chapter 11: financial instruments: investments in …boliver/ch11.pdf · solutions manual to...

© 2017 McGraw-Hill Education. All rights reservedSolutions Manual to accompany Intermediate Accounting, Volume 1, 7th edition 11-1

Chapter 11: Financial Instruments: Investments in Bonds and Equity Securities

Case 11-1 Quinter Corp.11-2 Wild Ones Ltd11-3 Quinn Inc.11-4 Northern Energy Ltd.

Suggested Time

Technical Review TR11-1 Amortized Cost—Bond ................................. 10TR11-2 FVOCI-Bond.................................................. 10TR11-3 FVTPL—Bond............................................... 10TR11-4 Sale of bond classified as FVOCI-Bond .......... 10TR11-5 Impairment – AC Bond................................... 10TR11-6 FVTPL -Shares............................................... 10TR11-7 FVOCI-Shares ............................................... 10TR11-8 Equity Method................................................ 10TR11-9 Joint Arrangement .......................................... 10TR11-10 Foreign Exchange ........................................... 10

Assignment A11-1 Classification............................................................ 20A11-2 Classification............................................................ 20A11-3 Classification............................................................ 20A11-4 Impairment Losses ................................................... 15A11-5 Amortized Cost Method—Bond Investment ............. 30A11-6 Amortized Cost Method—Bond Investment ............. 30A11-7 Amortized Cost Method—Debt Investment (*W)..... 30A11-8 Amortized Cost versus FVTPL

—Bond Investment .................................................. 40A11-9 Amortized Cost versus

FVOCI–Bond Investment..................................... 40A11-10 FVTPL—Comprehension ........................................ 20A11-11 FVTPL..................................................................... 35A11-12 FVTPL..................................................................... 35A11-13 FVTPL..................................................................... 35A11-14 FVTPL (*W)............................................................ 35A11-15 FVTPL..................................................................... 35A11-16 FVTPL—Foreign Currency...................................... 30A11-17 FVTPL—Impairment .............................................. 30A11-18 Impairment Loss AC Bonds...................................... 30A11-19 Equity Method ......................................................... 30A11-20 Equity Method ........................................................ 30

© 2014 McGraw-Hill Ryerson Ltd. All rights reserved.11-2 Solutions Manual to accompany Intermediate Accounting, Volume 1, 6th edition

A11-21 Comprehensive Investments ..................................... 40A11-22 Consolidation–Explanation (*W).............................. 20A11-23 Reclassification......................................................... 20A11-24 Statement of Cash Flows .......................................... 20

A11-25 Statement of Cash Flows .......................................... 30A11-26 ASPE—Classification ............................................. 20A11-27 ASPE—Classification .............................................. 20A11-28 ASPE—AC Investment (*W)................................... 30A11-29 ASPE—AC Investment ........................................... 30A11-30 ASPE—Cost versus Equity Method (*W) ................ 30

*W The solution to this assignment is on the text website, Connect. The solution is marked WEB.


Cases

Case 11-1 Quinter Corp.

OverviewQuinter Corp is a private company but its shareholders require statements be prepared under IFRS. The shareholders (five publicly traded companies) are interested in the choices available for four different investments that have been made during the year. In particular, the shareholders want to understand the impact on the statement of financial position and net earnings for the accounting for these investments and the alternatives that will result in the highest ROA before income taxes.

Issues

1. Investment in Paper Inc. bonds2. Investment in Book CO. convertible bonds3. Investment in 40,000 common shares of Wave Corp.4. Investment in 80,000 preferred shares of Beach Inc.

Analysis and Conclusions

1. Investment in Paper Inc. bondsThese bonds pay interest at a 6% semi-annual rate and mature in July 20X11. Accordingly, these bonds have contractual cash flows that represent principal and interest only, and the interest rate appears to reflect credit risk only. As a result, these bonds could qualify as a bond investment accounted for using amortized cost (AC) or FVOCI- bonds or FVTPL. Currently, the company is considering classification as AC or FVOCI-Bonds. The classification depends on the company’s objective for holding this investment.

Amortized cost – To qualify to be classified as AC, the company’s objective must be to hold the investment to receive its cash flows. Under AC, the investment is recognized at its amortized cost and the effective interest rate is used to recognize interest income. In this case the effective interest rate is 4%. The bonds are not adjusted to fair value, and interest income is recognized as earned. The interest income earned for 20X5 is: $6,634,520 x 4%/2 = $132,690. The investment at December 31,20X5 would be: $6,634,520 - $180,000 + $132,690 = $6,587,210.

FVOCI-Bonds – To qualify to be classified as FVOCI-Bonds, the company’s objective for holding this investment should be to both receive its cash flows and to sell. Under this classification, interest income is still recognized using the effective interest rate method, but the investment is adjusted to fair value at each reporting period. The change in fair value is recognized in OCI until the investment is sold. At the time of the sale, the accumulated amounts in OCI are recycled to profit and the realized gain or loss on sale is recognized in net earnings at that time. At December 20X5, the fair value of the investment is $6,000,000 x 1.05 = $6,300,000. This results in a loss on fair value adjustment of $287,210 ($6,587,210 – $6,300,000) which is recognized in OCI. The interest earned of $132,690 is recognized in net earnings.


Below is the calculation of ROA for each alternative:

Amortized Cost$

FVOCI-Bond$

Net earnings before taxes and investment related income

100,000 100,000

Add interest earned 132,690 132,690Revised net earnings 232,690 232,690

Total assets before investment 1,000,000 1,000,000Investment in Bonds 6,587,210 6,300,000Revised total assets 7,587,210 7,300,000ROA 3.06% 3.18% In this case, the FVOCI – Bonds results in the highest ROA. This is due to the fact that the fair market value of the bond has declined since its purchase, and therefore the lower asset balance results in a higher ROA, given the same amount of net earnings. Since the loss on fair value change is recognized in OCI, this does not impact net earnings.

RecommendationBased on the above information, the company should classify the bond as FVOCI-Bond if the objectives are met. However, if next year, the fair value increases above the amortized cost balance, then the ROA would be lower for this classification.

2. Investment in Book CO. convertible bondsThe investment in convertible bonds pays interest at 3% semiannually, and the principal is due in August 20X9. Although this investment pays contractual cash flows, the interest rate reflects not only credit risk but also the option to convert to shares. As a result, this investment cannot be classified as either AC or FVOCI-Bonds. There is only one allowable classification and that is FVTPL. Using this classification, the company will recognize interest earned (using the coupon rate of 3%) for the period August 1 to December 31 of $5,000,000 x 3%/2 x 5/6 = $62,500. In addition, the bonds must be adjusted to fair value at each reporting period, with the change in fair value recognized in net earnings. The fair value of the convertible bonds is $5,700,000 at December 31, 20X5, and so the gain on fair value adjustment is $300,000 ($5,700,000 – $5,400,000) which will increase net earnings.

The impact of this investment on ROA is as follows:

FVTPL$


100,000

Add interest earned 62,500Gain on fair value 300,000Revised net earnings 462,500


Total assets before investment 1,000,000Investment in Convertible Bonds

5,700,000

Revised total assets 6,700,000ROA 6.9%

3. Investment in 40,000 common shares of Wave Corp.The investment in common shares of Wave Corp has been made for trading purposes only. Since the investment is for trading purposes only, there is no choice – the investment in shares must be classified as FVTPL. Using this classification, the company will recognize the dividends received of $45,000 in net earnings. In addition, the shares must be adjusted to fair value at each reporting period, with the change in fair value recognized in net earnings. The fair value of the shares is $3,588,000 (40,000 x $89.70) at December 31, 20X5, and so the gain on fair value adjustment is $564,000 (3,588,000 – ($75.60 x 40,000)) which will increase net earnings.

FVTPL$


100,000

Add dividends received 45,000Gain on fair value 564,000Revised net earnings 709,000

Total assets before investment 1,000,000Investment in Convertible Bonds

3,588,000

Revised total assets 4,588,000ROA 15.5%

4. Investment in 80,000 preferred share in Beach Inc.The preferred share investment, being an investment in equity, can be classified as FVTPL or FVOCI-Equity given the fact that these are not held for trading purposes. If classified as FVOCI-Equity, this is an irrevocable classification made at the time of purchase.

FVTPL – If the shares are classified as FVTPL, the shares are adjusted to fair value at each reporting period. In this case, the fair value of the shares at December 31, 20X5 is $4,160,000 (80,000 x $52), there is a loss in value of $240,000 ($4,160,000 – (80,000 x $55.00)). This loss is recognized in net earnings.

FVOCI-Equity – If the company decides to classify as FVOCI –Equity – this is irrevocable and cannot be changed later. The shares are adjusted to fair value at each reporting period, but the change in fair value is recognized in OCI. Even on disposition, the realized gain or loss is recognized in OCI. As a result, the gain or loss on this investment will never impact net income. In this case, since there is a loss, this is good news since the ROA will be higher. However, if the shares were to increase in value in later years, the gain would also not be recognized in net earnings.


Below is the calculation of ROA for each alternative:

FVTPL$

FVOCI-Equity$


100,000 100,000

Add fair value adjustment (240,000)Revised net earnings (140,000) 100,000

Total assets before investment 1,000,000 1,000,000Investment in Bonds 4,160,000 4,160,000Revised total assets 5,160,000 5,160,000ROA -2.7% 1.9%

In this case, since the shares lost value during the holding period, the company will have a higher ROA if they choose to classify the investment as FVOCI-Equity. However, if the shares should increase in value in later years, this increase will not impact net earnings and will cause ROA to be lower.


Case 11-2 Wild Ones Limited

Overview

Wild Ones Limited (Wild Ones) is a private Canadian company in its first year of operations. Wild Ones’ creditors, the Regal Bank and ACOA, require Wild Ones to provide audited financial statements prepared in accordance with Accounting Standards for Private Enterprises. The 31 December interim draft financial statements have been prepared by students so their level of expertise might have reduced the reliability of the financial statements. A debt covenant with the Regal loan imposes a maximum debt-to-equity covenant. Wild Ones should, therefore, choose accounting policies that will maximize net income and minimize liabilities within ethical limits.

Issues

1. River Rafters investment2. Loan interest3. Development costs4. Promotional costs

Analysis and Conclusions

1. River Rafters investment

Wild Ones owns 22% of the common shares of River Rafters (Rafters) and has two of six seats on its Board of Directors and as such, is presumed to exercise significant influence over Rafters. ASPE permits investors a choice of methods to account for significantly influenced investments: the equity or the cost method.

Under the cost method, dividends paid by River would be reported in Wild Ones’ income. No adjustment would be made to Wild Ones’ investment in River Rafter’s account unless there is an indication of impairment. Impairment is not indicated in this situation. If the cost method were used, Wild Ones would increases its income for the $6,000 of dividends received with no need to record a $7,260 loss for its share of Rafter’s $33,000 loss. Under the equity method, Wild Ones would accrue its share of River’s loss, $7,260, for the year. Dividends would be reported as a reduction of the investment account.

It is recommended that Wild Ones use the cost method. See Exhibit 1, JE#1 to adjust the accounting for the dividends received.


2. Loan interest

Wild Ones loan with Regal Bank is at 9%, which presumably reflects Wild Ones credit risk. Although the loan from ACOA only bears interest of 1%, Wild Ones received and will repay the full $150,000 and no adjustments are required. However, three months of interest owing to ACOA are accrued in Exhibit 1, JE #2.

Principal due in the next fiscal year must be classified as a current liability. This has not been done in the revised financial statements because the amount is unknown.

3. Development costs

Wild has incurred development costs in creating a new snowshoe design. ASPE allows a choice of expensing development costs or deferring them if certain specific and stringent capitalization criteria have been met. Capitalization of the $81,000 of deferred development costs is supported by having a successful prototype, sales, and good sales forecasts for the next three years. Capitalization of these costs will strengthen Wild Ones’ debt-to-equity ratio and is given in Exhibit 1, JE #3. Also, given that Wild Ones has started to sell some of these new snowshoes, amortization of the $81,000 should start and be based on the estimated sales of this new product; this is not quantifiable at this time but must be investigated.

4. Promotional costs

Assets must have probable future benefit, and essentially be severable from the company. These criteria are not met for promotional costs. The $12,000 of promotional expenses do not meet the criteria for capitalization as an intangible and must be expensed as is shown in Exhibit 1, JE #4.

Conclusion

A revised balance sheet is shown in Exhibit 2. It reflects altered accounting policies for the River Rafters investment (cost method), capitalization of development costs, and expensing promotion costs. Interest accrual for the ACOA loan has been made. The statements do not yet reflect amortization of development costs or reclassification of the current loan principal; these adjustments must be investigated. Policies comply with ASPE and should result in an unmodified audit report.

The financial statements show higher assets, increasing from $180,500 to $255,000. Retained earnings are also higher, increasing from $15,300 to $89,925; this reflects all entries, and is higher primarily because of the development cost capitalization. Debt-to-equity has radically improved, from 9.1 to 1.8, which should be helpful with the debt covenant.


Exhibit 1Wild Ones LimitedJournal Entries

#1Investment in River Rafters.................................................. 6,000

Investment revenue....................................................... 6,000

#2Interest expense ($150,000 x 1% x 3/12) ............................. 375

Interest payable (1 Oct to 31 Dec) ................................ 375

#3Deferred development costs ................................................. 81,000

Repairs expense............................................................ 81,000

#4Promotion expense .............................................................. 12,000

Promotion cost (asset) .................................................. 12,000


Exhibit 2Wild Ones LimitedAdjusted Balance Sheet

Wild Ones Ltd.Balance Sheet

31 December 20X1(unaudited)

Assets: JEsADJUSTE

DCash $ 4,500 $ 4,500 Accounts receivable 42,000 42,000 Inventory 84,000 84,000 Investment in River Rafters 38,000 6,000 44,000

Promotional Costs 12,000 (12,000

) 0 Deferred Development Costs 81,000 81,000

Total Assets$180,50

0 $255,500

Liabilities:Accounts payable $ 3,200 $ 3,200 Interest payable 375 375 Payable to Regal Bank 9,500 9,500 Loan payable to ACOA 150,000 150,000 Total Liabilities 162,700 163,075 Shareholders' Equity:Common shares 2,500 2,500

Retained Earnings 15,300

6,000(375)

81,000(12,000

) 89,925 Total Equity 17,800 92,425

Total Liabilities and Equity$180,50

0 $255,500


Case 11-3 Quinn Inc.

Overview

Quinn Inc. (QI) develops and manufactures personal identification devices used in security systems. This is a private company with three shareholders. It is assumed that ASPE will be followed for simplicity and greater choice between policy alternatives. One shareholder, Beson, has been keeping accounting records for the first ten months but he has a potential conflict of interest because he may exercise a share sale arrangement and have a second shareholder (Goodman) buy him out at the end of this fiscal year. The formula for the buyout price is based on a multiple of earnings; anything that makes earnings higher would be to Beson’s advantage. Goodman is the controlling shareholder with 21 of 41 shares. Goodman has stated that she wants strong financial statements but presumably would not want to overpay for Beson’s shares. The users of the financial statements are the three shareholders, and a lender. There is a $600,000 loan on the statement of financial position.)

Issues1. Revenue recognition2. Accounting for Procurement Inc. shares3. Accounting for PZQ shares

Analysis and conclusions

1. Revenue recognition

QI has revenue earned from delivering two components: electronic cards and a card reader/programming device. The card reader/programming device has no stand-alone value, because it is only useful if the cards are also in use. The same is true for the cards; they have no utility without the card reader. If both components are delivered, and are functional, then there is no issue, and this appears to hold true for most of QI’s activity for the year.

For the customer SpaceCo, however, problems have been encountered with getting the card reader to function properly, and the sale is still being expedited. Replacement units will not be through assembly until March. It seems obvious that the account will likely remain unpaid until the customer is satisfied and all costs incurred. Therefore, it appears that revenue recognition, for all parts of the order, is premature since additional costs will be incurred. Revenue should be reversed. Note that Beson recorded this revenue, which would improve his buyout price; reversal will decrease the buyout price.

Entry #A1 (Exhibit 1) reverses this transaction.

2. Procurement Inc. shares

© 2014 McGraw-Hill Ryerson Ltd. All rights reservedSolutions Manual to accompany Intermediate Accounting, Volume 1, 6th edition 11-3

Normally, with 40% of the shares held, significant influence is present and the equity method is used. Significant influence is present when the investor can influence operating and financial decisions of the associate, and may be indicated by representation on the board of directors, participation in policy-making processes, material inter-company transactions, interchange of management personnel or provision of technical material. An ownership level of 20% of shares is used as a guideline as to when significant influence is, or is not, likely present.

Using the equity method, the investor records, as income, their pro-rata share of investee earnings after depreciation of fair value increments, elimination of intercorporate unrealized profits and, potentially, write-off of goodwill. Dividends are recorded as a reduction in the investment account, so the investment balance reflects cost plus unremitted earnings. Procurement has not declared dividends in this period. To apply the equity method, fair values of Procurement would have to be examined on the date of acquisition.

In this case, Beson has recorded 100% of Procurement’s income as investment revenue; at best, QI would be entitled to 40%, or $30,000. Note that the investment revenue would likely be lower than $30,000 if fair values were present and had to be amortized. The $75,000 entry would serve to increase Beson’s share purchase price, and is suspect.

Entry #B in Exhibit 1 reduces Investment revenue from $75,000 to $30,000, pending further investigation of fair values.

QI might prefer to use the cost method for this investment. As a private company, this option is completely open to them. Goodman might prefer this approach, to reduce the price paid to Beson further, or might prefer to leave investment revenue at $30,000 to reflect Procurement’s strong results and thus make QI’s financial statements stronger themselves. This decision must be evaluated by the shareholder/managers. If the cost method were followed, the elimination entry in Exhibit 1 would have been for $75,000.

3. PZQ shares

These shares are in a public company, and are presumably traded in an active market for which there are quoted prices. The company reportedly acquired the shares for short-term profit. The investment would be required to be fair value under ASPE. Therefore, under any scheme of investment reporting, it would seem that this investment has to be in the fair value category. It is reported at fair value, which is $16 per share, or $80,000. Gains and losses are included in income and therefore the $50,000 loss is recorded in income. However, Beson has included this adjustment in an equity reserve. This is incorrect for this investment. Once again, the entry made by


Beson has had a positive impact in earnings and therefore the price that would be paid for Beson’s shares.

Entry #C in Exhibit 1 reclassifies the loss to earnings.

Revised financial statements

Exhibit 2 shows the revised statement of financial position, reflecting deferred revenue recognition, adjusted equity method revenue for Procurement and FVPTL treatment of PZQ shares. Earnings of $200,000 for the ten months, (first year balance of retained earnings with no dividends), has declined to $31,800. This is more reflective of the results of operations for the first ten months, and is more realistic for lenders, but also for any share buyouts contemplated. Based on the entries booked by Beson, however, a review of transactions during the first ten months should be undertaken, to ensure the accuracy of financial records.


Exhibit 1Quinn Inc.Adjusting journal entries31 December 20x8

A. SpaceCo sale:A1. Revenue ........................................................................ 174,000

Cost of goods sold........................................................ 100,800Deferred gross profit .................................................... 73,200

This entry leaves the receivable on the books, and in essence treats the transaction as “pending.” If the entire transaction is to be removed from the books, then the account receivable will also be removed from the books, the inventory reinstated, and deferred gross profit replaced with unearned revenue equal to the cash received. The entry would be:

A2. Revenue ....................................................................... 174,000 Inventory...................................................................... 100,800

Unearned revenue ..................................................... 34,800 Accounts receivable................................................... 139,200 Cost of goods sold..................................................... 100,800

This second entry is more appropriate if the sale is risky/unlikely to go ahead; it is the most extreme view of the outcomes.

The financial statements reflect entry A1.

B. Procurement Inc.

Investment revenue .............................................................. 45,000Investment in Procurement shares................................. 45,000

C. PZQ Ltd.

I/S: Holding loss: PZQ shares .............................................. 50,000 Reserve: Holding loss: PZQ shares ............................. 50,000


Exhibit 2Quinn Inc.Statement of financial position, 31 December 20X8

As originally reported

Adjustments Revised 2008, unaudited

Assets

Cash $ 7,200 $ 7,200Accounts receivable, net 254,000 254,000Inventory 50,800 50,800Investments 80,000 80,000Investment in Procurement, Inc.

375,000 B (45,000) 330,000

Capital assets, net of amortization

50,000 50,000

$817,000 $772,000

Liabilities

Accounts payable $ 62,900 $ 62,900Deferred gross profit A1 73,200 73,200Loan payable 600,000 600,000

$662,900 $736,100

Shareholders’ equity

Common shares 4,100 4,100Reserve: holding loss, (50,000) C 50,000 --Retained earnings 200,000 A1 (174,000)

A1 100,800B (45,000)C (50,000)

31,800

$154,100 $35,900$817,000 $772,000


Case 11-4 Northern Energy Limited

Overview

Northern Energy Limited (NEL) is an operating company with an investment portfolio consisting of common shares, preferred shares and a bond. In the past, the company has accounted for all investments at cost. NEL is considering issuing debt through a public offering, and thus IFRS compliance would be required. Debt investors would be most concerned with the solvency and cash flow of the company. Investment policy would have to be changed retrospectively, affecting all prior years.

Issues

Accounting for investments

Analysis

Nico Investments Ltd. common shares

NEL now accounts for this investment using the cost method, but seems to have control with 80% of the voting shares and the ability to appoint the majority of the Board of Directors, including the chair. Nico is therefore a subsidiary. The fact that the chair is a minority shareholder is not relevant, as NEL can and would replace him if there were issues that the two parties did not agree on. For subsidiaries, consolidation is required.

The only question raised with respect to the exercise of control is the ability of the minority shareholder to veto certain decisions of the Board, dealing with operating and financing issues. The question might be whether this makes the investment a joint venture, subject to joint control. Joint control means that there must be unanimous agreement for major decisions. Veto power in two areas falls short of this, and this does not seem to be a joint venture.

The exact terms and scope of veto powers must be examined before a conclusion is reached.

If consolidation were used, the financial statements of the parent and subsidiary would be added together. The fair value of net assets acquired would be recognized, including goodwill. The investment account, and the shareholders’ equity accounts of the subsidiary, would be eliminated. Inter-company unconfirmed profits and intercompany balances would be eliminated. A non-controlling interest in net assets and in earnings would be recognized for the 20% of the shares that the parent company does not own. Earnings would be lower as compared to the cost method because the parent’s share of losses would be included in earnings, adjusted for fair value amortization and unrealized profit amounts.


However, one could argue that the ability of NEL to control the investee’s activities is limited by the shareholder agreement. That is, control is not present but rather joint control exists. This would make Nico a joint venture and the equity method would be used.

The equity method reflects fair values of underlying assets at the date purchase, and their depreciation. The investor’s share of earnings is recorded as investment revenue. The investment account would reflect cost plus unremitted earnings.

As compared to the cost method, overall earnings would drop for both the equity method and consolidation, because NEL’s portion of net losses would appear in earnings. Some investors have a difficult time interpreting consolidation and the equity method, as they do not reflect cash flow. Investors may be assisted with supplementary cash flow information and separate entity financial statements.

Another potential issue for this investment is impairment losses, because of the continued operating losses of the investee. If the underlying assets of the investee are impaired because they cannot generate positive earnings, they must be written down. Impairment is by no means an automatic conclusion, because future prospects are reported to be healthy. Future net cash flows must be evaluated carefully.

Note also that NEL’s loan guarantees must be valued and recorded.

Canner Ltd. non-voting preference shares

Preference shares have no voting rights, although a seat on the Board indicates friendly relationships. While it is tempting to consider the investment for significant influence, the maximum and minimum investment revenue flowing from these shares is the dividend entitlement. The accounting alternatives are FVTPL or the FVOCI- Equity. If the investment is designated FVTOCI-Equity, the investment is adjusted to fair value at each reporting period, but the gains and losses are recognized in OCI and will never recycle to net earnings, even on disposition. Given the fixed returns of the shares, fair value gains and losses should be modest, and therefore there may be no reason to exclude changes in value from earnings. .

If the FVTPL classification is used, the investment is valued at fair value, holding gains and losses are recorded in earnings, and dividend income is recorded as declared.

These preferred shares are not traded on active markets; Canner is a private company. Fair value would have to be based on valuation models that should render a fairly stable fair value, because valuation would be primarily based on future cash flows. As a result, use of the fair value method will not be radically different than the cost value now used. The dividend cash flow from the investment will be reflected as investment revenue in the financial statements, which serves the information needs of potential investors of NEL.


Later Corp. common shares

NEL owns 57.4% of the voting shares of Later, which constitutes voting control, and consolidation is required. The fact that NEL has allowed some Board members to continue from the old shareholder appointments is not relevant, because NEL has the power to replace these individuals if they wish. Later is a subsidiary.

Consolidation is radically different than the cost method, now used to report the investment in Later. The impact of consolidation has been described earlier in this report. In this case, a sizeable non-controlling interest, representing the 42.6% of net assets not owned by NEL will appear in equity on the statement of financial position and there will be a significant claim to earnings.

Since real estate assets of Later were undervalued on the books, they will be revalued to fair value as at the date of acquisition, and subsequent depreciation is based on this higher fair value. If there was any additional price paid over and above the fair value of the real estate assets, this is recorded as goodwill. Goodwill is not amortized but is evaluated annually for impairment. The additional asset depreciation is likely to reduce earnings to a result lower than if the two companies were evaluated separately.

Some investors have difficulty interpreting consolidated financial statements, which reflect the economic entity but not the legal entity. Debt investors may be assisted with supplementary cash flow information or separate entity financial statements.

Placement Resources Corp. common shares

NEL owns 10.2% of the common shares of Placement, and has two members on the 11-member Board of Directors. It seems as though the alternatives for accounting for this investment are the equity method if the investment is a strategic investment or, if a passive investment as either FVTPL or FVTOCI-Equity.

Dividends are volatile, as are operating results. There is a material difference between cost ($455,200) and estimated fair value ($900,000), so the difference caused by adjustment to fair value for the investment would be significant.

If NEL has significant influence over the decisions of Placement, then it is an associate and the equity method must be used. The equity method would result in NEL recording their share of Placement’s income on an annual basis, which is volatile. Dividends received would reduce the carrying value of the investment, and the investment would be valued at cost plus unremitted earnings. This would not reflect cash flow in earnings or fair value on the statement of financial position.

If NEL does not have significant influence, then NEL could classify this passive investment as FVTPL. In this case, the investment is valued at fair value, holding gains


and losses are recorded in earnings, and dividends are recorded as income when declared. Although the shares are thinly traded, valuation models can be used to substantiate values suggested by actual trading, however thin. If FVTOCI-Equity is used, the only difference is that holding gains and losses are excluded from earnings and included in OCI as recognized. A separate equity reserve account accumulates the OCI income amounts related to this investment. And for the FVOCI-Equity classification, gain and losses even when realized on sale, will never impact the company’s net earnings.

With 10.2% of the voting shares, significant influence would not normally be present. However, a minority shareholder of NEL owns 44% of Placement, so there are other ties. (Since the 44% is not owned by NEL, the two ownerships may not be combined to constitute control.) NEL also has two seats on the Placement Board of Directors. The minutes of these meetings must be reviewed to provide some insight as to the dynamics of the meetings, but significant influence seems logical, and thus, the equity method might well be applicable. It is not clear that this is the most informative accounting method for external debt investors, and if the equity method is used, information on cash flow and fair value should be clearly disclosed.

Trufeld Trucking 8% bonds

Bonds convey no voting rights, and even with friendly relationships and a seat on the Board of Directors. The three alternatives for bond accounting are Amortized Cost, FVOCI-Bonds and FVTPL.

If the FVTPL method is used, the bonds are valued at fair value, holding gains and losses are recorded in earnings, and interest revenue is recorded as time passes based on the coupon rate.

If the amortized cost method were used, the investment is carried at amortized cost, and interest revenue is recorded as time passes using the effective interest method. Investment revenue provides a constant return on carrying value, and includes premium or discount amortization. The cash flow from the investment is accurately reflected in the financial statements, which serves the information needs of potential investors of NEL.

Amortized cost can be used if the bond has cash flows for principal and interest, which it does, and if the bond is managed with a business objective for cash flow collection only. This appears to be the case; the bond will not be re-sold. It seems logical, with a member on the Board and good inter-company relationships, that the stated intent is to hold for cash flow only is trustworthy, and thus the amortized cost method is recommended.

The final alternative is to classify the bond as FVOCI-Bonds. In this case, interest income is recognized as time passes using the effective interest rate method (similar to the AC classification above). At each reporting period, the bond is adjusted to fair value, with holding gains and losses reported to OCI. On subsequent sale of the bond, the amounts accumulated to OCI in previous periods are reclassified to profit or loss, along with the


realized gain or loss on sale. In this way, not until the bond is sold, are gains and losses reported in net earnings. This classification is available if the bond has cash flows of principal and interest only, and it is managed not only for cash flow collection but also possible sale. We are specifically told that NEL is not intending to resell the bond, so likely AC is the appropriate classification.

Lu Trucking common shares

NEL owns 24.3% of the common shares of Lu. Normally, this level of ownership would be sufficient to require use of equity method, because significant influence would be assumed to be present. In this case, NEL does not even fill its one slot on the nine-member Board, and appears to have a hostile relationship with other shareholders. Use of the equity method is not appropriate.

Therefore, the investment could be classified as FVTPL or FVOCI-Equity. In FVTPL, investments are carried at fair value, holding gains and losses are recorded in earnings, and dividends are recorded as income when declared. The investment might also be classified as FVTOCI-Equity, which would be different only in that holding gains and losses would bypass earnings and be recorded in an equity reserve and OCI. In both categories, dividends are recognized as investment income on declaration.

However, the fair value is difficult to establish for this investment. NEL is unable to sell their shares because they have not been able to agree to a price with the interested purchasers, the remaining shareholders of Lu. This would seem to indicate that valuation is a problem. It may be possible to use reference pricing or valuation models to infer fair value. This may not be viable because of the lack of market for the shares.

Further investigation is needed, but if a value is not estimable, then the cost value is used as an approximation of fair value until a better estimate of fair value is determinable. However, the current cost value may have to be reduced if it is thought that even the cost cannot be recovered.

Continued use of the cost value would result in asset valuation at original cost. The possible new investors of NEL would have their information needs (likely cash flow) met with this approach, as long as the investment was carefully evaluated for fair value on an ongoing basis, at each reporting period.


Technical Review

Technical Review 11-1

Requirement 1

Principal $1,000,000 x (P/F, 3%,20 ) (.55368) = $ 553,680Interest $25,000* (P/A, 3%, 20) (14.87747) = 371,937Fair value $925,617

*$1,000,000 x 5% x 6/12

Requirement 2

Effective interest amortization

PeriodCash Payment

3% InterestRevenue

DiscountAmortization

Bond Carrying Value

0 $925,6171 $25,000 $27,769 $ 2,769 928,3862 25,000 27,852 2,852 931,238

Requirement 3

First period interest:

Cash .................................................................................... 25,000Investment in debt securities: Operating Company bonds ..... 2,769

Interest revenue ........................................................... 27,769



Requirement 1

Principal $5,000,000 x (P/F, 2.5%,10 ) (.78120) = $3,906,000 Interest $175,000* (P/A, 2.5%, 10) (8.75206) = 1,531,611Fair value $5,437,611

*$5,000,000 x 3.5% x 6/12

Requirement 2


PeriodCash Payment

2.5% InterestRevenue

Premium Amortization

Bond Carrying Value

0 $5,437,6111 $175,000 $135,940 $39,060 5,398,5512 175,000 134,964 40,036 5,358,515

Requirement 3

June 30.20X4:

Cash .................................................................................... 175,000Investment in FVOCI-B: Sport Company bonds................... 39,060

Interest revenue ........................................................... 135,940To record interest revenue for June 30

To adjust to fair value:Holding loss – OCI – Investment in FVOCI-Bonds .............. 158,551

Investment in FVOCI-B: Sport Company bonds ........... 158,551To adjust to fair value at June 30 ($5,240,000 – 5,398,551)

Requirement 4

December 31, 20X4

Cash .................................................................................... 175,000Investment in FVOCI-B: Sport Company bonds................... 40,036

Interest revenue ........................................................... 134,964To record interest revenue for December 31



Requirement 1

Principal $5,000,000 x (P/F, 2%,20 ) (.67297) = $ 3,364,850Interest $75,000* (P/A, 2%, 20) (16.35143) = 1,226,357Fair value $4,591,207

*$5,000,000 x 3% x 6/12

Requirement 2

Cash .................................................................................... 75,000Interest revenue ............................................................ 75,000

To record interest received on June 30.

Cash .................................................................................... 75,000Interest revenue ............................................................ 75,000

To record the interest received on December 31.

Investment in debt securities: Fire Company bonds............... 208,793Investment revenue ($4,800,000 – $4,591,207) ........... 208,793



Requirement 1

PeriodCash Payment

2.5% InterestRevenue

Premium Amortization

Bond Carrying Value

0 $2,737,4381 $45,000 $68,436 $23,436 2,760,8742 45,000 69,022 24,022 2,784,8963 45,000 69,622 24,622 2,809,518

Requirement 2

During 20X2Cash .................................................................................... 45,000Investment-FVOCI-Bond – Wind Corporation..................... 23,436

Interest revenue ............................................................ 68,436To record interest received on June 30.

Cash .................................................................................... 45,000Investment-FVOCI-Bond – Wind Corporation..................... 24,022

Interest revenue ............................................................ 69,022To record the interest received on December 31.

Investment –FVOCI-Bonds: Wind Company bonds.............. 115,104 OCI: Holding gain – FVOCI-Bonds ............................ 115,104

To adjust to fair value at December 31, 20X2 ($2,900,000 – $2,784,896).

Requirement 3

During 20X3Cash .................................................................................... 45,000Investment-FVOCI-Bond – Wind Corporation..................... 24,622

Interest revenue ............................................................ 69,622To record interest received on June 30.

OCI: Holding gain – FVOCI-Bonds .................................... 115,104Gain on sale of FVOCI-Bonds – Wind Corporation ...... 115,104

To recycle OCI gains on Wind bonds to profit at the time of sale.


Cash .................................................................................... 2,950,000Investment-FVOCI-Bond – Wind Corporation*............ 2,924,622Gain on sale of FVOCI-Bonds ..................................... 25,378

To record the cash received on sale of bonds.

Check: Gain on sale is difference between bond carrying value @ time of sale and proceeds of disposition. Therefore, difference between $2,809,518 and $2,950,000 is $140,482. (From entries above, $115,104 + $$25,378 = $140,482)* 115,104 + 2,809,518 = 2,924,622



Requirement 1June 30 20X3Note that since the bonds are purchased at par, 6% is the effective interest rate.Cash .................................................................................... 30,000

Interest revenue ............................................................ 30,000To record the interest received on June 30.

Impairment loss –AC-Bonds: Princess bonds........................ 22,000 Allowance for AC-Bonds: Princess bonds .................. 22,000

To adjust for expected credit losses as at June 30 20X3.

Requirement 2June 30 20X4Cash .................................................................................... 30,000

Interest revenue ............................................................ 30,000To record the interest received on June 30.

Impairment loss –AC-Bonds: Princess bonds........................ 53,000 Allowance for AC-Bonds: Princess bonds (75,000 – 22,000*) 53,000

To adjust for expected credit losses as at June 30 20X4. *$22,000 already recorded @ June 30, 20X3

Note: Gross carrying amount (i.e. present value of contractual cash flows) 500,000Estimated future cash flows discounted at 6%...................... 425,000

Revised Allowance for impairment loss 75,000

Requirement 3June 30 20X5Cash .................................................................................... 30,000

Interest revenue ............................................................ 25,500Investment-AC Bond - Princess .................................... 4,500

To record the interest received on June 30.

The interest income is now calculated using the original effective rate on the net balance ( gross less the allowance): (500,000 – 75,000 ) x 6% = 25,500



a. Cost method under ASPE:20X2:

Investment in securities: Prince Ltd .............................................. 13,000Cash.......................................................................................... 13,000

Cash............................................................................................. 500Dividend income ....................................................................... 500

20X3:Cash............................................................................................. 21,500

Investment in securities: Prince Ltd......................................... 13,000Investment revenue: Gain on sale ............................................ 8,500

b. FVTPL method:20X2:

Investment in FVTPL securities: Prince Ltd ................................. 12,000Commission expense .................................................................... 1,000

Cash.......................................................................................... 13,000

Cash............................................................................................. 500Dividend income ....................................................................... 500

Investment in FVTPL securities: Prince Ltd ................................. 4,000Investment revenue: Holding gain.............................................. 4,000

20X3:

Cash ............................................................................................ 21,500Investment revenue: Holding gain.............................................. 5,500Investment in FVTPL equity securities: Prince Ltd .................... 16,000



a. Cost method:20X1:

Investment in equity securities: Humor Ltd .................................. 6,500Cash.......................................................................................... 6,500

Cash............................................................................................. 1,200Dividend income ....................................................................... 1,200

20X2:Cash............................................................................................. 1,200

Dividend income ....................................................................... 1,20020X3:


20X4:Cash ............................................................................................ 30,500

Investment in equity securities: Humor Ltd................................ 6,500Investment revenue: Gain on sale .............................................. 24,000

b. FVTOCI method:20X1:

Investment in FVTOCI securities: Humor Ltd ............................. 6,500Cash.......................................................................................... 6,500


Investment in FVTOCI securities: Humor Ltd ............................. 12,500OCI: Holding gain..................................................................... 12,500

20X2:Cash............................................................................................. 1,200

Dividend income ....................................................................... 1,200Investment in FVTOCI securities: Humor Ltd ............................. 6,000

OCI: Holding gain..................................................................... 6,00020X3:


Investment in FVTOCI securities: Humor Ltd ............................. 15,000OCI: Holding gain..................................................................... 15,000

20X4:Cash ............................................................................................ 30,500OCI: Holding gain/loss ................................................................. 9,500

Investment in FVTOCI securities: Humor Ltd ........................... 40,000

OCI: Holding gain ($12,500 + $6,000 + $15,000 - $9,500)........... 24,000Retained earnings ...................................................................... 24,000


Check: Amount transferred to retained earnings is difference between investment’soriginal cost and proceeds on disposal. Therefore, net proceeds of $30,500 less cost of$6,500 results in gain of $24,000.


Requirement 1

Amount of goodwill purchased: $385,000

Book Fair 30% of

Value Value Difference Difference

Plant and equipment

(5-year remaining life)

$800,000 $1,000,000 $200,000 $60,000

Goodwill =

$565,000 (price paid) – (($400,000 x .3) (share of book value)) – $60,000 (share of fair value difference) = $385,000

Proportion of invested assets adjusted to fair value:Assets subject to depreciation $200,000 x 30% 60,000Additional depreciation ($60,000/5) $ 12,000

Requirement 2

Investment in Brampton Corp. ............................................ 565,000 Cash.......................................................................... 565,000

Investment in Brampton Corp..................................................... 18,000Investment revenue……………………………… 18,000

($100,000 x 30% = $30,000) - $12,000 depreciation

Cash ($30,000 x 30%)....................................................... 9,000Investment in Brampton Corp.............................. 9,000

Requirement 3

Investment in Brampton Corp ($565,000 + $18,000 - $9,000) $574,000



Requirement 1This is a joint venture since London has rights to the net assets (residual interest in JDX). The equity method is used for reporting this investment.

Requirement 2

20X5:Investment in JV: JDX Gold .......................................................2,500,000

Cash.......................................................................................... 2,500,000To record investment of cash in JV.

Investment Loss: Share of earnings of JV investment ...................100,000Investment in JV:JDX Gold....................................................... 100,000

To record share of loss of JDX Gold ($400,000 x 25%)

20X6:Cash ($200,000 x 25%) ................................................................ 50,000

Investment in JV: JDX Gold .................................................... 50,000To record dividends paid by JDX

Investment in JV: JDX Gold ($625,000 x 25%) ..........................156,250Investment revenue: Share of earnings of JV ............................ 156,250

Requirement 3

20X5:Investment account balanceInvestment in JV: JDX Gold 2,400,000(2,500,000 – 100,000)

Statement of Comprehensive IncomeInvestment loss: Share of earnings of JV investment 100,000

20X6:Investment account balanceInvestment in JV: JDX Gold(2,400,000 + 156,250 -50,000) 2,506,250

Statement of Comprehensive IncomeInvestment revenue: Share of earnings of JV investment 156,250



RequiredEntry to record the investment:

FVTPL investment: IBM bonds ($50,000 x $1.12) ................... 56,000Cash .................................................................................... 56,000

Entry to record change in fair value and exchange rate:

FVTPL investment: IBM bonds ($1.09 x $52,000)= $56,680 - $56,000............ 680

Foreign exchange loss ($50,000 x (1.12 - $1.09)........................ 1,500Investment revenue: holding gain: IBM

($50,000 x 1.09) = $54,500 - $56,680 2,180


Assignments

Assignment 11-1

a FVTPL Valued at fair value, interest in earnings, changes in fair value in earnings

b AC Valued at cost, interest in earningsc Joint Venture Equity methodd Associate

(assumes significant influence)Equity method

e FVOCI-Bonds Valued at fair value, interest income in earnings, changes in fair value in OCI until sold.

f FVTOCI-Equity Valued at fair value, dividends in earnings, changes in fair value in OCI.

g Associate(assumes significant influence)

Equity method

h Subsidiary(assumes control)

Consolidation

Assignment 11-2

a Associate (assumes significant influence)

Equity method

b FVOCI-Bonds Valued at fair value; interest in earnings and changes in fair value in OCI

c Joint venture Equityd FVTOCI Valued at fair value, interest in earnings,

changes in fair value in equitye AC Valued at cost, interest in earningsf FVTPL

(Associate is the other candidate but regular review for sale means it is difficult to think of this as a strategic investment)

Valued at fair value, dividends in earnings, changes in fair value in earnings

g Cost(No significant influence assumed as shareholder is only non-family member, fair value cannot be ascertained)FVTPL if valuation models can be used for fair value

Valued at cost, dividends in earnings


Assignment 11-3

a. C= FVTPL; or D =FVOCI-Equityb. A= Amortized costc. C= FVTPLd. B= FVOCI-Bondse. G= Joint venturef. E= Associateg. F= Subsidiary (Control need not be exercised to exist)h. C= FVTPL or D = FVOCI-Equityi. C= FVTPL (if FV can be ascertained as it is a private company) or D = FVOCI-

Equity

Assignment 11-4Case ASince the bond is carried at amortized cost, the impairment loss is recognized and set up as an allowance. As this is a Stage 1 level of credit risk, the impairment loss is equal to the estimated credit losses expected. The impairment loss of $125,000 is recognized as follows:Dr. Impairment loss 125,000 Cr. Allowance for impairment loss 125,000

Since this is a Stage 1 level of credit risk, there is no change in how the interest income is calculated for next year. It is still calculated using the gross amortized cost (not net of the allowance) and using the original effective interest rate. The interest income for the next year will be:$3,250,000 x 4% = $130,000.

Case BSince the bond is carried at FVOCI-Bonds, the impairment loss is recognized and set up as an allowance. This is a Stage 2 level of credit risk and therefore the estimated amount of credit losses are recognized as an impairment loss.

The impairment loss of $225,000 is recognized. In addition, the carrying value of the bonds has to be adjusted to fair value which is $1,530,000. The impairment loss and loss on holding is recognized as follows:Dr. Impairment loss 225,000Dr. OCI: Holding Loss 135,000 Cr. Investment (1,890,000 – 1,530,000) 360,000


Since this is a Stage 2 level of credit risk, there is no change in how the interest income is calculated for next year. It is still calculated using the gross amortized cost (not net of the allowance) and using the original effective interest rate. The interest income for the next year will be:$1,890,000 x 5% = $94,500.

Case CSince the bond is carried at FVTPL, there is no need to recognize an impairment separately from the change in fair value since the change in fair value is recognized through net earnings.

The current carrying value of the bonds, $6,750,000, has to be adjusted to fair value which is $6,122,000. The loss on holding is recognized as follows:Dr. Holding loss 628,000 Cr. Investment (6,750,000 – 6,122,000) 628,000

As this investment is classified as FVTPL, the interest income is equal the coupon payments received. The interest income will be: $7,000,000 x 3% = $210,000

Assignment 11-5 (WEB)

Requirement 1


*$4,000,000 x 6.2% x 6/12

Requirement 2


PeriodCash Payment

3% InterestRevenue Amortization

Bond Carrying Value

0 $4,034,1051 $124,000 $121,023 $ 2,977 4,031,1282 124,000 120,934 3,066 4,028,0623 124,000 120,842 3,158 4,024,9044 124,000 120,747 3,253 4,021,651


Requirement 3

First period revenue:Cash .................................................................................... 124,000

Investment in debt securities: Moon bonds.................... 2,977Interest revenue ........................................................... 121,023

Second period revenue:Cash .................................................................................... 124,000


Requirement 4

Interest revenue ($120,934 + $120,842) $241,776

Investment in Moon bond $4,024,904 (the bond’s carrying amount @ December 31, 20X9


Assignment 11-6

Requirement 1


*$7,000,000 x 5.8% x 6/12

Requirement 2


PeriodCash Payment


Bond Carrying Value

0 $6,940,261Nov 30, 20X8 $203,000 $208,208 $ 5,208 6,945,469June 1, 20X9 203,000 208,364 5,364 6,950,833

Nov 30, 20X9 203,000 208,525 5,525 6,956,358Jun 1, 20X10 203,000 208,691 5,691 6,962,049

Requirement 320X8June 1, 20X8:Investment in debt securities: Monaco bonds........................ 6,940,261

Cash ............................................................................. 6,940,261

30 November 20x8 revenue:Cash .................................................................................... 203,000Investment in debt securities: Monaco bonds........................ 5,208


31 December 20x8 year-end accrual:Interest receivable (1/6 of $203,000).................................... 33,833Investment in debt securities: Monaco bonds (1/6 of $5,364) 894


20X9

30 May 20x9 revenue:Cash .................................................................................... 203,000Investment in debt securities: Monaco bonds (5364 – 894)... 4,470

Interest revenue (208,364 – 34,727) ............................ 173,637


Interest receivable......................................................... 33,833

30 November 20x9 revenue:Cash .................................................................................... 203,000Investment in debt securities: Monaco bonds........................ 5,525

Interest revenue .......................................................... 208,525

31 December 20x9 year-end accrual:Interest receivable (1/6 of $203,000).................................... 33,833Investment in debt securities: Monaco bonds (1/6 of $5,691) 949

Interest revenue (208,691 x 1/6) ................................... 34,782

Requirement 420X8At December 31, 20X8, the balance in the investment account before the fair value adjustment is: $6,940,261 + $5,208 + $894 = 6,946,363Fair value of the investment at Dec 20X8 is $7,240,000 The fair value adjustment required is: $7,240,000 – $6,946,363 = $293,637

31 December 20x8 year-end adjustment:Investment in debt securities: Monaco bonds........................293,637

Holding Loss/gain OCI ................................................ 293,637

20X9At December 31, 20X9, the balance in the investment account before the fair value adjustment is: $7,240,000 + 4,470 + 5,525 + 949 = 7,250,944(or the same as: 6,956,358 + 293,637 + 949 = 7,250,944 Fair value of the investment at Dec 20X8 is $6,755,000 SO the fair value adjustment required is: $6,755,000 – $7,250,944 = ($495,944)

31 December 20x8 year-end adjustment:Holding Loss/gain OCI .......................................................495,944

Investment in debt securities: Monaco bonds ................ 495,944



Requirement 1

Principal $600,000 x (P/F, 2.5%,6 ) (.86230) = $ 517,380Interest $16,500* (P/A, 2.5%, 6) (5.50813) =

90,884

Fair value $608,264

*$600,000 x 5.5% x 6/12

Requirement 2


PeriodCash Payment

2.5% InterestRevenue Amortization

Bond Carrying Value

0 $608,2641 $16,500 $15,207 $ 1,293 606,9712 16,500 15,174 1,326 605,6453 16,500 15,141 1,359 604,2864 16,500 15,107 1,393 602,8935 16,500 15,072 1,428 601,4656 16,500 15,035* 1,465 600,000

* $15,037 - $2 rounding

Requirement 3


Investment in debt securities: Old bonds ....................... 1,293Interest revenue ........................................................... 15,207



Third period revenue:Cash .................................................................................... 16,500




Requirement 1

Principal $400,000 x (P/F, 3%,12 ) (.70138) = $ 280,552Interest $10,000* (P/A, 3%, 12) (9.954) = 99,540Fair value $380,092

*$400,000 x 5% x 6/12

Requirement 2


PeriodCash Payment


Bond Carrying Value

0 $380,0921 $10,000 $11,403 $ 1,403 381,4952 10,000 11,445 1,445 382,9403 10,000 11,488 1,488 384,4284 10,000 11,533 1,533 385,961

Requirement 3The effective interest rate method is used for bonds classified as AC.June 30 20x5:Cash .................................................................................... 10,000Investment in debt securities: Gentron bonds........................ 1,403


Dec 31 20x5:Cash .................................................................................... 10,000Investment in debt securities: Gentron bonds........................ 1,445


June 30 20x6:Cash .................................................................................... 10,000Investment in debt securities: Gentron bonds........................ 1,488


Dec 31 20x6:Cash .................................................................................... 10,000Investment in debt securities: Gentron bonds........................ 1,533



Requirement 4When the bond is classified as FVTPL, the interest revenue is based on the coupon payment received, and not on the effective interest rate.June 30 20x5:Cash .................................................................................... 10,000


Dec 31 20x5 (no change):Cash .................................................................................... 10,000


Adjustment for fair value, 20x5:Investment in debt securities: Gentron bonds ($385,000 - $380,092 (original cost)).................................. 4,908

Investment revenue: Holding gain: Gentron bonds ....... 4,098

June 30 20x6:Cash .................................................................................... 10,000


Dec 31 20x6:Cash .................................................................................... 10,000


Adjustment for fair value, 20x6:Investment in debt securities: Gentron bonds ($391,500 – $385,000) ....................................................... 6,500

Investment revenue: Holding gain: Gentron bonds ....... 6,500

Requirement 5 20x6 20x5

a) AC investment Investment in Gentron bond $ 385,961 $382,940 (This value represents amortized cost)

b) FVTPL investment Investment in Gentron bond $391,500 $ 385,000(This value represents fair value)


Assignment 11-9

Requirement 1

Principal $1,000,000 x (P/F, 3%,9 ) (.76642) = $ 766,420Interest $31,000* (P/A, 3%, 9) (7.78611) = 241,369Fair value $1,007,789

*$1,000,000 x 6.2% x 6/12

Requirement 2


PeriodCash Payment

3 % InterestRevenue Amortization

Bond Carrying Value

May 1 20X7 $1,007,789Nov 1 20X7 $31,000 $30,234 $ 766 1,007,023May 1 20X8 31,000 30,211 789 1,006,234Nov 1 20X8 31,000 30,187 813 1,005,421

May 1, 20X9 31,000 30,163 837 1,004,584Nov 1 20X9 31,000 30,138 862 1,003,722

May 1 20X10 31,000 30,112 888 1,002,834Nov 1 20X10 31,000 30,085 915 1,001,919

May 1, 20X11 31,000 30,058 942 1,000,977Nov 1 20X11 31,000 30,023* 977 1,000,000

* $30,029 - $6 rounding error

Requirement 3Assuming that the bond is classified as AC:20x7 entries:1 MayInvestment in debt securities: Fox Corp. bonds .................... 1,007,789

Cash ............................................................................. 1,007,789

1 NovemberCash .................................................................................... 31,000

Investment in debt securities: Fox Corp. bonds ............ 766Interest revenue ........................................................... 30,234


31 DecemberInterest receivable (2/6 of $31,000)...................................... 10,333

Investment in debt securities: Fox Corp. bonds (2/6 of $789) 263Interest revenue (2/6 of $30,211)................................. 10,070

20x8 entries:1 May

Cash ................................................................................... 31,000Investment in debt securities: Fox Corp. bonds (4/6 of $789) 526Interest receivable......................................................... 10,333Interest revenue (4/6 of $30,211)................................. 20,141

1 NovemberCash .................................................................................... 31,000


31 DecemberInterest receivable (2/6 of $31,000)...................................... 10,333


Requirement 4Assuming that the bond is classified as AC1 FebruaryInterest receivable (1/6 of $31,000)...................................... 5,167


Cash ($1,000,000 x .99) + $15,500** .................................. 1,005,500Investment revenue: Loss on sale of bond ............................ 15,002

Interest receivable......................................................... 15,500Investment in debt securities: Fox Corp. bonds * ......... 1,005,002* $1,005,421 - $279 - $140**$31,000 of interest due May 1, 20X9; since bond sold in between interest payment

periods, 3 months of interest accrual (November 1, 20X8 – January 31, 20X9). Therefore, $31,000 / 6 * 3 = $15,500. This can be verified by adding together the December 31st and February 1st interest receivable accounts. ($10,333 + $5,167 = $15,500).


Requirement 5(Requirement 3 again for this classification)Assuming that the bond is classified as FVOCI-Bond20x7 entries:

1 May (no change)Investment in debt securities: Fox Corp. bonds .................... 1,007,789

Cash ............................................................................. 1,007,789

1 November (no change)Cash .................................................................................... 31,000


31 December (no change)Interest receivable (2/6 of $31,000)...................................... 10,333


Adjustment for fair value, 20x7Investment in debt securities: Fox Corp. bonds ($1,050,000 – ($1,007,789 - $766 - $263)) ....................................... 43,240

Investment revenue: Holding gain: OCI Fox Corp. bonds ............ 43,240

Using FVOCI-Bonds, the bond is reported at fair value, or $1,050,000 and the fair value adjustment is recognized in OCI

20x8 entries:1 May (no change)

Cash ................................................................................... 31,000Investment in debt securities: Fox Corp. bonds (4/6 of $789) 526Interest receivable......................................................... 10,333Interest revenue (4/6 of $30,211)................................. 20,141

1 November (no change)Cash .................................................................................... 31,000


31 December accrued interest (no change)Interest receivable (2/6 of $31,000)...................................... 10,333



Adjustment for fair value, 20x8Investment account balance at Dec 31 20X8 prior to fair value adjustment:$1,050,000 – 526 - 813 – 279 = 1,048,382(Also equal to: 1,005,421 + 43,240 – 279 = 1,048,382Investment in debt securities: Fox Corp. bonds ($1,310,000 – $1,048,382) ................................................................261,618

Investment revenue: Holding gain: OCI Fox Corp. bonds ............ 261,618

(Requirement 4 for this new classification)Assuming that the bond is classified as FVOCI-Bonds1 February – set up accrued interest revenueInterest receivable (1/6 of $31,000)...................................... 5,167


Record receipt of cashCash ($1,000,000 x .99) + $15,500...................................... 1,005,500Investment revenue: Loss on sale of bond ............................ 319,860

Interest receivable......................................................... 15,500Investment in debt securities: Fox Corp. bonds * ......... 1,309,860* $1,310,000 - 140

To close out accumulated OCI amounts to profit/lossHolding gain OCI: (43,240 + 261,618)................................. 304,858

Investment revenue: Gain on sale of bond .................... 304,858


Assignment 11-10

Requirement 1

Current investments are those that are cash equivalents (shares do not qualify) or investments that are expected to be realized during the current operating cycle, or twelve months. Current investments are also those that are held for trading purposes. Investments are otherwise classified as long-term.

Requirement 2

The reported values are presumably fair values. Fair values are estimated with reference to quoted (bid) price in active markets. (This would be termed a Level 1 measure of fair value.) Recent transactions can be extrapolated to ascertain fair value, or valuation models can be used (models involving estimates are Level 2 or 3 measures of fair value.)

Requirement 3

Star shares have AOCI (OCI equity reserve) amounts recorded, therefore must be FVTOCI. These investments must be investments in shares and management must irrevocably designate the investment as FVTOCI on initial recognition.

Shares cannot be classified as AC as they have no interest or principal payments.

Requirement 4

The Star Co. shares were purchased for $1,219,800 ($1,370,100 - $150,300). The Comet Co. shares were purchased for $459,300 ($434,700 + $24,600).

Requirement 5

No gain or loss is reported in earnings for Star Co. shares because the investment is classified as FVTOCI. A further gain of $129,900 ($1,500,000 - $1,370,100) would be reported in OCI (equity reserve), bringing the balance to $280,200. This amount may be transferred to retained earnings/another equity account, if the company chooses, but never to earnings.

A gain of $300 ($435,000 - $434,700) would be reported on the Comet Co. shares. Since these shares were reported using FVTPL, the investment account ($434,700) already reflects the $24,600 fair value adjustment at the end of 20X9.



Requirement 1

1 November 20x8 – to record acquisition of investments:

Investment in Minto Co. shares .......................................................... 30,000Investment in Pugwash Co. shares...................................................... 17,500

Cash............................................................................................ 47,500

Requirement 2

31 December 20x8 - Adjusting entry to record fair value:

Investment in Pugwash Co. shares...................................................... 1,400Investment revenue: Holding gain: Pugwash Co. shares............... 1,400

Investment revenue: Holding loss: Minto Co. shares........................... 6,000Investment in Minto Co. shares ................................................ 6,000

Calculation:

Company Shares Cost Market

Minto 2,000 @ $15 = $30,000 @ $12 =$24,000 $6,000 lossPugwash 700 @ $25 = 17,500@$27 = 18,900 1,400 gain

$42,900Requirement 3

Earnings, 20x8Net losses on FVTPL investments ($6,000 - $1,400) ................... $4,600 loss

Statement of financial position, 31 December 20x8

FVTPL investments, at fair value................................................. $42,900


Requirement 4

2 March 20x9 - To record dividends received:Cash (2,000 shares x $2.10) + (700 shares x $1.25)............................ 5,075

Dividend income ......................................................................... 5,075

1 October 20x9 - To record sale of 200 shares of Pugwash stock:Cash (200 shares x $29) ..................................................................... 5,800

Investment in Pugwash Co. shares (200 shares x $27) ................. 5,400Investment revenue: Holding gain: Pugwash Co. shares............... 400

31 December 20x9 - Adjusting entry to record fair value:Investment in Minto Co. shares .......................................................... 22,000

Investment revenue: Holding gain: Minto Co. shares ................... 22,000Investment revenue: Holding loss: Pugwash Co shares ....................... 500

Investment in Pugwash Co shares................................................ 500

Calculation:Company Shares Carrying value Fair value

Minto 2,000 @ $12 = $24,000 @ $23 =$46,000 22,000 gainPugwash 500 @ $27 = 13,500@$26 = 13,000 500 loss

$59,000Requirement 5

Earnings, 20x9:Investment revenue - Dividends................................................... $ 5,075Holding gains on FVTPL investments ($22,000 + $400 - $500)... $ 21,900 $

26,975

Statement of financial position, 31 December 20x9FVTPL investments, at fair value................................................. $59,000

Requirement 6

Earnings, 20x9:Investment revenue ..................................................................... $ 5,075

Statement of financial position, 31 December 20x9FVTOCI investments, at fair value .............................................. $59,000Other comprehensive income (loss) ($4,600dr - $21,900cr) ................................................................ $17,300 cr


The company would begin the year with OCI of $4,600 ($6,000 dr. for Minto shares and $1,400 cr. for Pugwash shares.) This would change by the $21,900 net holding gains recorded in the year.


Assignment 11-12 (WEB)Requirement 1a. Cost method

20x2 20x3 20x4EarningsDividend revenue $1,500 $1,500 $ 1,000Fees and commissions expense -- -- --Loss on sale (1) (1,850)Statement of financial positionInvestment (3,000 x $42) + $1,200; 2/3 in 20X4 $127,200 $127,200 84,800

OCI: Holding gain/(loss) -- -- --(1) cost of ($127,200 x 1/3) = $42,400 vs net proceeds $40,550 ((1,000 x $41) - $450)

b. FVTPL method20x2 20x3 20x4

EarningsDividend revenue $1,500 $1,500 $ 1,000Fees and commissions expense 1,200Holding gains (losses)(1) (12,000) 21,000 (14,450)Statement of financial positionInvestment ($38; $45; $40 for 2,000 shares) $114,000 $135,000 $80,000OCI: Holding gain/(loss) -- -- --(1) 3,000 x ($38 - $42); ($45-$38) x 3,000; 2,000 x ($40-$45) + (1,000 ($41-$45) plus $450 in commission)

c. FVTOCI-Equity method20x2 20x3 20x4

EarningsDividend revenue $1,500 $1,500 $ 1,000Fees and commissions expense -- -- --Holding gains (losses) -- -- --Statement of financial positionInvestment ($38; $45; $40 for 2,000 shares) $114,000 $135,000 $80,000

OCI: Holding gain/(loss)(1) (13,200) 7,800 6,650 Transfer to RE -- -- (1,850)

4,800(1) 20x2: $127,200 - $114,000 = $13,200 loss ; 20x3: ($135,000 - $114,000) = $21,000 + ($13,200); 20x4: ($14,000 )FVTPL loss + ($450 comm) + $7,800 opening; 20x4: realized cost of ($127,200 x 1/3) = $42,400 vs net proceeds $40,550 ((1,000 x $41) - $450) Proof of $4,800 = cost of 2,000 shares = $84,800 – fair value $80,000


Requirement 2

The cost method is used when the investor is a private company and the shares are not traded in active markets where price quotes are readily available. It will also be used during the year for certain investments (subsidiaries) prior to consolidation at year-end. FVTPL is used when the investment has a fair value and is not classified elsewhere. Management could designate the investment as FVTOCI-Equity on initial recognition if they wish.



Requirement 1Cost method

20x2 20x3 20x4EarningsDividend revenue $2,600 $4,200 $ --Fees and commissions -- -- --Gain on sale (1) 3,050

Statement of financial positionInvestment (4,000 x $17) + $400 $68,400 $68,400 --

OCI: Holding gain/(loss) -- -- --(1) cost of $68,400 versus net proceeds $71,450 ((4,000 x $18) - $550)

FVTPL method20x2 20x3 20x4

EarningsDividend revenue $2,600 $4,200 $ --Fees and commissions 400Holding gains (losses)(1) (4,000) 16,000 (8,550)

Statement of financial positionInvestment ($16; $20) $64,000 $80,000 --OCI: Holding gain/(loss) -- -- --(1) 4,000 x ($17 - $16); ($16-$20); ($20-18) plus $550

FVTOCI-Equity method20x2 20x3 20x4

EarningsDividend revenue $2,600 $4,200 $ --Fees and commissions -- -- --Holding gains (losses) -- -- --

Statement of financial positionInvestment ($16; $20) $64,000 $80,000 --

OCI: Holding gain/(loss)(1) (4,400) 11,600 3,050 Transfer to RE -- -- (3,050)

0(2) 20x2: $68,400 - $64,000 = $4,400loss ; 20x3: ($80,000 - $64,000) = $16,000 + ($4,400); 20x4: ($71,450 - $80,000) = ($8,550) + $11,600; agrees to cost method


Requirement 2

The cost method is used when the investor is a private company and the shares are not traded in active markets where price quotes are readily available. It will also be used during the year for certain investments (subsidiaries) prior to consolidation at year-end. FVTPL is used when the investment has a fair value and is not classified elsewhere. Management could designate the investment as FVTOCI-Equity on initial recognition if they wish.



Requirement 1

a) FVTOCI investment: Front Corp., common ............................... 96,720Cash .................................................................................... 96,720

[(3,000 x $31) + (3,000 x $31 x 4%)]= $96,720 ($32.24 per share)

b) FVTOCI investment: Ledrow Corp., preferred ............................ 803,400Cash .................................................................................... 803,400

[(10,000 x $78) + (10,000 x $78 x 3%] = $803,400 ($80.34 per share)

c) FVTOCI investment: Front Corp., common ................................ 72,800Cash .................................................................................... 72,800

[(2,000 x $35) + (2,000 x $35 x 4%)] = 72,800 ($36.40 per share)

d) Accrued interest receivable ($400,000 x .09 x 3/12) .................... 9,000FVTPL investment: Container Bonds ........................................ 400,000

Cash .................................................................................... 409,000

e) Cash ...................................................................................... 40,000Dividend income (10,000 x $4) ........................................... 40,000

f) Accrued interest receivable ($400,000 x .09 x 2/12) .................... 6,000Interest revenue ................................................................... 6,000

g) Holding loss: Container bonds..................................................... 8,000FVTPL investment: Container Bonds .................................. 8,000

FVTOCI investment: Front Corp shares ...................................... 480OCI: Holding gain: Front Corp. shares ..................................... 480

FVTOCI investment in Ledrow Corp. shares .............................. 16,600OCI: Holding gain: Ledrow Corp shares................................... 16,600

Computations:Cost/

Investment Quantity Carrying Value Market Holding G/L

Container $400,000 $400,000 x 98% = $392,000 $ 8,000 loss

Front 5,000 shares $169,520 x $34 = 170,000 480 gainLedrow 10,000 shares $803,400 x $82 = 820,000 16,600 gain

$990,000 $17,080 gain


Requirement 2

20x2 Comprehensive Income:Earnings: Revenue from investments: Interest revenue……………………………………… $ 6,000 Dividend income…………………………………….. 40,000 Investment revenue: holding loss (8,000)

Other Comprehensive IncomeInvestment – FVTOCI – Equity investments ($16,600 + $480) ................ 17,080

20x2 Statement of financial position:

Accrued interest receivable.......................................................................$ 15,000

FVTOCI-Equity investments.................................................................... 990,000FVTPL investment ................................................................................... 392,000

Equity reserve: holding gain: OCI ($16,600 + $480) ................................ 17,080 gain

Requirement 3

a) FVTPL investment: Front Corp., common (3,000 x $31) ........ 93,000Commission expense (3,000 x $31 x 4%) .................................... 3,720

Cash .................................................................................... 96,720

b) FVTPL investment: Ledrow Corp., preferred (10,000 x $78) ...... 780,000Commission expense (10,000 x $78 x 3%) .................................. 23,400

Cash .................................................................................... 803,400

c) FVTPL investment: Front Corp., common (2,000 x $35)............. 70,000Commission expense (2,000 x $35 x 4%)] ................................... 2,800

Cash .................................................................................... 72,800

d) Accrued interest receivable ($400,000 x .09 x 3/12) .................... 9,000FVTPL investment: Container Bonds ........................................ 400,000

Cash .................................................................................... 409,000

e) Cash ...................................................................................... 40,000Dividend income (10,000 x $4) ............................................ 40,000

f) Accrued interest receivable ($400,000 x .09 x 2/12) .................... 6,000Interest revenue ................................................................... 6,000


g) Investment revenue: holding loss: Container bonds...................... 8,000FVTPL investment: Container Bonds ...................................... 8,000

FVTPL investment: Front Corp shares ........................................ 7,000Investment revenue: holding gain: Front Corp. shares ............... 7,000

FVTPL investment: Ledrow Corp. shares ................................... 40,000Investment revenue: holding gain: Ledrow Corp shares ............ 40,000

Computations:Cost/

Investment Quantity Carrying Value Market Holding G/L

Container $400,000 $400,000 x 98% = $392,000 $ 8,000 lossFront 5,000 shares $163,000 x $34 = 170,000 7,000 gainLedrow 10,000 shares $780,000 x $82 = 820,000 40,000 gain

$1,382,000 $39,000 gain

20x2 Earnings:

Revenue/expense from long term investments:Interest revenue ................................................................................ $6,000Dividend income ............................................................................... 40,000Commission expense ......................................................................... 29,920Investment holding gain ($40,000 + $7,000 - $8,000) ....................... 39,000

20x2 Statement of financial position:

Accrued interest receivable.......................................................................$ 15,000

FVTPL investments .................................................................................$1,382,000

Note: Retained earnings are higher under this alternative.


Assignment 11-15

Requirement 1

Earnings, 20x5:Dividend income (2,000 x $1.30) + (7,200 x $2) ......................... $17,000Commission expense (Wilton) ............................................... ….. $630Holding loss, Kelowna Ltd (1). ................................................... ($7,900)Holding gain, Burnaby Corp. (2) ........................................... … . $1,600Holding gain, Burnaby (3) ........................................................... $21,462Holding loss, Wilton ($21,000 - $20,000)................................... ($1,000)

(1) Kelowna: Proceeds: ($82,000 - $1,200) ......................... $80,800 Carrying value ...................................................88,700

$7,900 loss

(2) Burnaby: Proceeds: ($23,460 - $700) ............................. $22,760 Carrying value ($66,240 x 2,300/7,200)..............21,160

$1,600 gain

(3) Burnaby: Fair value: (4.900 x $13.58) ............................ $66,542 Carrying value ($66,2400 x 4,900/7,200) ............45,080

$21,462 gain

Requirement 2

Statement of financial position, 31 December 20x5Burnaby Corp, 4,900 shares (@$13.58)....................................... $66,542Wilton Ltd, 700 shares ................................................................ 20,000

Requirement 3

Investments in shares are current if they are expected to be realized during the company’s normal operating cycle or within twelve months, or if held for trading. Otherwise, they are long-term.


Assignment 11-16

Requirement 1

18 June FVTPL investment – bond ..........................................1,595,000Cash ($1,450,000 x $1.10) .................................... 1,595,000

Requirement 2

22 May FVTPL investment - Gerstan Ltd ($696,800 x 1.07).... 745,576Commission expense ($2,000 x 1.07) .......................... 2,140

Accounts payable……………………………….. ((52,000 x $13.40) + $2,000) = $698,800 x $1.07 747,716

3 September Accounts payable ........................................................ 747,716Foreign exchange loss $698,800 x ($1.12 - $1.07)....... 34,940

Cash $698,800 x $1.12.......................................... 782,656

Requirement 3

31 Dec FVTPL Investment - Gerstan Ltd ................................ 73,424Investment revenue: holding gain .......................... 73,424

Fair value = 52,000 x US$15 = US $780,000 x 1.05 = $819,000 $819,000 - $745,576 = $73,424

This change in value includes a change in the exchange rate of ($13,936) (($1.07 - $1.05) x $696,800) and a change in the value of the shares of $87,360 ($819,000 – ($696,800 x 1.05)). The two amounts are not separately recognized.

31 Dec FVTPL investment – bond (1) ..................................... $18,850Foreign exchange loss ($1,450,000 x ($1.10 - $1.05) .. $72,500

Investment revenue: holding gain: bond (2) ........... 91,350(1) $1,450,000 x 1.06 = 1,537,000 x 1.05 = $1,613,850 $1,613,850 - $1,595,000 = $18,850

(2) $1,450,000 x 1.05 = $1,522,500; $1,522,500 - $1,613,850 = $91,350


Assignment 11-17

Requirement 1Cost might be appropriate if there was no quoted market value, and valuation techniques were not effective. For example, values provided by alternate models might be radically different, etc. In these circumstances, cost, which was presumably fair value on the transaction date and thus verified by an arms-length transaction, is used as an approximation of fair value.

Use of cost is inappropriate if fair value is defensible. It is also inappropriate if fair value is lower than cost, with the result that the asset is overvalued. In this case there is no evidence for impairment in 20x5, the 20x6 failed contract bid is an indication of decline in value at that time. From the chapter:

The investor is expected to consider a broad range of information that is available about the investee. Such information might include the performance of the investee in comparison to budget, technological risks, the health of the economy in general, the performance of competitors, any evidence of financial distress apparent in transactions with third parties, and any evidence of internal fraud or external litigation.

Requirement 2Yes, an increase in fair value would be recognized, as long as the recovery was associated with a particular event, which provides a reason for fair value to rebound. Income will increase (loss reversal) because of the increase in fair value.

Requirement 320x5 20x6 20x7 20x8

Earnings: Holding loss (50%) ($364,000) Gain on sale ($364,000 - $524,300) $160,300Statement of financial position: FVTPL investment $728,000 $364,000 $364,000 ---Evidence to support the lower fair value is primarily the loss of the contract bid. Internal budgets or valuations from the investee or the fair value of comparable companies might be available. Share transactions would be useful but likely unavailable because the company is private.

Requirement 420x5 20x6 20x7 20x8

Earnings: -- -- -- --

Statement of financial position: FVTOCI investment $728,000 $364,000 $364,000 ---Equity reserve: OCI holding gains/losses

(364,000) (364,000) (203,700)*

*(364,000 - $160,300) Could be transferred to RE after realization in 20x8



Requirement 1

Principal $4,000,000 x (P/F, 2%,8 ) (.85349) = $ 3,413,960Interest $120,000* (P/A, 2%, 8) (7.32548) = 879,060**Fair value $4,293,020

*$4,000,000 x 6% x 6/12**$2 rounding up to the nearest ten. Requirement 2


PeriodCash

Payment$

2% InterestRevenue

$Amortization

$

BondCarrying

ValueFeb 1 20X5 $4,293,020

July 31 20X5 $120,000 85,860 $ 34,140 4,258,880Jan 31, 20X6 120,000 85,178 34,822 4,224,058July 31 20X6 120,000 84,481 35,519 4,188,539Jan 31, 20X7 120,000 83,771 36,229 4,152,310July 31 20X7 120,000 83,046 36,954 4,115,356Jan 31, 20X8 120,000 82,307 37,693 4,077,663July 31 20X8 120,000 81,553 38,447 4,039,216Jan 31, 20X9 120,000 80,784 39,216 4,000,000Jan 31, 20X9 4,000,000 0

Requirement 3February 1, 20X5 Purchase of the bondsInvestment in debt securities: Moon bonds ...........................4,293,020

Cash ............................................................................ 4,293,020

July 31 20X5 – Interest received:Cash .................................................................................... 120,000


January 31, 20X6- Interest receivedCash .................................................................................... 120,000



January 31, 20X6 – Impairment loss (Stage 1 level of credit risk)Impairment loss ................................................................... 65,000

Allowance on Investment in debt securities: Moon bonds 65,000





January 31, 20X7 – Impairment loss (Stage 2 level of credit risk)Impairment loss ($475,000 – 65,000)................................... 410,000






January 31, 20X8 – Impairment loss – Stage 3 level of credit risk See explanation and calculations belowImpairment loss ................................................................... 492,781


Explanation of journal entryThe investment is now credit impaired and has a revised value. At the fiscal 20X8 year end, the payments are now revised and the present value of the expected cash flows are determined using the 2% original effective interest rate as follows:


PeriodCash

Payment$

Present value at 2%

July 31 20X8 $75,000 75,000 / (1.02) = 73,529Jan 31, 20X9 75,000 75,000 / (1.02)2 = 72,088July 31 20X9 75,000 75,000 / (1.02) 3 = 70,674

Jan 31, 20X10 75,000 75,000 / (1.02) 4 = 69,288July 31 20X10 75,000 75,000 / (1.02) 5 = 67,930Jan 31, 20X11 75,000 75,000 / (1.02) 6 = 66,598July 31 20X11 75,000 75,000 / (1.02) 7 = 65,292Jan 31, 20X12 75,000 75,000 / (1.02) 8 = 64,012Jan 31,20X12 3,000,000 / (1.02) 8 = 2,560,471

Total 3,109,882

Based on the AC balance as per the original amortization schedule at January 31, 20X8, the bond’s carrying value is $4,077,663. Therefore the total allowance is now $967,781 (4,077,663 – 3,109,882 )

The entry required to adjust the allowance is $492,781 (967,781 – 475,000)

Requirement 4

For 20X9 and onwards, the interest is now calculated on the net balance (after the allowance) and the revised interest schedule is as follows:

PeriodCash

Payment$

2% InterestRevenue

$Amortization

$

BondCarrying Value

3,109,882July 31 20X8 $75,000 62,198 12,802 3,097,080Jan 31, 20X9 75,000 61,942, 13,058 3,084,022July 31 20X9 75,000 61,680 13,320 3,070,702

Jan 31, 20X10 75,000 61,414 13,586 3,057,116July 31 20X10 75,000 61,142 13,858 3,043,258Jan 31, 20X11 75,000 60,865 14,135 3,029,123July 31 20X11 75,000 60,582 14,418 3,014,705Jan 31, 20X12 75,000 60,295* 14,705 3,000,000Jan 31,20X12 3,000,000 0

*$1 rounding up to $60,295


Investment in debt securities: Moon bonds.................... 12,802






Requirement 1

a) Entry at date of acquisition:Investment in WC Corp. (5,000 shares)................................ 120,000

Cash.......................................................................... 120,000

b) Amount of goodwill purchased: $52,500

Computation of goodwill:Purchase price for 25% ownership $120,000Fair value of identifiable assets ($170,000 + $140,000) $310,000Less: Liabilities (40,000)Total fair value of identifiable net assets 270,000Proportion purchased x 25%Fair value of 25% of identifiable net assets purchased 67,500Goodwill $52,500

Proportion of invested assets adjusted to fair value:Land ($170,000 - $150,000) x 25% $5,000Assets subject to depreciation ($140,000 - $120,000) x 25% 5,000Additional depreciation ($5,000/5) $ 1,000

c) Entries at 31 December 20x5: Investment revenue:

Investment in WC Corp............................................ 9,000Investment revenue (WC earnings)………………. 9,000

($40,000 x 25% = $10,000) - $1,000 additional depreciation

Dividends:Cash ($15,000 x 25%)................................................ 3,750

Investment in WC Corp.................................... 3,750


d) Entries at 31 December 20x6:Investment revenue:

Investment in WC Corp................................................ 15,250Investment revenue.................................................. 15,250

$65,000 x 25% = $16,250 - $1,000

Dividends:Cash ($20,000 x 25%)........................................................ 5,000

Investment in WC Corp................................................ 5,000


Requirement 2

Fair value is $85,000 at the end of 20x5 and $155,000 at the end of 20x6. Book value is higher than fair value in 20x5 and lower than fair value in 20x6. No write-down to fair value is necessary (in 20x5) unless the decline in fair value is permanent. Requirement 3

Investment account:Investment Account (Equity Method)

Acq. 120,00020x5 Rev. 9,000 20x5 Div. 3,75020x6 Rev. 15,250 20x6 Div. 5,000Bal. 135,500

Requirement 4

If the cost method were used, the investment would be reported at its $120,000 cost. Investment revenue would be dividends declared, $3,750 in 20x5 and $5,000 in 20x6.


Assignment 11-20

Requirement 1

Significant influence is present when the investee has the power to participate in financial and operating policy decisions of the investee, even though the investor does not control the investee. In this case, 37% is well over the 20% benchmark for significant influence. However, since the remaining 63% of the shares are owned by family members of the founder, Loffer may be shut out in decision making and have no influence. Countering this suspicion is the fact that Loffer has three members on the Board, who feel they have been influential. Finally, Loffer is a supplier and thus has regular dealings with the company. Significant influence seems present, and the investment is an associate.

Requirement 2

Dividend cash flow is not considered to be an appropriate measure of investment earnings because Loffer’s representatives on the Board of Directors are in a position to change dividend levels. If Loffer wanted higher or lower investment earnings, they could influence the dividend policy of the associate accordingly.

Requirement 3

Investment earnings begin with Loffer’s 37% share of earnings but then are adjusted by amortization of the patent value that Loffer effectively bought. Since Loffer is a supplier, if there are intercompany profits unconfirmed by transactions with Ming’s customers, these also have to be eliminated. Finally, if there was goodwill inherent in the purchase price, and it was impaired, this would also be adjusted. These adjustments are meant to appropriately measure all aspects of the price paid and the intercompany dealings before investment revenue is reported.


Requirement 4

Purchase price for 37% ownership . $875,000Book value of assets $700,000Less: Liabilities (200,000)Net assets 500,000Proportion purchased x 37%

185,000Excess $690,000

Note: This is the value of Loffer’s interest in the patents, or patents plus goodwill. An independent assessment of the patents would be needed to ascertain if goodwill is also present. This “excess” will affect future recognized earnings because of patent amortization over ten years and/or the possibility of patent or goodwill impairment.

Requirement 5

Investment account:Investment Account (Equity Method)

Cost 875,00020x6 Rev.(1) 23,500 20x6 Div.(2)20,350Bal. 878,150

(1) $250,000 earnings x 37% = $92,500 less patent amortization; $690,000/10 years (2) $55,000 x 37%

This $878,150 is not fair value. It is cost plus unremitted earnings.


Assignment 11-21

Requirement 1

EarningsInvestment revenue: dividend income............................................. $ 47,900 (20,000 x $1.20) + (28,000 x $0.80) + (3,000 x $0.50)Interest revenue on Sawicki bond .................................................. 10,000 ($150,000 x 8% x 10/12)Loss on sale of FVTPL Adams investments ……………..($1,778,000 - $1,816,000)

(38,000)

Loss on sale of FVTPL Sawicki investments ……………..($142,800 - $148,000)

(5,200)

Long-term Investment revenue: equity income in Binod ................ 93,200 ($400,000 x .25) less $6,800AC Interest revenue ……………………… 39,213 ($391,344 x 5% = $19,567; discount amortization of $1,567) + (($391,344 + $1,567) x 5% = $19,646; discount amortization of $1,646)Holding gain recognized on Power Co. shares………………… ($438,000 - $198,000)

240,000

Holding loss on Wong shares ………………………………….($297,000 - $312,000)

(15,000)

Other comprehensive income Gain on sale of Huebner Co shares………………………………($807,000 - $742,000)

$65,000

Note: Accounts may be grouped within the short-term category. Separate disclosure of the various sources of income is not required.

Requirement 2

Statement of financial positionFVTPL investment Wong Ltd. 3,000 shares............................................................... $297,000 Power Co. 600,000 shares ........................................................... $438,000

Long-term investments Binod Ltd. 30,000 shares, equity method..................................... $2,520,200 ($2,478,000 - (30,000 x $1.7) + $93,200 Duval Co. bonds, $400,000 par value, 9 % bond, semi-annual interest, due 30 June 20x8 ($391,344 + $1,567 + $1,646)......... $394,557

Equity reserve: holding gains on FVTOCI investment ($65,000 for 20X6 + $90,000 beginning balance) $155,000



Requirement 1

The parent company must use the consolidation method to report to shareholders and other users. Consolidation only occurs at year-end and is not recorded in a set of books; the parent company must do something during the year, and may use either cost or equity to record the investment in its records.

Requirement 2

The following accounts appear in the consolidated financial statements but not in the unconsolidated financial statements:

Intangible assets (goodwill) Intangible assets implied in the purchase price. Excess of (grossed up) purchase price over proportionate share of FMV of net assets.

Non-controlling interest (SFP) Interest in net assets of subsidiary owned by shareholders other than the parent.

Non-controlling interest (allocation of income) Percentage of confirmed earnings of subsidiary

not accruing to the parent.

Requirement 3

The following accounts are removed from the unconsolidated financial statements:

1. Investment in S Co. Replaced with net assets of subsidiary.

2. Equity accounts of S Co. Equity is owned by the parent or reclassified as NCI.

3. Inter-company receivables and payables Only receivables or payables to those outside the two companies remain.

4. Inter-company sales See #3.

Requirement 4

Both accounts receivable and current liabilities do not cross-add by $4,000. This implies that there is an inter-company receivable/payable that was eliminated from the categories.


Assignment 11-23

Requirement 1

The carrying value of the FVTOCI-Equity and the FVTPL investments represents fair value, at the reporting date. The amortized cost investment represents amortized cost, converging on par value at maturity. The significant-influence investment is carried at cost plus unremitted earnings.

Requirement 2

Gold Corp. shares were purchased for $805,730 ($763,500 + $42,230).

Requirement 3

TKB will transfer the Walsh bond to FVTPL investments at its fair value of $316,000. The holding gain ($19,000) is included in earnings.

Fair value is established through price quotes or valuation models/techniques (present value, etc.)

Requirement 4

The investment is recorded at its fair value, or $2,519,000. The holding gain of $125,000 is included in earnings.

Requirement 5

Transfers in and out of the FVTOCI-Equity category are not permitted. The designation of FVTOCI-Equity category must be made when the investment is purchased and is then irrevocable.



a. InvestingPurchase of common shares....................................................................($130,000)

b. Not disclosed on the CFS; non-cash transaction with no impact on earnings

c. Not recorded separately on CFS: part of cash and cash equivalents

d. OperatingDeduct: investment revenue (($300,000 x 3%) + $6,200)........................... ($15,200)Add: interest received ................................................................................ $9,000*

* Cash from investment revenue must be shown separately on the CFS. May also be shown net, as a deduction of $6,200, with the cash received as part of supplementary disclosure.

e. OperatingDeduct: non-cash investment revenue......................................................... ($99,000)*Add: dividends received ............................................................................. $46,000*

*Or shown net, ($53,000)

f. InvestingPurchase of common shares....................................................................($210,000)

g. OperatingAdd: non-cash change in fair value ........................................................ $35,000

(Included in earnings so must be backed out)

h. InvestingSale of common shares ........................................................................... $200,000

The gain /loss is excluded because it does not affect earnings.

i. Not recorded separately on CFS: part of cash and cash equivalents


Assignment 11-25

CFS disclosures:Operating activities

Less: Discount amortization on long-term bond investment (1)....$ (19,700) Less: Holding gain, FVTPL investments (2) ................................. (81,000)Less: Equity-based Investment revenue, Falcon (3)...................... (442,000) Plus: Dividends received from Falcon (given).............................. 80,000

Investing activitiesPurchase of FVTOCI investments (4)............................................. (70,500)Proceeds on sale of FVTOCI investments ...................................... 64,400

(1) $551,000 - $531,300 = $19,700. If cash received is known, the required disclosure is to list cash received from investment revenue.

(2) $756,000 versus $675,000; no other reason for change is given(3) ($1,649,000 - 80,000) = $1,569,000 - $2,011,000 = $442,000(4) Change in OCI: $51,400 + recognized on sale of FVTOCI investment, $21,600

($64,400 - $42,800) = $73,000 vs actual $59,300 = $13,700 fair value decrease

Opening investment balance, $991,000, less $42,800 sold = $948,200 - $13,700 decrease in value = $934,500 Actual balance is $1,005,000 Difference represents acquisitions= $70,500


Assignment 11-26 (ASPE)

a Cost, unless designated FVTPL Valued at cost, interest in earnings, no change in value recognized unless sold

b Cost (amortized cost), unless designated FVTPL

Valued at cost, interest in earnings, no change in value recognized unless sold

c Joint Venture Equity method, proportionate consolidation, or cost*

d Significant Influence investment(assumes significant influence)

Equity method, or cost*

e FVTPL(assumes OTC market is active enough for valuation. If not, cost)

Valued at fair value, dividends in earnings, changes in fair value in earnings Or, Valued at cost, interest in earnings, no change in value recognized unless sold

f FVTPL(not able to bypass earnings) (FVTOCI does not exist)

Valued at fair value, dividends in earnings, changes in fair value in earnings.Cost is not an option as Elm Inc. is publicly traded.

g Significant Influence investment (assumes significant influence)

Equity method, or cost*

h Subsidiary(assumes control)

Consolidation, equity method, or cost*

* FVTPL rather than cost if shares actively traded


Assignment 11-27 (ASPE)

a Significant influence(assumes significant influence)

Equity method, or FVTPL (public co, cost not an option)

b Cost(Not FVTPL because gains and losses would go to earnings)

Valued at cost, interest in earnings, no change in value recognized unless sold

c Subsidiary Equity method, consolidation or cost*d FVTPL

(not able to bypass earnings)Valued at fair value, interest in earnings, changes in fair value in earnings

e Cost (amortized cost) Valued at cost, interest in earningsf FVTPL

(publicly traded)Valued at fair value, dividends in earnings, changes in fair value in earnings

g Cost(No significant influence, fair value cannot be ascertained)

Valued at cost, dividends in earnings

* FVTPL rather than cost if shares actively traded


Assignment 11-28 (ASPE) (WEB)

Requirement 1 (unchanged from 11-7)

Principal $600,000 x (P/F, 2.5%,6 ) (.86230) = $ 517,380Interest $16,500* (P/A, 2.5%, 6) (5.50813) =

90,884

Fair value $608,264

*$600,000 x 5.5% x 6/12

Requirement 2

Straight-line amortization

PeriodCash Payment

InterestRevenue

Straight lineAmortization*

Bond Carrying Value

0 $608,2641 $16,500 $15,123 $ 1,377 606,8872 16,500 15,123 1,377 605,5103 16,500 15,123 1,377 604,1334 16,500 15,123 1,377 602,7565 16,500 15,122 1,378 601,3786 16,500 15,122 1,378 600,000

* $8,264/6

Requirement 3





Third period revenue:Cash .................................................................................... 16,500




Requirement 1

Principal $2,000,000 x (P/F, 3%,12 ) (.70138) = $ 1,402,760Interest $54,000* (P/A, 3%, 12) (9.954) = 537,516Fair value $1,940,276

*$2,000,000 x 5.4% x 6/12

Requirement 2

Straight-line amortization

($2,000,000 - $1,940,276) / 12 periods = $4,977

PeriodCash Payment


Bond Carrying Value

0 $1,940,2761 $54,000 $58,977 $ 4,977 1,945,2532 54,000 58,977 4,977 1,950,2303 54,000 58,977 4,977 1,955,2074 54,000 58,977 4,977 1,960,184

Requirement 3

First period revenue:

Cash .................................................................................... 54,000Investment in debt securities: Harvest bonds ........................ 4,977


Subsequent periods:

Identical entry.



Requirements 1 and 2

Entries and Other Information

Requirement 1Cost Method

Is Appropriate

Requirement 2Equity MethodIs Appropriate

a) Entry to date of acquisition, 3 January 20x4:Investment in UK Corp. common ..........

Cash ...................................................14,600

14,60014,600

14,600

b) Goodwill Computation:

Purchase price (20% ownership) FMV of net assets purchased (20%):

Total fair value of assets of UK ($50,000 + $33,000)Less: Total liabilities of UK

Total fair value of net identifiable assetsProportion purchased

FMV purchasedGoodwill

Depreciable: $3,000 x .2 = $600 (/10 = $60)

Not applicable $ 2,000

$14,600

$83,000(20,000)63,000

x 20% 12,600

$ 2,000

c) Entry on 31 December 20x4 to record $15,000 earnings reported by UK:Investment in UK Corp. common............

Investment revenue............................Income: $15,000 x .2 $3,000Depreciation: ($3,000 x .2) / 10( 60)

$2,940

No entry2,940

2,940

d) Entry on 31 March 20x5 for a $1 cash dividend; $1 x 2000 shares = $2,000

Cash......................................................Investment revenue........................Investment in UK Corp. common..

2,0002,000

2,000

2,000

Requirement 3

TA Co might use the cost method if it were a private company. They might also use the cost method during the year, adjusting to equity for external reporting.

chapter 11: financial instruments: investments in …boliver/ch11.pdf · solutions manual to...

Documents