Investment Income or Loss3 ..........................
3
[$523,000 – ($499,000 + $20,794)]
To record fair value adjustment
3,206
3,206
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PROBLEM 9.6 (Continued)
b. (continued)
Dec. 31, 2022
Cash ........................................................................ 55,000
FV-NI Investments ................................................... 23,910
Interest Income .............................................
78,910
To record collection of interest
FV-NI Investments ...................................................
Investment Income or Loss4 ..........................
4
[$550,000 – ($523,000 + $23,910)]
To record fair value adjustment
3,090
3,090
Cash ........................................................................ 550,000
FV-NI Investments .........................................
550,000
To record maturity of bond investment
LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting
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PROBLEM 9.7
a.
b.
January 1, 2020 purchase entry:
FV-OCI Investments ........................................
Cash ........................................................
369,114
369,114
The amortization schedule is as follows:
Schedule of Interest Revenue and Bond Discount
Amortization—Effective-Interest Method
8% Bonds Purchased to Yield 10%
Date
1/1/20
7/1/20
12/31/20
7/1/21
12/31/21
7/1/22
12/31/22
7/1/23
12/31/23
7/1/24
12/31/24
Total
1
c.
Interest
Receivable
Or
Cash Received
Interest
Revenue
Bond
Discount
Amortization
16,000
16,000
16,000
16,000
16,000
16,000
16,000
16,000
16,000
16,000
$160,000
$ 18,456
18,579
18,707
18,843
18,985
19,134
19,291
19,455
19,628
19,8081
$190,886
$ 2,456
2,579
2,707
2,843
2,985
3,134
3,291
3,455
3,628
3,808
$30,886
Carrying
Amount of
Bonds
$369,114
371,570
374,149
376,856
379,699
382,684
385,818
389,109
392,564
396,192
400,000
$2 difference due to rounding.
Interest entries:
July 1, 2020
Cash ...........................................................
FV-OCI Investments ...................................
Interest Income ...................................
16,000
2,456
18,456
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PROBLEM 9.7 (CONTINUED)
c. (continued)
December 31, 2020
Interest Receivable ..........................................
FV-OCI Investments ........................................
Interest Income ........................................
d.
16,000
2,579
18,579
December 31, 2021 adjusting entry:
Securities
Aguirre (total portfolio
*
value)
Previous fair value
adjustment—Dr.
Fair value adjustment—Cr.
2
Amortized
Cost
Fair Value
Unrealized
Gain (Loss)
$379,6992
$372,726
$ (6,973)
3,375
$(10,348)
This is the amortized cost of the bonds on December 31, 2021. See
b. schedule.
December 31, 2021
Unrealized Gain or Loss—OCI ..........................
FV-OCI Investments................................
10,348
10,348
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PROBLEM 9.7 (CONTINUED)
e.
January 1, 2022
Unrealized Gain or Loss—OCI3 .........................
FV-OCI Investments ................................
3
($370,726 - $372,726)
To adjust to fair value at date of disposal
2,000
2,000
Cash .................................................................. 370,726
FV-OCI Investments ................................
370,726
To record disposal
Loss on Disposal of Investments – FV-OCI .......
Unrealized Gain or Loss - OCI .................
4
($370,726 – $379,699)
To reclassify holding loss
8,973
8,973
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PROBLEM 9.8
a.
b.
The bonds were purchased at a discount. That is, they were
purchased at less than their face value because the bonds’
amortized cost increased from $491,150 to $550,000.
December 31, 2020
FV-OCI Investments ...........................................
Unrealized Gain or Loss—OCI ....................
4,850
4,850
FV-OCI Investment Portfolio
Debt Investment
Previous fair value adjustment—Dr.
Fair value adjustment—Dr.
c.
Amortized
Cost
$491,150
Fair
Unrealized
Value
Gain (Loss)
$497,000 $5,850
1,000
$4,850
December 31, 2021
Unrealized Gain or Loss—OCI ..........................
FV-OCI Investments...................................
16,292
16,292
FV-OCI Investment Portfolio
Debt Investment
Previous fair value adjustment—Dr.
Fair value adjustment—Cr. needed
to bring balance to $10,442 Cr.
Amortized
Fair
Unrealized
Cost
Value
Gain (Loss)
$519,442 $509,000
$(10,442)
5,850
$(16,292)
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PROBLEM 9.9
a.
February 1
FV-OCI Investments ......................................
Interest Income (4/12 X .10 X $300,000) .......
Cash ......................................................
300,000
10,000
310,000
April 1
Cash ..............................................................
Interest Income ($300,000 X .10 X 6/12)
15,000
15,000
July 1
FV-OCI Investments ......................................
Interest Income (1/12 X .09 X $200,000) .......
Cash ......................................................
200,000
1,500
201,500
October 1
Cash [$300,000 X .10 X 6/12] ........................
Interest Income ......................................
15,000
15,000
December 1
Cash ($200,000 X 9% X 6/12) .......................
Interest Income ......................................
9,000
9,000
December 31
Interest Receivable ........................................
Interest Income ......................................
(3/12 X $300,000 X .10 = $7,500)
(1/12 X $200,000 X .09 = $1,500)
($7,500 + $1,500 = $9,000)
To accrue interest
9,000
9,000
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PROBLEM 9.9 (CONTINUED)
a. (continued)
December 31
Unrealized Gain or Loss—OCI ......................
FV-OCI Investments...............................
To record fair value adjustment
29,000
29,000
FV-OCI Portfolio
Security
Gibbons Co.
Sampson Inc.
Total
1
Cost
Fair
Value
Unrealized
Gain (Loss)
$300,000
200,000
$500,000
$285,0001
186,0002
$471,000
$(15,000)
(14,000)
$(29,000)
$300,000 X 95%
$200,000 X 93%
2
(Note to instructor: Some students may debit Interest Receivable at
date of purchase instead of Interest Income. This procedure is
correct, assuming that when the cash is received for the interest, an
appropriate credit to Interest Receivable is recorded.)
b.
All the entries would be the same except the account title Bond
Investment at Amortized Cost would be used instead of FV-OCI
Investments. In addition, cost / amortized cost securities would be
carried at amortized cost and not valued at fair value at year-end,
so the last entry would not be made.
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PROBLEM 9.10
a.
July 1, 2020
FV-OCI Investments ...................................
Cash ...................................................
b.
48,645.70
Schedule of Interest Revenue and
Bond Discount Amortization
Effective-Interest Method
5% Bonds Sold to Yield 6%
Date
July 1, 2020
Dec. 31, 2020
July 1, 2021
Dec. 31, 2021
July 1, 2022
Dec. 31, 2022
July 1, 2023
c.
48,645.70
Cash
Received
Interest
Revenue
Discount
Amortized
—
—
—
$1,250.00
1,250.00
1,250.00
1,250.00
1,250.00
1,250.00
$1,459.37
1,465.65
1,472.12
1,478.79
1,485.65
1,492.72
Amortized
Cost of Bonds
$48,645.70
$209.37
215.65
222.12
228.79
235.65
242.72
48,855.07
49,070.72
49,292.84
49,521.63
49,757.28
50,000.00
December 31, 2020
Cash ..............................................................
FV-OCI Investments ......................................
Interest Income ......................................
To record collection of interest
1,250.00
209.37
FV-OCI Investments ......................................
Unrealized Gain or Loss – OCI ..............
To record fair value adjustment
($49,100.00 - $48,855.07)
244.93
1,459.37
244.93
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PROBLEM 9.10 (Continued)
c. (Continued)
July 1, 2021
Cash ..............................................................
FV-OCI Investments ......................................
Interest Income ......................................
To record collection of interest
1,250.00
215.65
1,465.65
December 31, 2021
Cash ..............................................................
FV-OCI Investments ......................................
Interest Income ......................................
To record collection of interest
1,250.00
222.12
1,472.12
Unrealized Gain or Loss – OCI ......................
FV-OCI Investments...............................
To record fair value adjustment
[$49,500.00 - ($49,100.00 + $215.65 + $222.12)]
37.77
37.77
July 1, 2022
Cash ..............................................................
FV-OCI Investments ......................................
Interest Income ......................................
To record collection of interest
d.
1,250.00
228.79
1,478.79
July 1, 2022
FV-OCI Investments ......................................
121.21
Unrealized Gain or Loss – OCI ..............
To record fair value adjustment to date of disposal
[$49,850.00 - ($49,500.00 + $228.79)]
121.21
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PROBLEM 9.10 (Continued)
d. (Continued)
July 1, 2022
Cash .............................................................. 49,850.00
FV-OCI Investments...............................
49,850.00
To record disposal of the bond
Unrealized Gain or Loss – OCI ......................
Gain on Disposal of Investment – FV-OCI
To reclassify accumulated unrealized gains
and losses from OCI to net income
($244.93 - $37.77 + $121.21) = $328.37
328.37
328.37
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PROBLEM 9.10 (Continued)
e.
Menard Concrete Ltd.
Statement of Financial Position
December 31
2022
Non-current Assets:
Investments in equity securities, FV-OCI
$0
Shareholders’ Equity:
Accumulated Other Comprehensive Income
Unrealized gains on FV-OCI investments
$0
2021
2020
$49,500 $49,100
$ 207 .
$ 245
f.
Menard Concrete Ltd.
Statement of Income
Year ended December 31,
2022
2021
Other revenues and gains
Interest income1
$1,479 $2,938
Gain on disposal of bonds
328 ____
Net income
$1,807 $2,938
1
2020
$1,459
__ _
$1,459
$1,465.65 + $1,472.12 = $2,937.77 for 2021
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PROBLEM 9.10 (Continued)
g.
Menard Concrete Ltd.
Statement of Comprehensive Income
Year ended December 31,
2022
Net income
Other Comprehensive Income
Item that will be reclassified to net income:
Unrealized gain (loss) on FV-OCI investments
Less: reclassified to net income
Comprehensive Income
121
(328)
2021
2020
$1,807
$2,938
$1,459
(207)
$1,600
(38)
______
$2,900
245
__ __
$1,704
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PROBLEM 9.10 (Continued)
h.
Menard Concrete Ltd.
Statement of Changes in Shareholders’ Equity (Partial)
For the Year Ended December 31, 2021
Accumulated
Other
Retained
Comprehensive
Earnings
Income
Balance January 1, 2020
$800,000
$ 0
Comprehensive income
Net income
Other comprehensive Income
Balance December 31, 2020
1,459
________
245
$801,459
$245
Comprehensive income
Net income
Other comprehensive (Loss)
Balance December 31, 2021
Net income
Other comprehensive Income
Balance December 31, 2022
i.
2,938
_______
(38)
$804,397
$ 207
1,807
_______
(207)
$806,204
$ 0
Retained earnings increased from $800,000 to $806,204 as
demonstrated in part h. above. This increase is made up of interest
income for the two years the bond was held of $5,875.93 (refer to
amortization table) and the gain on sale of the bond of $328.37.
The market value of the bond increased beyond the amortized cost
of the bond because the market rate of interest fell below the yield
rate of the bond, making it more attractive to other investors. Rather
than wait to the maturity date and effectively only earn interest at
the yield rate of the bond, Menard sold the bond before the maturity
date and realized a gain on resale of $328.37.
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PROBLEM 9.11
a.
It is first necessary to determine the proper accounting treatment
for each individual investment. The Chiang Corp. common shares
are an investment in an equity instrument that is not held for trading
purposes and thus would likely be accounted for using the FV-OCI
model.
The Government of Canada bonds and the note investment should
be accounted for at cost/amortized cost since they are being
managed for their yield to maturity. The Government of Canada
bonds would be accounted for at cost, since there is no difference
between the stated interest rate and the market rate. The purchase
price of the bonds was the same as their face value so there is no
need to amortize any premium or discount. The note investment
should be accounted for at amortized cost since it is being
managed for its yield to maturity. Although the note says that it is
non-interest-bearing, it was purchased to yield 10% interest, and
the resulting discount from its face value must be amortized over
the life of the note using the effective interest method. Be aware
that the accounting standards refer to both the cost and amortized
cost valuation methods as “at amortized cost.”
The Monet bonds should be accounted for using the FV-NI model
(with interest not reported separately according to the company
policy) as they are being managed based on their fair value in the
hopes of trading them when their market value increases as
interest rates fall.
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PROBLEM 9.11 (CONTINUED)
a. (continued)
Interest Receivable
($50,000 X 1.08) – ($56,000) ...............
FV-OCI Investments .....................................
Bond Investment at Amortized Cost..............
FV-NI Investments ........................................
Note Investment at Amortized Cost ..............
Investments ..........................................
2,000
37,400
100,000
54,000
57,143
250,543
The investment in Monet Corp. bonds is corrected to separate the
interest purchased from the price of the bond. The Interest Income
account could have been debited instead of the Interest Receivable
as long as it was also credited later when the full interest is received.
b.
December 31, 2020
Interest Receivable ......................................
Note Investment at Amortized Cost2 .............
Interest Income ($952 + $1,500 + 3,000)
To record accrued interest
1
4,500
952
5,452
1
Accrued interest (Monet)
$50,000 X .12 X 6/12 =
Accrued interest – Gov’t bonds
$100,000 X .06 X 3/12 =
Interest Receivable
$3,000
1,500
$4,500
2
Interest on Note
($57,143 X 10% X 2/12)
952
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PROBLEM 9.11 (CONTINUED)
b. (continued)
Investment
Chiang Corp. common
(FV-OCI)
Monet Corp. bonds
(FV-NI)
Carrying
Amount
Fair Value
Gain (Loss)
$37,400
$33,800
$ (3,600)
54,000
55,600
1,600
December 31, 2020
Unrealized Gain or Loss - OCI ......................
FV-NI Investments ........................................
Investment Income or Loss ......... ……
FV-OCI Investments…………………...
To record fair value adjustment
3,600
1,600
1,600
3,600
c. 1.
February 1, 2021
Note Investment at Amortized Cost ..............
476
3
Interest Income ....................................
3
($57,143 X .10 X 1/12) = $476 for January 2021
Amortize discount on note receivable
Cash .............................................................
Note Investment at Amortized Cost4 .....
Gain on Disposal of Investments –
Cost/Amortized Cost .......................
4
($57,143 + $952 + $476)
Sale of note receivable
476
59,600
58,571
1,029
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PROBLEM 9.11 (CONTINUED)
c. (continued)
2.
July 1, 2021
Cash ($109,200 + $1,500) ............................ 110,700
Bond Investment at Amortized Cost ......
100,000
5
Interest Income ....................................
1,500
Gain on Disposal of Investments –
Cost/Amortized Cost .......................
9,200
5
($100,000 X .06 X 3/12)
d.
May 1, 2021
Note Investment at Amortized Cost ..............
1,905
6
Interest Income ....................................
1,905
6
Interest since December 31, 2020: ($57,143 X .10 X 4/12)
To record accrued interest earned
Cash .............................................................
Note Investment at Amortized Cost7 .....
7
($57,143 + $952 + $1,905)
To record maturity of note
e.
60,000
60,000
If Octavio Corp. was a private entity following ASPE, then the
Chiang Corp. common shares would have to be accounted for
using fair value through net income (since ASPE does not have an
FV-OCI option), or at cost, if the Chiang shares do not trade in an
active market.
Under ASPE, the straight-line method of determining interest could
be used instead of the effective interest method, and the interest
income on the Monet bonds would have to be accounted for and
reported separately from other types of investment income.
f.
A public company must follow IFRS. However, a private company
can choose to follow either IFRS or ASPE.
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PROBLEM 9.12
a.
Investment in trading (FV-NI) securities:
Investment Income or Loss .......................
FV-NI Investments..............................
To record fair value adjustment
Calculations:
Securities
Delaney Motors
Isha Electric
Total of portfolio
80,000
80,000
Cost
Fair Value
$1,400,000 $1,600,000
1,000,000
720,000
$2,400,000 $2,320,000
Unrealized
Gain (Loss)
($200,000)
((280,000)
$(80,000)
Investment in FV-OCI securities - Norton:
FV-OCI Investments ..................................
Unrealized Gain or Loss - OCI ...............
To record fair value adjustment
Fair value of investment in Norton
Carrying amount of investment
Unrealized holding gain
725,000
725,000
$22,225,000
21,500,000
$ 725,000
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PROBLEM 9.12 (CONTINUED)
b.
Statement of Financial Position:
Current Assets
Trading securities, at fair value
$2,320,000
Long-term Investments
Investment in shares of Norton Industries,
at fair value with holding gains in OCI
$22,225,000
Shareholders’ Equity
Accumulated other comprehensive
income (loss) ($22,500,000 - $22,225,000)
$(275,000)
Statement of Comprehensive Income:
Other Expenses and Losses (in net income)
Investment loss on securities at FV-NI
Other Comprehensive Income:
Item that will not be reclassified to net incomeHolding gain on FV-OCI securities
Included in comprehensive income
$(80,000)
725,000
$ 645,000
Statement of Changes in Shareholders’ Equity (Excerpt) –
Accumulated Other Comprehensive Income:
Accumulated other comprehensive income (loss),
January 1, 20201
Other comprehensive income, 2020
Accumulated other comprehensive income (loss),
December 31, 2020
1
$(1,000,000)
725,000
$(275,000)
Norton: $21,500,000 opening FV – $22,500,000 invested
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PROBLEM 9.12 (CONTINUED)
c.
Investment in Associate ..............................
Investment Income or Loss2...............
2
($13,800,000 X 18%)
To record investment income
Cash ($2.4 M X 18%)..................................
Investment in Associate .....................
To record dividends collected
2,484,000
2,484,000
432,000
432,000
Brooks has significant influence and should apply the equity method. No
fair value adjustments are recorded under the equity method.
d.
Under parts a. and b., if Brooks Corp. was a private entity following
ASPE, then the Norton Industries shares would have to be accounted for
using fair value through net income (since ASPE does not have an FVOCI option). However, if the Norton Industries shares were not actively
traded and there was no active market price available for the shares,
then Brooks could also account for the shares at cost.
Under part c., ASPE permits the investor to account for shares in a
significantly influenced company to be accounted for using the equity
method or at cost. However, if the shares of Norton Industries were
actively traded, then the cost method is not permitted and the FV-NI
method is.
e.
The 20%-50% holding is a guide only. It is up to the entity to determine
if significant influence exists; specifically, does the entity have the power
to participate in the financial and operating policy decisions of the entity
whose shares it owns. If the other shares are widely held, for example,
an 18% interest could result in very significant influence. On the other
hand, if one other party owned the other 55% of the shares, a 45%
interest might not enable the investor to have any influence at all.
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PROBLEM 9.13
a.
Equity investments accounted for using the FV-OCI model:
Security
Frank Inc.
Ellis Corp.
Mendota Ltd.
Total of portfolio
Cost
$ 22,000
115,000
124,000
$261,000
Fair Value
$ 32,000
95,000
96,000
$223,000
Holding
Gain (Loss)
$ 10,000
(20,000)
(28,000)
$(38,000)
Statement of Financial Position (Excerpt)—December 31, 2020
Long-term investments:
Investments at fair value, with gains and
losses in OCI
Shareholders’ equity:
Accumulated other comprehensive loss
($261,000 – $223,000)
b.
$223,000
$(38,000)
Equity investments accounted for using the FV-OCI model:
Security
Ellis Corp.
Mendota Ltd.
Kaptein Inc.
Total of portfolio
Cost
$115,000
124,000
50,000
$289,000
Carrying
Amount
$ 95,000
96,000
50,000
$241,000
Fair
Value
$140,000
92,000
44,000
$276,000
2021
Holding
Gain (Loss)
$45,000
(4,000)
(6,000)
$35,000
Statement of Financial Position (Excerpt)—December 31, 2021
Long-term investments:
Investments at fair value, with gains and
losses in OCI
$276,000
Shareholders’ equity:
Accumulated other comprehensive loss1
$(13,000)
1
(cost of $289,000 – FV of $276,000)
(or beg. Bal. ($38,000) + OCI current year $36,660 less
reclassification $11,660)
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PROBLEM 9.13 (CONTINUED)
c.
Statement of Comprehensive Income – 2021
Net income (includes only dividends from FV-OCI
investments)
Other Comprehensive Income:
Items that will not be reclassified to
net income Holding gains in year1
Comprehensive Income
$158,300
36,660
$194,960
1
Calculations:
Proceeds on Frank Inc. shares (2,000 X $17) X .99
Carrying amount, Dec. 31, 2020
Holding gain, 2021 Frank Inc. shares
Holding gain on other shares in 2021 (part b.)
Increase in OCI due to unrealized holding gains
2
$33,660
32,000
1,660
35,000
$36,660
Transfer of realized gain from OCI to retained earnings:
Net proceeds from sale of Frank Inc. shares
Cost of shares (2,000 X $11)
Gain on securities while held
$33,660
(22,000)
$11,660
Accumulated Oher Comprehensive Income..... 11,660
Retained Earnings ...................................
11,660
To reclassify realized gains – Frank Inc. shares
Note: Under IFRS, transaction costs are capitalized for all investments
except those accounted for under the FV-NI model.
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PROBLEM 9.13 (CONTINUED)
d.
Note X—Investments Accounted for Using the FV-OCI Model
Investments are accounted for using the FV-OCI model with
realized gains and losses transferred to retained earnings and are
reported at fair values based on third-party quotes. The fair values
and unrealized holding gains and losses of equity securities were
as follows:
December 31, 2021
Gross Unrealized
FV-OCI model
Equity securities
Fair
Cost
Gains
Losses
Value
$289,000 $25,000 $(38,000) $276,000
December 31, 2020
Gross Unrealized
FV-OCI model
Equity securities
Fair
Cost
Gains
Losses
Value
$261,000 $10,000 $(48,000) $223,000
e.
The information about other comprehensive income indicates whether
the company’s management of its investment portfolio during the year
has added to (or reduced) the potential for cash flows, the extent to which
such gains and losses have been realized or converted to cash, and
whether future net income will be affected as gains and losses (in OCI)
are realized. The AOCI, on the other hand, indicates the extent to which
investments accounted for at FV-OCI are reported at amounts above (or
below) their original cost at the company’s year end.
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PROBLEM 9.14
a.
Some of the journal entries proposed by Ted Yan are not in
accordance with the applicable reporting standards. For those
entries that are not correct, revised entries are presented below.
Entry 1
The proposed entry is in accordance with applicable reporting
standards (IFRS in this case since the company is a public
company). The difference between the net proceeds from the sale
of a trading equity security and its carrying amount represents the
realized gain or loss. Any transaction costs on this disposition have
been expensed in the period because the net proceeds have been
used to determine the investment gain on disposal.
Entry 2
The November 26, 2020 entry to record the purchase of Mer Limited
common shares is not in accordance with IFRS. Brokerage fees for
trading investments accounted for using the FV-NI model must be
expensed and cannot be included in the cost of the investment. The
following entry should have been made:
FV-NI Investments ........................................ 102,200
Investment Income or Loss ...........................
2,800
Cash .....................................................
105,000
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PROBLEM 9.14 (CONTINUED)
a. (continued)
Entry 3
The proposed entry is not in accordance with IFRS. The amount of
$3,000 represents the excess of the cost of equity investments of
$819,000($615,000 + $204,000) over the fair values totalling
$816,000 ($611,000 + $205,000). IFRS requires that the carrying
amount of a portfolio of trading investments be reported at fair value
at the reporting date. Adjustments to fair value are recorded at each
reporting date and should be the difference between the
investments’ carrying amount and its current fair value, not its cost
and fair value. These adjustments are included in the determination
of net income for the period and need to be separated from the
amount that is reported in OCI, such as the adjustment on the Admin
Importers shares. In addition, an allowance account might be used
in situations where there is an impairment of an amortized cost
investment, but it is not appropriate for the fair value adjustments of
FV-NI and FV-OCI investments.
The correct entry as at November 30, 2020 is as follows, assuming
the correct entry was made for Entry 2:
Security
Craxi Electric
Renoir Inc.
Mer Limited
Total of portfolio
Carrying
Amount
$314,000
181,000
102,200
$597,200
Fair
Value
$323,000
180,000
108,000
$611,000
Holding
Gain (Loss)
($ 9,000
( (1,000)
( 5,800)
$13,800)
Thus, the correct entries would have been:
FV-NI Investments ........................................
Investment Income or Loss ...................
To record fair value adjustment
13,800
FV-OCI Investments ....................................
Unrealized Gain or Loss - OCI ..............
($205,000 – $198,000)
To record fair value adjustment
7,000
13,800
7,000
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PROBLEM 9.14 (CONTINUED)
a. (continued)
Entry 4
As Fellows Inc. has indicated, it exercises significant influence over
Yukasato Inc. (25% ownership), and its investment requires using
the equity method of accounting. Accordingly, the dividends
received from Yukasato are treated as a reduction of Fellows’
investment in Yukasato. The remaining dividends are correctly
recognized as dividend revenue. The correct entries as at
November 30, 2020, are as follows:
Cash .............................................................
Dividend Revenue .................................
13,500
13,500
To record dividends received from investments where Fellows does not
have significant influence (Admin Importers, $9,000 and Craxi Electric,
$4,500)
Cash .............................................................
Investment in Associate .......................
25,000
25,000
To record dividend received from Yukasato Inc., accounted for using
the equity method.
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PROBLEM 9.14 (CONTINUED)
a. (continued)
Entry 5
The entry for recording Fellows’ share of Yukasato’s reported net
income, under the equity method, is in accordance with IFRS.
There is, however, an entry missing for the amortization of the
excess of purchase price over carrying amount of the assets of
Yukasato.
Purchase price
Carrying amount of net assets (25% X $1,800,000)
Excess of purchase price over carrying amount
Amortization ($138,000 / 20 years)
Investment Income or Loss ...........................
Investment in Associate .......................
$588,000
(450,000 )
138,000
$6,900
6,900
6,900
b.
The circumstances where it would be inappropriate to use the equity
method of accounting, even though the investor owns 25 % of the
investee’s common shares, would be when the investor does not
have significant influence over the operating and financial policies of
the investee.
The investment would then be classified according to the nature of
the investment and management’s investment strategy. It could be
classified as trading (FV-NI model) and adjusted to fair value if it
meets the criteria or if management wants to use the fair value option.
Alternatively, it could be accounted for using the FV-OCI model. The
FV-OCI method would be more appropriate if the investor intends to
hold the investment for longer-term, relationship purposes.
The nature of the investment in Yukasato indicates a longer-term
investing strategy than a trading classification (using the FV-NI
model) would require. The recommended accounting model would be
the FV-OCI model.
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PROBLEM 9.14 (CONTINUED)
c.
To be accounted for using the FV-OCI model, the investment under
IFRS must not be held for the purposes of trading either for debt or
equity securities.
For example, an entity may acquire an investment for longer-term
strategic purposes (but where the investor does not have significant
influence or control). These shares or debt are not held for realizing
direct investment gains. Therefore, a special election may be made,
on acquisition, to classify the investment as FV-OCI. With respect to
share investments classified as FV-OCI, gains and losses
are not recycled back through net income. Conversely, debt
investments classified as FV-OCI do have gains and losses recycled
back through net income when the instrument is sold (when realized).
In addition, the standard indicates that any dividends received from
such an investment are recognized in net income unless the dividend
is determined to be a return of capital rather than a return on the
investment. They can be classified as either current or long-term
assets depending on management’s intention.
Trading investments accounted for using the FV-NI model, on the
other hand, are financial assets that are reported at fair value, with
unrealized and realized holding gains and losses reported as part of
net income.
Fellows appears to make some investments for the purposes of shortterm trading (Craxi, Renoir, Seferis, and Mer), while other, larger
holdings are acquired for longer-term purposes. Admin Importers and
Yukasato Inc. are examples of the latter.
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PROBLEM 9.15
a.
Investment Accounted for Using the FV-OCI Model
FV-OCI Investments. .................................... 375,000
Cash (15,000 X $25) .............................
375,000
To record investment purchase
b.
Cash ($5,000 X 15/50)..................................
Dividend Revenue .................................
To record dividend collected
1,500
Unrealized Gain or Loss – OCI1 ...................
FV-OCI Investments..............................
1
[15,000 shares X ($24 – $25)]
To record fair value adjustment
15,000
1,500
15,000
Equity Method (15,000 shares = 30% holding)
Cost of 30% interest
Carrying amount
Assets ($290,000 + $860,000)
Liabilities
Excess paid above share of book value
Allocated to:
Assets subject to depreciation
[($960,000 – $860,000) X .30]
Unexplained excess to Goodwill
$375,000
$1,150,000
(150,000)
$1,000,000
X
.30 300,000
$ 75,000
30,000
$ 45,000
Subsequent amortization needed:
On undervalued depreciable assets ($30,000 ÷ 8)
On unrecorded Goodwill – not amortized
$3,750
0
$3,750
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PROBLEM 9.15 (CONTINUED)
b. (continued)
Alternatively, the amount of goodwill is calculated as follows:
Cost
$375,000
Fair value of net identifiable assets
Assets ($290,000 + $960,000) $1,250,000
Liabilities
(150,000)
$1,100,000
X
.30 330,000
Excess assumed to be goodwill
$ 45,000
Equity Method Entries
Investment in Associate. ............................... 375,000
Cash .....................................................
375,000
To record investment purchase
c.
Cash ($5,000 X .30) .....................................
Investment in Associate ........................
To record dividend collected
1,500
Investment in Associate ................................
Investment Income or Loss2 ..................
2
($100,000 X .30)
To record investment income
30,000
Investment Income or Loss ...........................
Investment in Associate ........................
To record amortization of fair value difference
3,750
1,500
30,000
3,750
The answer to part a. would remain the same. The entries do not
relate to a particular time frame but rather reflect cash dividends as
income received in December and show the investment at fair value
at the reporting date.
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PROBLEM 9.15 (CONTINUED)
c. (Continued)
For part b., the two entries that record the proportionate share of the
associate’s net income and the depreciation of the undervalued
assets would need to be pro-rated to reflect a half-year of
ownership. The general concept is that you can only earn income
on assets from the point in time that you own/control them.
d.
If Melbourne Corp. was a private entity following ASPE, and did not
have significant influence, then the investment in Noah Corp. shares
would be accounted for using the cost method. Because the shares
are not actively traded, it is unlikely the FV-NI method would be
chosen. ASPE does not recognize the FV-OCI method.
Investment Accounted for Using Cost Model
Other Investments. ....................................... 375,000
Cash (15,000 X $25) .............................
375,000
To record investment purchase
Cash ($5,000 X 15/50)..................................
Dividend Revenue .................................
To record dividend collected
1,500
1,500
If Melbourne Corp. has significant influence, the equity method could
be used as illustrated in part b.
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PROBLEM 9.15 (CONTINUED)
e.
Financial Statement Amounts Reported
ASPE Choices from d.
Equity Method
Investment in Noah Corp.,
Dec. 31, 2020
$399,7501
Cost Method
$375,000
Investment income, year
ended Dec. 31, 2020
$26,2502
$1,500
1
Refer to b. $375,000 - $1,500 + $30,000 - $3,750 = $399,750
2
Refer to b. $30,000 - $3,750 = $26,250
Assuming Melbourne has significant influence over the operating,
financing, investing, and dividend policies of Noah Corp., the equity
method provides the more relevant and faithful representation of the
economic events and circumstances. If management’s influence has
been positive in an accounting period, the effect will be a positive one on
Melbourne’s statement of income; if Noah’s results are not good, the
poor result will be reflected on the investor’s financial statements. As
Noah’s net assets increase due to earning profits, so will Melbourne’s
carrying amount of its investment representing its share of Noah’s
increased net assets. When Noah pays out a dividend and its net assets
decrease, so will the carrying value of Melbourne’s investment in Noah.
The cost method has some support when the investor cannot
significantly influence the policies of the investee. Because the investor
cannot control or even influence in any real way the paying of dividends
to the investor, no income should be reported as earned until received.
This is consistent with the revenue recognition principle when there are
collectibilty issues. However, if possible, the estimated fair value of the
investment would be useful information for users.
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PROBLEM 9.16
a.
January 1, 2020
Fair value of FV-OCI equity investments .................... $240,000
Accumulated other comprehensive income ................. (30,000)
Thus, cost of FV-OCI equity investments =................. $210,000
The breakdown of balances at January 1, 2020:
Sold
Unsold
Cost
$70,000
$140,000
1
Fair value
80,000
160,000
Amount in AOCI
$10,000
$20,000
Total
$210,000
240,000
$30,000
1
(1/32 of $240,000)
2
($70,000 / $210,000)
Because there were no new investments acquired, the reduction in
the cost of the FV-OCI investments must be the cost of the
investments sold:
$ 70,000
Gain on disposal given as ...........................................
30,000
Thus, proceeds on the sale (fair value) ....................... $100,000
FV-OCI Investments ............................................. 20,000
Unrealized Gain or Loss – OCI3. ..................
20,000
To adjust to fair value at date of disposal
3
(fair value at sale $100,000 less fair value Jan. 1 $80,000)
Cash ............................................................. 100,000
FV-OCI Investments................................
100,000
Sale of FV-OCI investments
b.
Accumulated Oher Comprehensive Income.....
Retained Earnings ...................................
To reclassify realized gains
30,000
30,000
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PROBLEM 9.16 (CONTINUED)
c.
December 31, 2020
Fair value of FV-OCI equity investments ................
Cost of FV-OCI equity investments refer to (a) .......
Thus, accumulated other comprehensive income ...
$185,000
(140,000)
$ 45,000
FV-OCI Investments ........................................ 25,000
Unrealized Gain or Loss – OCI 4 ..............
25,000
Fair value adjustment
4
(fair value at Dec. 31 $185,000 less fair value Jan. 1 $160,000)
AOCI continuity:
Beg. Bal. January 1, 2020 refer to (a) above ..........
Fair value adjustment to date of disposal ................
Reclassification to Retained Earnings.....................
Fair value adjustment Dec. 31, 2020 ......................
Ending balance December 31, 2020 .......................
d.
$30,000
20,000
(30,000)
25,000
$45,000
Net Income:
Dividend revenue ........................................................ $ 5,000
Gain on disposal of investments- FV-NI ...................... 40,000
Net income .................................................................. $45,000
Acker Ltd.
Statement of Comprehensive Income
For the Year Ended December 31, 2020
Net income .......................................................................... $45,000
Other comprehensive income
Items that may not be reclassified subsequently
to net income:
Holding gains arising during the year 5 ........................ 45,000
Comprehensive income......................................................... $90,000
5
($20,000 + $25,000)
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PROBLEM 9.16 (CONTINUED)
e.
Acker Ltd.
Statement of Financial Position
As of December 31, 2020
Assets
FV-OCI equity
investments
Cash6
Total assets
6
$185,000
195,000
_________
$380,000
Equity
Contributed capital
Retained earnings7
Accumulated other
comprehensive income8
Total equity
$260,000
75,000
__45,000
$380,000
Cash balance:
Beginning balance .................................................................$50,000
Dividend revenue..................................................................... 5,000
Additional cash from purchase and resale of FV-NI Inv. ......... 40,000
Cash proceeds on sale of FV-OCI investments .................... 100,000
Ending balance ...................................................................$195,000
7
Retained Earnings Balance:
Beginning balance .................................................................. $
0
Net income ............................................................................. 45,000
Reclassification of FV-OCI realized gains .............................. 30,000
Ending balance .....................................................................$75,000
8
Refer to part c. continuity
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PROBLEM 9.16 (CONTINUED)
f.
The opening SFP at January 1, 2020 (December 31, 2019), aside
from describing the investments as FV-NI investments, would also
show retained earnings of $30,000 instead of AOCI of $30,000.
Because the assets are measured at fair value in both cases, the
only difference is that the unrealized gains or losses would have
been recognized in net income and closed into retained earnings
under ASPE.
Net Income would be made up of:
Dividend revenue
$ 5,000
Gain on purchase and resale of
FV-NI investments (other)
40,000
Investment income from fair value adjustment
Holding gain for the year ($20,000 + $25,000)
Net income
45,000
$90,000
Retained Earnings on SFP:
Fair value adjustment FV-NI investments of 2019
($240,000 – cost $210,000, Refer to a.)
Net income – Income statement
Retained Earnings Dec. 31, 2020
$ 30,000
90,000
$120,000
The same holds true for the closing SFP at December 31, 2020. The
investments will be described as FV-NI investments, and because
they are measured at the same fair value that the FV-OCI classified
investments were, the total shareholders’ equity must be the same
amount as well: $380,000. Because the contributed capital is not
affected, the retained earnings would be $380,000 - $260,000 =
$120,000.
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PROBLEM 9.16 (CONTINUED)
f. (continued)
With an opening retained earnings of $30,000 and an ending
balance of $120,000, net income for 2020 was $90,000 (as given
earlier) - the same as comprehensive income under the FV-OCI
model. Why is this? Because unrealized and realized gains and
losses are recognized under both models, and there is no “other
comprehensive income” under the FV-NI model; all gains and losses
must be recognized in net income in the period they arise. Under the
FV-OCI approach, they are split between net income and OCI.
g.
Acker Ltd.
Statement of Financial Position
As of December 31, 2020
Assets
FV-NI investments
Cash
Total assets
$185,000
195,000
$380,000
Equity
Contributed capital
Retained earnings
Total equity
$260,000
120,000
$380,000
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PROBLEM 9.17
a.
2020
Hysenaj Ltd. shares (FV-NI)
Mar. 18 Cash ($3 X 6,400) .................................
Investment Income or Loss .........
To record dividends collected
19,200
19,200
Sept.17 Cash1 .................................................... 367,488
FV-NI Investments ......................
316,300
Gain on Disposal of Investment –
FV-NI .......................................
51,188
1
(6,400 X $58) X 99%
Growthpen Corp. shares (FV-OCI)
Jan. 2
FV-OCI Investments2 ............................
Unrealized Gain or Loss – OCI .......
To adjust to fair value at date of disposal
2
1,675
1,675
At Dec. 31/19, 1,000 shs FV = 1,000/4,000 X $26,100
$6,525
FV of shares on Jan. 2/20 = 1,000 X 8.50
8,500
Less commission
( 300)
8,200
Increase in fair value in 2020
$1,675
Cash (1,000 X $8.50) ˗ $300 .................
FV-OCI Investments .......................
To record disposal
8,200
8,200
Accumulated Other Comprehensive
Income3 .......................................
1,000
Retained Earnings ..........................
1,000
To reclassify holding gain
$1,675 – (25% X $2,700 loss) = $1,0003 gain in AOCI and OCI
Mar. 18 Cash (3,000 X $1) .................................
Dividend Revenue ..........................
To record dividends collected
3,000
3,000
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PROBLEM 9.17 (CONTINUED)
a. (continued)
Dec. 31 FV-OCI Investments..............................
1,425
4
Unrealized Gain or Loss – OCI ......
To adjust to fair value
4
Balance in FV-OCI investment account:
($26,100 + $1,675 - $8,200) ..........= $19,575
FV of shares at Dec. 31/20:
$7 X 3,000 shares ..........................= 21,000
Unrealized gain to OCI ........................= $ 1,425
1,425
Metal Corp. bonds at amortized cost
May 1 Cash (6% X $500,000) X 6/12 ………
15,000
Interest Receivable ………………
5,000
Interest Income ($13,047 X 4/6)...
8,698
Investment in Bonds at Amortized Cost5
1,302
5
($1,953 X 4/6) = $1,302
Date
Cash
Interest
Premium
Investment
received
income 2.5%
amort’n
balance
Nov 1/19
$521,878
May 1/20
$15,000
$13,047
$1,953
519,925
Nov 1/20
15,000
12,998
2,002
517,923
May 1/21
15,000
12,948
2,052
515,871
Jun.30 Interest Receivable ($15,000 X 2/6)…….
5,000
Interest Income ($12,998 X 2/6). ……..
Investment in Bonds at Amortized Cost6
6
$2,002 X 2/6
To accrue interest
Balance in Investment in Bonds of Metal at June 30, 2020:
$521,227 – $1,302 – $667 = $519,258
4,333
667
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PROBLEM 9.17 (CONTINUED)
a. (continued)
Jun.30
Cash ($500,000 X 1.02) + $5,000……... 515,000
Loss on Disposal of InvestmentsCost/Amortized Cost ………
9,258
Interest Receivable ………………
5,000
Investment in Bonds at Amortized Cost
519,258
To record disposal
Investment in Lloyd Corp. shares
It appears that Minute Corp. can exercise significant influence over
Lloyd’s operations and finances, and there is a 3,600/12,000 = 30%
equity interest, therefore the equity method should be used.
Jan. 3
Investment in Associate …………...
234,000
Cash……………………………….
234,000
To record purchase of investment
Analysis:
Paid……………………………….……
$234,000
For 30% of BV: ($1,400,000 - $750,000) X .3 = 195,000
+ 30% of patent FV: ($60,000 X .3) =
18,000
213,000
Excess = goodwill
$21,000
Patent FV difference to be amortized at a rate
of $18,000/6 years = $3,000 per year
Oct. 15
Cash (3,600 x $1)…………………………… 3,600
Investment in Associate ………...
To record dividends collected
3,600
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PROBLEM 9.17 (CONTINUED)
a. (continued)
Dec. 31
Dec. 31
Investment in Associate……………
Investment Income or Loss 7……
7
$48,000 X 30%
To record investment income
14,400
14,400
Investment Income or Loss………
3,000
Investment in Associate ……….
To record amortization of fair value difference
3,000
The carrying amount of the Investment in Lloyd Corp. in Minute’s
accounts is now:
$234,000 - $3,600 + $14,400 - $3,000 = $241,800
Although the fair value of the investment is only $217,800, no information
is provided to indicate there has been a permanent impairment in the
investment’s value. Because of this and the fact that this investment is
not measured at fair value, no adjustment to its fair value is required.
b.
Partial Statement of Financial Position, December 31, 2020
Long-term Assets
Equity Investments, at fair value
with gains and losses in OCI
Investment in associate company,
at equity
Shareholders’ Equity
Accumulated other comprehensive
income (loss)8
8
$ 21,000
241,800
$(600)
(-$2,700 + $1,675 - $1,000 + $1,425) = -$600
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PROBLEM 9.17 (CONTINUED)
c.
Investment income-related accounts included in net income:
Investment income on FV-NI investments
($19,200 + $51,188)
Dividend revenue on FV-OCI investments
Interest income on amortized cost investments
($8,698 +$4,333)
Loss on disposal of investment in bonds
Equity in income of associate company
($14,400 - $3,000)
$70,388
3,000
13,031
(9,258)
11,400
Statement of Comprehensive Income
Year ended December 31, 2020
Net income
Other Comprehensive Income
Items that will not be reclassified to
net income:
Holding gains on investments9
Comprehensive Income
9
$1,422,600
3,100
$1,425,700
($1,675 + $1,425)
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PROBLEM 9.17 (CONTINUED)
d.
Statement of Changes in Shareholders’ Equity (Partial)
For the Year Ended December 31, 2020
Accumulated
Other
Retained
Comprehensive
Earnings
Income
Beginning balance
$1,980,000
$(2,700)
Comprehensive income
Net income
1,422,600
Other comprehensive Income
3,100
Reclassification of realized gains
Ending balance
1,000
(1,000)
$3,403,600
$(600)
Underlying investment related to balance of AOCI
Cost of 3,000 shares of Growthpen:
3,000/4,000 X $28,800 =
Fair value, Dec. 31, 2020
Unrealized loss in AOCI
$21,600
21,000
$( 600)
e.
Certain investments in debt and equity instruments may be accounted
for using FV-OCI. Gains and losses are accumulated in the OCI account
which adjusts net income to arrive at comprehensive income. The OCI
account is closed out to a SFP account called Accumulated Other
Comprehensive Income. The OCI account accumulates gains and losses
which, by definition, are excluded from net income under IFRS.
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CASES
See the Case Primer on the Student Website as well as the summary case primer
in the front of the text.
CA 9.1 INVESTMENT COMPANY LIMITED (ICL)
Overview:
Private company – therefore, no legal GAAP constraint. The bank, who is looking at
lending the company money, might want GAAP statements since they are relevant
and reliable. Owners might also want GAAP statements so that they can assess
stewardship of the two managers. The company may follow ASPE or IFRS. The bank
may want one or the other. Both will be considered in the analysis.
As the accountant, you will want to provide the bank with useful information to
secure the loan to expand.
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CA 9.1 ICL (CONTINUED)
Analysis and Recommendations:
Issue: How to account for IA.
Significant influence
At cost or fair value
- ASPE- 15% does not usually represent
- At least two owners interested
significant influence as it is below the
in holding onto shares for the
20% threshold.
longer term and therefore, could
- Investments in equity shares are
be long-term investment.
generally carried at cost under ASPE
unless there is significant influence or
- Supported by interchange of
unless the shares are quoted in an
technology (company uses lab
active market (these do not appear to
equipment), representation on
be). Therefore, under ASPE they
Board (1 out of 3 represents
would likely be carried at cost.
- Under IFRS, the investment may be
significant influence),
carried at FV-NI or FV-OCI. It may
interchange of managerial
make sense to use the former if they
personnel (owner hired as
plan to trade them. It appears as
consultant – therefore may
though at least 2 of the owners would
influence).
like to hang on to the shares for the
longer term so perhaps FV-OCI makes
- Use equity method if significant
more sense. An election is required to
influence. Record at cost and
classify instruments under FV-OCI. If
recognize pro-rata share of
FV-OCI is used, dividend income from
income/losses.
these investments is reported directly
in net income while remeasurement
gains and losses are recorded in OCI.
- There is no recycling of unrealized
gains and losses to income when
those investments are sold.
Conclusion: the involvement of the owners would appear to indicate significant
influence exists and therefore, the equity method should be used.
Issue: How to account for IB.
Under ASPE, IB would be carried at cost for the same reasons as IA above. Under
IFRS, IB would be carried at fair value (as noted above using either FV-NI or FVOCI). Note that these are preferred shares and therefore would not be accounted for
under the equity method. Given that they will be resold in the near term, FV-NI may
make the most sense. The fair value is known – making it easy to measure.
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CA 9.1 ICL (CONTINUED)
Issue: How to account for IC.
Likely a significant influence investment since 25% ownership, however, we need to
consider the actual interrelationship of ICL’s management and board with the
management and board of directors of IC before making this decision. It would
appear that there is an impairment in the value of this investment. If the $10,000,000
is written off by IC, ICL’s share is $2,500,000. Using the equity method as required
under IFRS, this would wipe out the carrying value of the investment and may create
a liability. Even though IC’s financial statements will not be prepared for another 2
months, you should still consider this information. It would appear to be a nontemporary decline, since it affects a drug that was meant to provide 50% of the profits
of the company going forward. Consequently, impairment testing should be
performed.
Should a liability be created? Only if ICL is committed to making up the cash shortfall,
is on the hook to make up cash shortfalls, or if a turnaround is imminent. There is no
evidence of any of these, therefore, using the equity method should result in writing
off the investment and not creating a liability. Under both IFRS and ASPE, an
investment that results in significant influence is assessed at each financial statement
position date to determine if there are any indications that the investment may be
impaired. If there are indicators, the investment’s carrying amount is compared with
the investment’s recoverable amount: the higher of its value in use and fair value less
costs to sell, both of which are discounted cash flow concepts.
Alternatively, if the ICL managers and owners cannot significantly influence the
policies and operations of the management and board of IC, the equity method
cannot be used under either ASPE or IFRS. Under ASPE, ICL would likely account
for the investment at cost (along with recognizing an impairment loss) as IC is a
private company without a reliable FV share price. Under IFRS, it is likely that the
shares would be measured at fair value, even though there may not be an active
market price. In either case, a loss in FV would have to be recognized—reported in
net income if a FV-NI approach is chosen, or in OCI under a FV-OCI approach. In
the latter case, the loss would not be recycled. FV-NI is appropriate if the investment
is being held for trading or for speculative purposes while FV-OCI is more appropriate
if the investment is held for longer periods or for strategic purposes. To classify the
investment as FV-OCI, management must make an election upon initial designation.
Because the owners of ICL have employed managers to manage their investments
with a view to maximizing their return on investment (an assumed but very likely
objective), it is likely that they would prefer full FV valuation for ICL’s assets.
However, because the investments are in smaller private companies instead of
publicly traded entities, the owners might very well prefer reliable cost measures
instead.
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CA 9.2 CANDO COMMUNICATIONS (CC)
Overview:
CC is a conglomerate with investment in many companies. As an analyst, care
should be taken to ensure that the accounting reflects the true nature of the business
relationship and that it assists in predicting future cash flows, which are used in
valuing a company.
Net income is down substantially ($42 million lower than prior year), even though
revenues are up 15%. Care should be taken to ensure that aggressive accounting
has not been used to mitigate the impact of the loss. IFRS is a constraint since the
company is a public company.
Note that all the investments appear in line with the company’s main business of
operating in the telecommunications industry and unless otherwise noted, would be
assumed to be long-term investments.
Analysis and Recommendations:
Issue: Investment in Australia TV
Significant Influence
- Owns 15% of the investment, which is
close to the 20% benchmark.
- Has representation on the board in
the amount of 3 out of 12 – which
does not indicate control – only
influence (perhaps not even that).
- Other.
Subsidiary
- % share ownership along with the
convertible debentures yield effective
control. If the debentures were
converted, the company would have
approximately 50% of the shares,
which is equal to control in terms of
voting rights.
- If a subsidiary – will consolidate 100%
of the assets, liabilities, revenues, and
expenses – which gives a better
picture of what net assets are under
the control of CC.
-CC would also report non-controlling
interest on its financial statement
representing the portion of Australia
TV not owned by CC
- Other.
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CA 9.2 CC (CONTINUED)
Conclusion: Likely a subsidiary, because of the potential to exercise control.
Consolidation provides greater transparency in terms of the underlying business.
(Note: IFRS 10.B47 indicates that potential voting rights as well as existing voting
rights are considered by the investor in determining whether there is control if the
potential voting rights are substantive.)
Issue: Investment in Ulster TV
Even though Cando has almost a 30% equity interest in UlsterTV, it appears that it
cannot exercise any influence over the activities of the investee company.
Therefore, the equity method of accounting is not appropriate. The accounting
issue is whether this investment should be carried at fair value with changes in
value being recognized in net income, or whether changes in value should be
recognized through OCI.
Issue: Investment in Ulster TV
FV-NI
- If Cando expects to hold this
investment for the short term and will
likely realize any gains or losses in
the investee’s fair value, net income
treatment would be a better predictor
of future cash flows and the effect on
Cando of changes in the FV of
UlsterTV.
-If Cando’s management affects the
performance of UlsterTV, changes in
its value would be more appropriate if
recognized in net income and its EPS
- Other.
FV-OCI
- If Cando expects to hold this
investment for strategic purposes in
the longer term, so that the variability
in the investee’s fair value is not
expected to be realized, OCI
treatment would produce a better
result. The current fair value of the
investment is provided, but the
variability does not affect net income
or EPS since FV-OCI equity
investments are not recycled to
income
-If Cando does not influence the
economic performance of UlsterTV,
including changes in its FV would
introduce “noise” to the net income
number that is not warranted.
-Other.
Conclusion: Because it appears that Cando does not have any effect on UlsterTV’s
performance and its future prospects at this point, changes in FV would be better
reported outside of net income – that is, in OCI.
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CA 9.3 IMPAIRED INVESTMENTS LIMITED (IIL)
Overview:
-
Since the company is considering going public, they should prepare GAAP
financial statements. They have decided to adopt IFRS.
It would appear that the investment values may be in question.
As controller, would want to ensure transparency but there may be a bias to
show current shareholders that the investment decisions made were good
ones. Care should be taken to ensure that this bias does not creep into the
financial statements.
Analysis and Recommendations:
Issue: Bond investment
-
-
-
-
-
The bond investment would be carried at amortized cost where the intent is to
hold to contractual maturity and the instrument is debt-like (appears to be the
case since structured as a bond with interest payments). There is no indication
of the intent of management so this would have to be determined.
For investments carried at amortized cost, IFRS would require IIL to use the
expected loss model to determine impairment.
More specifically,
management would have to determine whether the credit risk of the
investment has significantly increased. If not, a 12-month timeframe would be
used to assess defaults. Otherwise, defaults would have to be considered
over the lifetime of the investment.
In this case, the change in interest rates in the market place are not significant
enough evidence of impairment as they appear to be due to general economic
factors in the marketplace and not specific problems related to this instrument.
Moreover, it is difficult to determine if the credit risk change is significant or
not. The evidence is vague as to whether there is objective evidence of a
decline in value.
If the investment were recorded as FV-OCI (not likely FV-NI since no
indication of holding for short term), management would have to use the fair
value impairment model.
Therefore, do not write down based on evidence obtained thus far.
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CA 9.3 IIL (CONTINUED)
Issue: Common shares A
-
The company has a choice under IFRS to classify these shares as FV-NI or
FV-OCI. This is an accounting policy choice.
If the entity chooses FV-OCI – this is an irrevocable election. Amounts in
OCI are not subsequently transferred to net income.
If the entity chooses FV-NI, all gains and losses will flow through net income
and introduce volatility.
There is no need to worry about impairment for this asset since it is already
marked to fair value with gains/losses being booked to income (fair value
model is used for FV-NI investments and therefore no separate impairment
testing is performed since the assets are continually revalued to fair value).
The accounting policy choice (FV-NI or FV-OCI) will affect the accounting for
impairment on a going forward basis, however.
Should IIL decide to account for the investment using FV-OCI, impairment
testing would not be performed since impairment losses on equity investments
are not recycled to net income.
Issue: Common shares B
-
-
-
-
The company has a choice under IFRS to classify these shares as FV-NI or
FV-OCI. This is an accounting policy choice.
If the entity chooses FV-OCI – this is an irrevocable election. Amounts in
OCI are not subsequently transferred to net income (including impairment
losses).
If the company chooses FV-OCI – all gains and losses will be reported outside
of net income. It looks like the investment may be declining in value but the
controller believes this is temporary.’
If the company chooses FV-NI – all gains and losses will be reported as part
of net income. Since the controller’s intention is to sell the shares as soon as
a 10% return on investment is achieved, it would be preferable to account for
the investment at FV-NI so that the realized gain is included in net income.
Whether IIL should choose FV-NI or FV-OCI for these investments (and for
the investment in shares of Company A) depends on how the financial
statement information will be used. If management is to be evaluated on the
performance of the investments – both dividend/interest income and changes
in the fair value of the investment holdings, the FV-NI choice for both may be
better. If the intent is to hold these shares for the short term, perhaps for more
strategic purposes, the FV-NI choice would probably be better.
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INTEGRATED CASES
IC 9.1 EMI INC.
As a corporation, EMI is now operating with a different business model and is
undertaking new investments. These complex transactions may increase EMI's risk
of misstatement from misapplied accounting policies.
The equity analyst will use the financial statements for financial analysis, particularly
to determine the economic performance of the company and its new strategy. Has
the new strategy provided opportunities for increased cash flows to investors in the
future? Is the company earning more on these investments than the investors could
if the cash had been distributed to them directly? Analysts will want the financial
statements to be prepared with transparency and based on substance over legal
form.
Other users will be EMI's shareholders and board of directors. These users will
review the financial statements to evaluate management, in addition to the prospects
for future cash flows.
EMI is a public company and therefore must use GAAP financial statements in
accordance with IFRS for financial reporting purposes. ASPE is not an option:
however, references to ASPE have been included for information purposes.
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IC 9.1 EMI INC. (CONTINUED)
Issue - EMI's investment in ABC
Significant Influence
Consolidation
- EMI only owns 40% of the voting
shares of ABC which does not imply
legal control
-The remaining 60% ownership of ABC
shares is widely held with no
individual shareholder holding more
than 1% of the outstanding shares
- EMI has only one of twelve seats on
the board of directors providing it with
the ability to influence but not control
ABC's operations
- EMI is a guarantor for ABC's
outstanding debt and has the right to
use ABC's fixed assets as collateral
- ASPE allows for a choice of the
equity or cost method of accounting.
- EMI's two executives participate in
ABC's strategic committee
- IFRS requires the equity method
- In substance, EMI has the risk and
rewards of control and has the ability
to control ABC's strategic and
financial operations
- IFRS requires consolidation
- ASPE allows for a choice of equity or
cost
- EMI would be required to show the
minority interest (non-controlling
interest – portion of the company not
owned by EMI) in both its income
statement and balance sheet
EMI should consolidate its investment in ABC because of its ability to control ABC's
resources despite not having legal control. Under consolidation, the combined
assets of ABC and EMI would be shown on the consolidated statement of financial
position. 100% of ABC’s assets would be included and a noncontrolling interest
would be shown in Shareholders’ Equity for recognize the portion of net assets not
owned by EMI.
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IC 9.1 EMI INC. (CONTINUED)
Issue - Corporate bonds
Amortized Cost Model
Fair Value - NI or FV-OCI
- Management has stated its intention
of holding the investment for longterm interest earning (cash flow)
purposes, signalling the investment
will be measured using the amortized
cost model.
- Historically EMI has always
purchased corporate bonds for shortterm trading, which would be
accounted for under the FV-NI model.
- For such investments, IFRS requires
that the interest is recognized using
the effective interest rate method
- ASPE - permits interest to be
recorded using the straight-line or
effective method
-Under FV-NI model, the investment is
adjusted to fair value at the end of
each reporting period. All unrealized
gains/losses and interest earned is
reported in net income.
- Another option is to use the FV-OCI
model (assuming that the bonds will
either be held to collect principal and
interest payments or for sale). Gains
and losses would be booked through
OCI (with recycling), but interest
earned is reported in net income.
- Under ASPE, the fair value option can
be used to account for the investment
at FV-NI.
EMI should account for the corporate bonds at amortized cost given management's
intention for the investment. Interest should be recorded using the effective interest
method as shown in the amortization table below. In addition, given management’s
intention of holding the bonds to earn income, this investment should be shown as
a non-current asset. Other bonds held for short-term trading would be shown as a
current asset.
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IC 9.1 EMI INC. (CONTINUED)
6% Corporate Bonds Purchased to Yield 8%
Cash Interest
Interest
Income
Bond
Discount
Amortized
1/1/2021
Amortized
Cost of Bonds
$ 94,758
7/1/2021
$ 3,000
$ 3,790
$ 790
95,548
1/1/2022
3,000
3,822
822
96,370
7/1/2022
3,000
3,855
855
97,225
1/1/2023
3,000
3,889
889
98,114
7/1/2023
3,000
3,925
925
99,039
1/1/2024
3,000
3,961
961
100,000
$18,000
$23,242
$ 5,242
Journal entry - upon inception 1/1/2021
Dr. Bond Investment at Amortized Cost
Cr. Cash
94,758
94,758
Journal entry - to record the first receipt of interest on July 1, 2021
Dr. Cash
Dr. Bond Investment at Amortized Cost
Cr. Interest Income
3,000
790
3,790
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IC 9.1 EMI INC. (CONTINUED)
Issue - Portfolio investment
FV-NI or FV-OCI Model
- In the past, management has held
similar portfolios for the purpose of
holding to trade and earn short-term
profits. For these investments, the FVNI method would have been
appropriate.
- Under the FV-NI method:
 Transaction costs of 2% of the
purchase price are expensed.
 Changes in FV (unrealized
changes) are recognized through
net income
 Each portfolio must be remeasured to FV at each balance
sheet date
 This option is available under
both ASPE and IFRS.
- Under IFRS – the option exists to use
FV-OCI when the investment is first
recognized.
 Transaction costs would be
included in the cost of the
investment.
 Changes in fair value would be
recognized through OCI.
 Realized gains and losses on
disposal would not be recycled
and would be transferred to
retained earnings from AOCI.
Cost Model
- Management has not explicitly stated
its intention to hold only for the shortterm
-Transaction costs are added to the
cost base
- Changes in FV are not applicable and
not adjusted for
- IFRS - the cost method is used for the
portfolio of equity instruments for
which fair value is not measurable
- ASPE - the cost method is used for
the portfolio of equity instruments with
no quoted market price
Note that the investments in Portfolios A and B are relatively minor in relation to the
company’s total assets.
Portfolio A should be measured using the FV-NI model; however, Portfolio B must
remain at cost because there is no quoted market price. The 2% transaction costs
for Portfolio A must be expensed. Transaction costs for Portfolio B must be added
to the cost base. Portfolio A must record an investment loss to bring the portfolio to
its fair value at the end of the year.
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IC 9.1 EMI INC. (CONTINUED)
Journal entry - to adjust to fair value - December 31, 2021.
Dr. Investment Income or Loss
Cr. FV-NI Investments
5,778
5,778
Management’s intention will also determine the classification of these investments
on the company’s statement of financial position. If the portfolios are held for trading,
they would be shown as current assets. If management’s intention is to hold them for
a longer term, they would be shown as non-current assets.
Because the 3% investment in Portfolio B is in a movie theatre, EMI management
might decide to follow a different strategy for this investment. This may be just the
beginning of an increased interest later, so EMI might have a more strategic plan for
this investment. The accounting method and strategy should be monitored going
forward. Accounting for this investment at FV with changes going to OCI may be an
option (with no recycling), although for now, the immateriality of the investment gives
EMI management some time to determine what their longer-term plans are.
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RESEARCH AND ANALYSIS
RA 9.1 HUDSON’S BAY COMPANY
a. Hudson’s Bay Company reports only Investments in Joint Ventures as financial
investments on its Consolidated Balance Sheet at February 3, 2018.
Feb. 3, 2018
Jan. 28, 2017
Investments in joint ventures
$ 602
$ 581
Total assets
12,234
12,204
(millions of Canadian dollars)
Percentage of investments in
joint ventures to total assets
4.92%
4.76%
Note 12 to the financial statements discloses that these investments are
accounted for using the equity method.
The accounting policies note describes a joint venture as follows: a joint venture
is a type of joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the joint venture. Joint control is the
contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require unanimous consent of the
parties sharing control.
The joint ventures represent 4.92% (4.76% in 2016) of total assets for the year
ended February 3, 2018 and this is relatively important because they form a
significant percentage of the company’s total assets.
b. Hudson’s Bay has investments in subsidiary companies. Note 2 – Significant
accounting policies also discloses the basis of consolidation as follows: “These
consolidated financial statements of the Company include the accounts of HBC
and its subsidiaries.”
It appears that the subsidiaries are wholly owned as Hudson’s Bay
provides no disclosure about significant non-controlling interests (i.e.,
ownership) held by other parties.
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RA 9.1 HUDSON’S BAY COMPANY (CONTINUED)
b. (continued)
The equity section of Hudson’s Bay’s balance sheet does not show any noncontrolling interests and the Consolidated Statement of Loss does not allocate
the loss between the shareholders of Hudson’s Bay and the non-controlling
interests. The statement of cash flows shows the acquisition of a subsidiary in
2016. This acquisition is also disclosed in Note 1 to the financial statements.
There is a substantial amount of information disclosed about its joint venture
investments:
Note 2: Hudson’s Bay’s accounting policies related to its joint ventures and how
they are presented in the financial statements.
Note 12: information about the company’s three major joint ventures with
summarized balance sheet and income statement information for the two more
significant investments, as well as a reconciliation of the transactions affecting
the investment account.
c.
There were no business acquisitions during the period as indicated in Note 1:
General Information, but there was an acquisition in the prior year, which is
described briefly in Note 1.
There is also an indication that a business was acquired in the previous year on
the Statement of Cash Flows, which shows an investing $322 million cash
outflow for the acquisition of a subsidiary, as well as a $10 million investing
outflow of cash for an investment in joint ventures. No acquisitions were made in
2017 or further investments in joint ventures.
Analysts need to be careful when using ratios of income and balance sheet
amounts in any year where there have been business combination transactions.
This is because 100% of the assets and liabilities resulting from the acquisitions
are included in the 2017 balance sheet, but the income statement includes the
results of operations of the acquired businesses only from the date of acquisition
in the current year to year end. Therefore, the analysts must make adjustments
to normalize the income amounts to an estimate of a full year’s results.
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RA 9.2 Royal Bank of Canada
a.
($ millions)
Securities
Total Assets
Percentage of total assets
Loans (net)
Oct. 31, 2017
$218,379
1,212,853
18.0%
542,617
Oct. 31, 2016
$236,093
1,180,258
20.0%
521,604
Because banks are primarily in the business of lending money, a significant
portion of their assets are made up of loans receivable from businesses and
individuals. The investments (securities) are shown on the balance sheet after
cash resources and before loans receivable. The balance sheet is not classified
between current and non-current assets and liabilities. The banking industry
operates in a unique environment where investments in securities do not reflect
the same motivations, goals, or risks as they do for other companies. The usual
corporate classification of investments as temporary investments because the
investments reflect excess cash invested for the short term, is not relevant to
the banking industry. Financial institutions tend not to present classified balance
sheets since the classification does not present useful information to readers.
b.
($ millions)
Interest income from securities
A
Total interest income
Percentage of total interest income
Other “comprehensive income” items relating to securities:
Trading revenue
B
Commissions on securities transactions
C
Net gain on investment securities
D
Net change in unrealized gains (losses) on
available-for-sale securities (in OCI)
E
Net securities income
(A + B + C + D + E)
F
Net income + E
Percentage of securities income to net income + E
Investment in securities
G
Return on investment in securities (F/G)
2017
$4,899
26,904
18.2%
2016
$4,593
24,452
18.8%
806
1,416
172
701
1,429
76
38
25
7,331
11,507
63.7%
218,379
3.4%
6,824
10,483
65.1%
236,093
2.9%
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RA 9.2 ROYAL BANK OF CANADA (CONTINUED)
b. (continued)
The return on investment in securities increased slightly from 2016 to 2017 with
a relatively low 2.9% to 3.4% return on investment, consistent with the relatively
low but increasing market interest rates over the 2016 – 2017 period. The
investment income on the securities made up a somewhat lower percentage of
net income (including the net OCI income (losses) on the same investments) in
2017 than in 2016, due in large part to a larger net income base in 2017. Total
investment in securities decreased by a larger proportion than the decrease in
percentage of securities to net income, thereby generating a greater return on
investment.
c.
Securities consist of “Trading”, “Available-for-sale” and “Held-to-maturity”
investments. The valuation methods used by RBC are as follows:
Trading securities comprise debt and equity securities purchased and
measured subsequently at fair value at each reporting date. Unrealized gains
and losses are recognized directly in net income as a component of non-interest
income as the fair values change in each reporting period. Available-for-sale
securities also represent debt and equity investments that are remeasured to
their fair value at the end of each reporting period. However, any unrealized
gains and losses are recognized in “Other Comprehensive Income (OCI)” rather
than net income. Once an investment is sold, the realized gains and losses
(proceeds on disposal less the original cost of the investment) are transferred
to net income as a component of non-interest income. The unrealized gains
(losses) previously included in OCI related to such investments are transferred
to net income and are included in the realized gains and losses. Held-tomaturity securities represent investments in debt securities. These are reported
in the financial statements at their amortized cost using the effective interest
method.
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RA 9.2 ROYAL BANK OF CANADA (CONTINUED)
c. (continued)
Dividend income and interest income related to all types of securities are
reported directly in net income. The trading securities are reported at their fair
value at each reporting date and are not subject to impairment testing as all
changes in their fair values go directly to net income. The available-for-sale
investments, on the other hand, are assessed for impairment at each reporting
date at a minimum. When an impairment in value is evident, an impairment loss
is recognized in net income, with the prior accumulated fair value changes
adjusted out of OCI. The held-to-maturity securities are also assessed regularly
for impairment with all impairment losses recognized in net income.
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RA 9.3 STRUCTURED, OR VARIABLE INTEREST ENTITIES
Until recent years, companies determined whether an investee was a controlled
investee (and therefore, a subsidiary that needed to be consolidated) by whether the
reporting company held a majority of the voting shares of the investee. Over time, as
business methods and strategies evolved, in some cases due to financial
engineering practices designed to keep the assets and liabilities of other entities off
the reporting entity’s balance sheet, it became evident that using the “voting control”
criteria did not always produce financial statements that faithfully represented the
financial position, performance, and risks faced by the reporting company. In many
cases, investor companies did not consolidate a number of associated business
interests where control was exercised by means other than the proportion of equity
interests held. Companies such as Enron managed to keep the liabilities of various
investees off its balance sheet and their losses out of its net income when it was
clearly exposed to the risks of both, although it did not hold the majority of the
investees’ shares. The poor financial position and subsequent collapse of Enron,
among other significant corporations, was a result of the use and non-consolidation
of these specially structured entities.
The accounting issue that needed resolution was how interests in such entities
should be accounted for by the reporting entity. Consolidation by the reporting entity
did not usually apply because the reporting entity did not have clear control of the
investee company through voting interests. However, when the reporting entity was
the primary beneficiary/risk holder of the investee because it held the majority of
rights and obligations of the other enterprise (such as financial instruments, service
contracts, and non-voting ownership interests) as well as direct exposure to their
profits and losses, it would have been more appropriate to require consolidation of
such entities. Under current accounting standards, it is recognized that in today’s
complex business environment, determination of control is based on factors other
than common share ownership and a control test of ownership of 50% of voting
shares. Accounting standards have dealt with this issue as follows.
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RA 9.3 STRUCTURED, OR VARIABLE INTEREST ENTITIES
(CONTINUED)
Under IFRS, a structured entity is defined in IFRS 12 (Disclosure of Interests in Other
Entities), Appendix A as:
An entity that has been designed so that voting or similar rights are
not the dominant factor in deciding who controls the entity, such as
when any voting rights relate to administrative tasks only and the
relevant activities are directed by means of contractual
arrangements.
Control of an investee is deemed to exist “when an investor is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee” (Appendix A to IFRS 10 Consolidated Financial Statements). The accounting standard explains what ‘power’
is and ‘the ability to use its power over the investee to affect the amount of the
investor’s returns’ means. In effect, an investor has power when it exercises or has
the right to exercise rights to direct activities that significantly affect the returns of the
investee. The variable returns could be positive or negative (or both) as a result of
its involvement with the investee. It is clear that the activities refer to key strategic,
operating, and financing activities, and not merely administrative ones. The other part
of the definition requires that the entity be exposed to the variability of the returns
that the investee entity generates. These definitions and the concept of control have
evolved over time so that the investor reports a faithful representation of the
resources and obligations under its control.
Under U.S. GAAP, FASB uses the term variable interest entity or VIE in FIN 46 to
indicate a business enterprise for which the majority of rights and obligations that
convey economic gains and losses are held by another reporting entity, even though
the reporting entity does not have clear control over the enterprise through voting
interests. In situations where the reporting entity is the primary beneficiary of the
returns and risks offered by the investee, the investee is consolidated by the investor.
ASPE’s Accounting Guideline 15 - Consolidation of Variable Interest Entities uses
terminology and general requirements similar to those of FASB, if an enterprise’s
choice of accounting policy is to consolidate its subsidiaries.
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RA 9.3 STRUCTURED, OR VARIABLE INTEREST ENTITIES
(CONTINUED)
An example of a company that is affected by accounting for such structured entities
(SEs) where control is exercised by means other than through voting control is
Empire Company Limited. Note 3 (a) to Empire’s May 6, 2017 reporting date financial
statements indicates that “SEs controlled by the company were established under
terms that impose strict limitations on the decision making powers of the SEs
management and that results in the Company receiving the majority of the benefits
related to the SEs operations and net assets, being exposed to the majority of risks
incident to the SEs activities, and retaining the majority of the residual or ownership
risks related to the SEs or their assets.”
Such investees include franchise affiliate stores where the terms of the franchise
agreements result in profits or losses of these enterprises accruing to Empire, and a
warehouse and distribution agreement that Empire has with an independent entity
where the terms of the agreement result in profits and losses accruing to Empire.
Both investees are structured entities and are consolidated by Empire Company
Limited.
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RA 9.4 POTASH CORPORATION OF SASKATCHEWAN
a. PotashCorp indicates that control exists when the following three conditions are
present:
 It has the current ability to direct the investee’s relevant activities and
policies by virtue of holding existing rights that give it that power
 Its involvement with the investee gives PotashCorp rights or exposure to the
investee’s variable returns
 It has the ability to exercise its power to influence the investee’s returns.
In assessing whether control exists, PotashCorp also considers the existence and
effect of current and potential voting rights, including those that are currently
exercisable or convertible.
Estimates and judgements are required to determine what the substance of the
relationship is between the investor and investee and whether control exists. This
includes assessing what the relevant activities are in connection with the investee,
and deciding which entity, if any, controls them. Factors that need to be considered
include:
 The relative size and dispersion of voting rights held by other shareholders
 The role that other shareholders play in appointing key management
personnel and board members
 PotashCorp’s rights to direct the investee entity to perform for its benefit
 PotashCorp’s exposure and/or rights to the variability of the investee’s returns
as a result of its involvement with the investee company
b. PotashCorp applies IAS 39 in accounting for its financial asset investments. This
information is found in Note 31 – Accounting policies, estimates and judgments
in the section dealing with standards that are not yet effective or applied by the
company. The company is reviewing IFRS 9 to determine what the potential effect
would be of applying that standard.
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RA 9.4 POTASH CORPORATION (CONTINUED)
c. (in millions of US dollars)
Name
Classification
Sociedad
Quimica y
Minera de
Chile SA
Arab Potash
Company
Canpotex
Associate
% of
voting
rights
28%2
Associate
28%
Associate
33%
Other
Available for Not given
sale
Joint
n/a4
ventures
Available for
14%
sale
Available for
22%
sale
Other and
joint ventures1
ICL
Sinofert
Accounting
Method
Carrying
Amount
Fair
Value
Equity
method
$784
$4,645
Equity
method
Equity
method
FV-OCI
$362
$543
$0
n/a3
$4
$4
Equity
method
FV-OCI
$30
n/a
$708
$708
FV-OCI
$258
$258
1
No company names provided
Proportion of ownership interest is 32%
3 Private company, no quoted market price available
4 Control is shared and not a function of share ownership. Share of net assets is not
provided.
2
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RA 9.4 POTASH CORPORATION (CONTINUED)
d.









Other information provided about its equity-accounted investments:
A description of the accounting policies and accounting estimates and
judgements applicable to this group of assets.
Proportion of ownership interest and voting rights held, as well as quoted fair
value and carrying amount for 2017 and 2016.
Information about how impairment losses are determined
The principal activity/business of each
The geographic location of the operations of each
A summary of PotashCorp’s interest in the associates’ earnings reported in
income from continuing operations and net income, other comprehensive
income, and total comprehensive income
A summary total of key subtotals from the balance sheets of its equityaccounted for investees at December 31, 2017 and 2016
A summary of the total sales, gross profit, and income from continuing
operations and net income lines reported on the investees’ income statements
for the past three years
The total dividends received from these investees in each of the past three
years.
The equity method of accounting for investees is an application of the accrual
method of accounting for investments. As the investees earn income, the investor
recognizes its share of the income earned as its income, and this
is what is reported on the statement of comprehensive income, split between the
portion that is reported in net income and in OCI. The dividends received from the
investees simply reduce the carrying amount of the investment on PotashCorp’s
balance sheet to recognize that part of its investment has been converted to cash.
It would be double-counting if it were included in income again.
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RA 9.4 POTASH CORPORATION (CONTINUED)
e. Because available-for-sale investments are carried at fair value, the impairment
assessment looks at whether the decline in an investment’s fair value below its
cost is significant and likely to be prolonged. PotashCorp indicates that this
assessment requires significant judgement, and looks for objective evidence of
impairment. Where the fair value of the investment later falls below the adjusted
carrying amount at a previous impairment date, the company considers this
objective evidence. Whether this is merely an ordinary change in the investee’s
market value or whether the investment is considered impaired is important
because impairment losses on such investments are recognized in net income,
whereas ordinary decreases in fair values are recognized in other comprehensive
income.
Note 19 indicates that a prior impairment charge (in 2012) had been recorded on
the company’s investment in Sinofert because its fair value was significantly below
its cost. During 2014 and 2016, the fair value of the investment had declined
further below its carrying amount at the previous impairment date and this
triggered another impairment assessment and further losses were recognized in
2014 and 2016 net income. No impairment loss was recognized in income during
2017.
During 2017, Sinofert’s fair value improved and the subsequent adjustment to fair
value was recognized in other comprehensive income.
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RA 9.5 IMPAIRMENT MODELS
An investment is recognized as impaired when there is not reasonable
assurance that the future cash flows associated with the investment will be collected
on time or in the full amount, under the incurred loss model. To determine when there
is not reasonable assurance of the future cash flows, a triggering event that would
impact the amount or timing of future cash flows is considered. Examples of triggering
events include when the investee has been late making payments, significant
negative economic conditions exist, and the investee is experiencing significant
financial difficulty and potential bankruptcy. If a triggering event does occur,
impairment is recognized. The investment will be valued at the estimated realizable
amount, which is calculated using the revised payments and interest rates or the net
proceeds that would be received from collecting collateral or the realizable amount
from selling the investment. Interest income on the impaired investment is recognized
based on the discount rate used in calculating the present value of cash flows from
the investment. Changes in net realizable value of the investment are recognized
when they occur (which would be noted with a triggering event).
The benefit of the incurred loss model is that an impairment is recognized and
measured at the balance sheet date only when there has been a specific triggering
event. Therefore, the cost of measurement is lower, and the amount of the loss is
based on objective information. A weakness of this model is that it only recognizes
the losses that have been incurred at that point rather than continuously measuring
the loss.
The expected loss impairment model is continuous and estimates the
expected future cash flows from an investment throughout the period. The
recognition of impairment for investments under this model does not depend on a
triggering event; instead impairment is recognized based on changing cash flow
projections. The discount rate stays at the same effective interest rate that the
instrument was initially measured with so the measurement of the investment is costbased. The impairment loss is recognized as the difference between the carrying
amount and the revised present value of cash flows. Interest income after an
impairment is recognized, is based on the original effective interest rate. Since cash
flows are continuously estimated, this model recognizes impairments that have been
incurred to date as well as future expected losses.
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RA 9.5 IMPAIRMENT MODELS (CONTINUED)
The benefit of the expected loss impairment model is that impairment losses
(or the reversal of losses) are recognized sooner under this model, which improves
the quality of the information. Transparency is improved with this model since users
are provided with information as soon as it is available rather than only at the end of
the period. The weakness of the expected loss model is that it is both costly and
difficult to consistently measure the estimated future cash flows from an investment.
IFRS requires that all instruments valued at cost/amortized cost and debt
investments carried at FV-OCI use the expected loss model as opposed to the
incurred loss model, primarily because this model provides more transparent
information to users.
ASPE uses the incurred loss model for all investments measured at
cost/amortized cost.
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RA 9.6 SPECIFIC DISCLOSURE REQUIREMENTS
One of the objectives of financial instrument disclosure is to communicate to
users the significance of financial instruments to the financial position and
performance of the company. The requirements to disclose carrying values and any
impairment allowances supports this objective since the user can clearly see how
significant the values of financial instruments are compared to the company’s total
balance sheet.
Another objective is to explain the risks an entity is exposed to as a result of
their financial instruments. Impairment losses and reversals must be disclosed by the
company, which indicate some of the risks relating to the financial instruments and
the losses or gains they have experienced. Disclosure of financial risks relating to
investments and their changes over time also supports this objective.
The third objective of disclosure is to ensure companies describe their risk
management strategies. IFRS specifically has provisions for the disclosure of
management strategies for financial risks to address this objective.
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CUMULATIVE COVERAGE AND TASK-BASED SIMULATION:
CHAPTERS 6 TO 9
Part A – Cash and investments
Required: Determine whether each financial instrument should be presented in with
the cash and cash equivalents or investments section of the statement of financial
position.
Instruction: Place an X in the appropriate column in the table below.
Financial Instrument
Euro currency
Bank account
90-day Canadian government treasury bill
Western Hotel Company common shares
Dufort Corp. common shares
Cash and
cash
equivalents
X
X
X
Investments
X
X
Part B – Bank reconciliation
Required: Prepare a bank reconciliation for PHL as at December 31 to determine
the adjusted cash balance per the general ledger.
Instruction: Enter the description and amount of any adjustment in the table below.
To be completed by
Student (Description)
Cash per bank account:
Add:
Outstanding deposits
Deduct:
To be completed
by student ($)
$158,293
15,487
Outstanding cheques
52,375
Adjusted cash per general ledger:
$121,405
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CUMULATIVE COVERAGE (CONTINUED)
Part C: Investment income
Required: Calculate the carrying value as at December 31 and investment income
for the year ended December 31 for each of the financial instruments listed below.
Instruction: Enter the total investment income in the box in the table below.
Financial
Instrument
90-day Canadian
government
treasury bill
Carrying
Amount ($)
$98,693
Investment
income ($)
$654
Notes for instructor
$98,039 + (8% X $98,039
X 1/12)*
OR
Using: Amortized
Cost
($100,000 - $98,039) X
30/90
Western Hotel
Company common
shares
Using: Equity
Method
$5,045,000
$75,000
Western Hotel
Company common
shares
$30,000 dividend
$5,100,000
$130,000
Using: FV - OCI
Dufort Corp.
common shares
See Note 1 below
$100,000 FV gain
$500 dividend
$47,000
$(500)
Using: FV-NI
Note 1 - Investment in Western Hotel Company
Original cost
Add: Share of income
$250,000 x 30%
Less: Dividend received
$100,000 x 30%
Ending balance
$1,000 FV loss
$5,000,000
75,000
(30,000)
$5,045,000
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CUMULATIVE COVERAGE (CONTINUED)
Part D: Inventory carrying values
Required: Calculate the carrying value of each inventory items as at December 31.
Identify any inventory that requires a write-down.
Instruction: Enter the carrying value in the box in the table below. Place an X in the
box for any inventory that requires a write-down.
Carrying
Amount ($)
Food:
Chicken dinners
Beef dinners
Vegetable servings
Fruit servings
Desserts
Bathrobes and towels:
Bathrobes
Towels, extra-large
Towels, large
Writedown
Required
Instructor
notes
102.00
152.50
82.50
82.50
310.00
See Note 1
below
1,980.00
360.00
300.00
See Note 1
below
X
Note 1 – Calculations:
Food:
Chicken dinners (Note A)
(40-20) x ($5 + $0.10)
Beef dinners (Note A)
(35-10) x ($6 + $0.10)
Vegetable servings
75 x ($1 + $0.10)
Fruit servings
75 x ($1 + $0.10)
Desserts
100 x ($3 + $0.10)
Sub-total (all have cost lower than NRV)
$ 102.00
152.50
82.50
82.50
310.00
729.50
Bathrobes and towels:
Bathrobes
40 X $49.50 cost
Towels, extra-large
25 X ($18.00 X 80%) NRV
Towels, large 20 X $15 cost
Sub-total
Total
1,980.00
360.00
300.00
2,640.00
$3,369.50
Note A – The spoiled food has been written off and has no balance. Accordingly,
the amounts have been deleted from both inventory items.
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CUMULATIVE COVERAGE (CONTINUED)
Part E: Accounts receivable
Required: Calculate the accounts receivable, allowance for doubtful accounts, and
bad debt balances as at December 31.
Instruction: Enter the dollar amount for each item in the box in the table below.
Amount as at December 31
Accounts receivable
Allowance for doubtful accounts
Bad debt expense
$20,500 see below
Note 1
$525 see below.
Note 2
$22,525
Note 1 - Accounts receivable:
Short Term
Accrued (given)
Suites
Amount expected to be collected – corporate 1
Total
Note 2 - Allowance for doubtful accounts
Opening balance
Accounts written off during year
Balance before adjustment
Desired ending balance
Adjustment needed
Note 3 - Bad Debt expense
Adjustment to obtain desired ending
balance in Allowance for doubtful
accounts
Uncollectible amount on suite written
off as uncollectible
Ending balance
Note for instructor
Given
5% X $10,500
Note 3
$ 10,500
10,000
$ 20,500
$15,000 cr.
32,000 dr.
17,000 dr.
525 cr.
$17,525 cr.
$17,525
$45,000 x 4/12 $10,000
5,000
$22,525
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Intermediate Accounting, Twelfth Canadian Edition
CUMULATIVE COVERAGE (CONTINUED)
Part E: (Continued)
1. For the amount to be collected for the corporate suite, the wording in the question
suggests that Posh Hotels would have accrued 4 months of rental income as
follows:
Accounts Receivable (4/12 X $45,000)
$15,000
Service Revenue
$15,000
At year-end since only $10,000 is expected to be collected, Posh Hotels can set
up an Allowance for Doubtful Accounts in the amount of $5,000 in order to leave
a net realizable amount of $10,000. The presentation above suggests that the
outstanding receivable has been partially written off. This might be the case since
the company is in bankruptcy proceedings.
An additional issue relates to the service (rental) revenue. The revenue should
not be recorded unless it is realizable. When expecting $45,000 as a prepayment
on July 1, the Hotel would have expected payment. Later with the bankruptcy
and “allowing the tenant to stay to the end of October” the amount of revenue is
still questionable because at that point they know it won’t be the full year’s
$45,000. Certainly by year end they know the realizable value is $10,000 and
that should correspond to the AR (gross less allowance or just net). This raises
the issue of whether the revenue on the income statement should be $15,000 or
only $10,000, with bad debts expense of only $17,525.
We end up with 3 alternative answers based on the following journal entries:
Accounts Receivable
$15,000
Service Revenue
To record the accrual of rental income from July to October.
Alternative 1:
Bad Debts Expense
Allowance for Doubtful Accounts
To set up an allowance for the uncollectible portion.
$15,000
$5,000
$5,000
Alternative 2:
Service Revenue
$5,000
Accounts Receivable
$5,000
To write-off a portion of the receivable since the revenue is known not to be
realizable at year end. This also does not overstate receivables.
Alternative 3:
Bad Debts Expense
$5,000
Accounts Receivable
$5,000
To write off a portion of receivables to bad debts expense since the company is
in bankruptcy proceedings (approach used in the solution)
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CUMULATIVE COVERAGE (CONTINUED)
Alternative 1
(consistent with
Ch. 7)
Alternative 2
Alternative 3
(used above)
$25,500 ($10,500
accrued + $15,000
from suites)
$20,500 ($10,500
accrued + $10,000
from suites)
$20,500
($10,500
accrued +
$10,000 from
suites)
$5,525 ($525 +
$5,000 for the
suites).
$525
$525
Net realizable
value
$19,975
$19,975
$19,975
Service Revenue
$15,000
$10,000
$15,000
Bad debt expense
$22,525
$17,525
$22,525
Net impact on
income statement
$(7,525)
$(7,525)
$(7,525)
Accounts
receivable
Allowance for
doubtful accounts
All 3 approaches create the same net realizable value on the SFP and the
same net impact on the income statement. Alternative 3 is preferable over
Alternative 1, because it does not overstate accounts receivable.
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