Chapter 8

Solutions

Exercise 8.1

a. This investment will be classified as equity investments at cost less any reduction for impairment, because these are equity investments that are not publicly traded. They would be reported as either current or long-term, depending upon the intention of management to hold or sell within one year.

b. Journal entries
General journal. To record construction costs: Construction in progress 1,600,000 under debit; Materials, payables, cash, etc. 1,600,000 under credit. To record billings: accounts receivable 1,100,000 under debit; billings on construction 1,100,000 under credit. To record collections: cash 1,000,000 under debit; accounts receivable 1,000,000 under credit. To recognize revenue: Construction expenses (includes actual costs incurred plus additional loss to recognize) 1,680,000 under debit; construction in progress 365,650 under debit; revenue 1,314,350.

c. To purchase the investment:
General journal. Investments in shares – FVNI under debit 50,000 Brokerage fee expense under debit 500 Cash under credit 50,500 For Brokerage fee expense: (500,000 × 1%)To receive the cash dividends:
General journal. Cash 1,125 under debit. Dividend revenue 1,125 under credit. (500 shares x $2.25)Year-end adjusting entry to fair value for FVNI investments:General journal. Investment in shares -FVNI 4,000 under debit. Unrealized gain on investments (NI) 4,000 under credit ($108 - $100 x 500 shares)For sale of investment:
General Journal. Cash under debit 56,430 Brokerage fee expense under debit 570 Gain on sale of investments (to net in- come) under credit 3,000 Investment in shares – FVNI under credit 54,000 For Cash: ($57,000 − 570), for Brokerage fee expense: (57,000 × 1%), for Investment in shares: (50,000 + 4,000)No year-end adjustments are needed under the cost method.

d. Under ASPE, if the shares traded on an active market, they would be classified as a short-term trading investment at FVNI. The entries would be identical to the ones in part (c) above, including the adjustment to fair values at year end.


Exercise 8.2

  1. Using a business calculator present value functions, solve for interest I/Y when the present value, payment, number of periods and future values are given:

    PV = (PMT, I/Y, N, FV)± 25,523PV = 1000 PMT, unknown I/Y, 10 N, 25000 FV = 3.745% (rounded)

  2. Face value of the bond

    Present value of the bond

    Bond premium

    $25,000

    25,523

    $523

  3. Journal entries for a AC investment using amortized cost:
    General Journal. Jan 1 2020 Investment in bonds – at amortized cost under debit 25,523 Cash under credit 25,523 Dec 31 2020: Interest receivable under debit 1,000 Investment in bonds – at amortized cost . under credit 44 Interest income under credit 956 For Investment in bonds: (1,000 − (25,523 × 3.75%)) Jan 1 2021: Cash under debit 1,000 Interest receivable under credit 1,000 Jan 1 2028: Cash under debit 25,250 Investment in bonds – at amortized cost under credit 25,121 (see schedule below or alternative PC calculation) Gain on sale of investment under credit 129 For Cash: ($25,000 × 101)

    Alternative calculation to the effective interest rate schedule below using a business calculator and present value functions:

    PV = 1000 PMT, 2 N, 3.745 I/Y, 25000 FV = 25,120.68 where N is 2 years left to maturity.

    Effective Interest Rate Schedule

    Date Cash Received 4% Interest Income (3.745%) Bond Premium Amortization Carrying Value
    Jan 1/20 25,523
    Jan 1/21 1,000 956[1] 44 25,479
    Jan 1/22 1,000 954 46 25,433
    Jan 1/23 1,000 953 47 25,386
    Jan 1/24 1,000 951 49 25,337
    Jan 1/25 1,000 949 51 25,286
    Jan 1/26 1,000 947 53 25,233
    Jan 1/27 1,000 945 55 25,178
    Jan 1/28 1,000 943 57 25,121 (date of sale)
    Jan 1/29 1,000 941 59 25,062
    Jan 1/30 1,000 938 62[2] 25,000
    Total $10,000 $9,477 $523 25,000
  4. Total interest income is $9,477 − 941 − 938 = $7,598 after holding the investment for eight out of ten years.

    Total net cash flows for Smythe is (25,523) cash paid + ($1,000 × 8 years) + 25,250 cash received upon sale = $7,727 over the life of the investment.

    The difference of $129.48 (7,597.52−7,727) is the gain on the sale of the investment of $130 at the end of eight years. (The small difference is due to rounding.)

  5. If Smythe followed ASPE, then the investment would be accounted for using amortized cost. However, in this case, there would be a choice regarding the method used to amortize the bond premium of $523 calculated in part (b). The choices are straight-line amortization over the bond’s life or the effective interest rate method shown in part (c). If the straight-line method was used, then the yearly amortization amount would have been $523 ÷ 10 years or $52.30 per year for 8 years until the bonds were sold in 2028. The interest income would be the same over the 8 years.

Exercise 8.3

  1. Face value of the bond

    Amount paid

    Discount amount

    $100,000

    88,580

    $11,420

    The market value of an existing bond will fluctuate with changes in the market interest rates and with changes in the financial condition of the corporation that issued the bond. For example, a 9% bond will become more valuable if market interest rates decrease to 8% because the interest payment is at a higher rate than what investors would receive if they invested in a market that yielded only 8%.

    In this case, the issued bond promises to pay 4% interest for the next 10 years in a marketplace where interest has now risen to 5.5% for bonds with similar characteristics and risks. This bond will now become less valuable because the market interest rate has risen, and investors would receive a higher return in the market than with the 4% bond. When the financial condition of the issuing corporation deteriorates, the market value of the bond is likely to decline as well.

  2. General journal. Jan 2 Investment in bonds – at amortized cost under debit 88,580 Cash under credit 88,580 Jul 1 Cash under debit 2,000 Investment in bonds – at amortized cost under debit 436 Interest income under credit 2,436 For Cash: (100,000×4%×6÷12), for Interest income: (88,580 × 5.5% × 6 ÷ 12) Dec 31 Interest receivable under debit 2,000 Investment in bonds – at amortized cost under debit 448 Interest income under credit 2,448 For Interest income: ([$88,580 + $436] × 5.5% × 6 ÷ 12) Jan 1 Cash under debit 2,000 Interest receivable under credit 2,000

  3. General journal Jan 2: Investment in bonds – at amortized cost under debit 88,580 Cash under credit 88,580 Jul 1: Cash under debit 2,000 Investment in bonds – at amortized cost under credit 571 (11,420 ÷ 20 time periods for interest paid) Interest income under credit 2,571 For Cash: (100,000 × 4% × 6 ÷ 12) Dec 31: Interest receivable under debit 2,000 Investment in bonds at amortized cost under debit 571 Interest income under credit 2,571 Jan 1: Cash under debit 2,000 Interest receivable 2,000


Exercise 8.4

General journal. Jul 1: Cash under debit 2,000 Investment in bonds – at amortized cost under debit 436 Interest income under credit 2,436 For Cash: (100,000×4%×6÷12), for Interest income: (88,580 × 5.5% × 6 ÷ 12) Sept 30: Interest receivable under debit 1,000 Investment in bonds – at amortized cost. under debit 224 Interest income under credit 1,224 For Interest receivable: (100,000 × 4% × 3 ÷ 12), for Interest income: ([$88,580 + $436] × 5.5% × 3 ÷ 12) Jan 1: Cash under debit 2,000 Investment in bonds – at amortized cost. under debit 224 Interest receivable under credit 1,000 Interest income under credit 1,224 ([$88,580 + $436] × 5.5% × 3 ÷ 12)


Exercise 8.5

a. Imperial Mark will classify this investment as an investment in bonds – FVNI and will report the investment as a current asset.

b. Investment purchase:General journal. Mar 1: Investment in bonds FVNI 20,200 under debit. Interest receivable 667 under debit. Cash 20,867 under credit. For Investment in bonds: (20,000 × 101), for Interest receivable: ((20,000 × 5%) × 8 ÷ 12), for Cash: (20,000 × 101) + unearned interest from July 1 to Feb 28Payment of interest using the effective interest rate (IFRS):General journal. Jul 1: Cash 1,000 under debit. Investment in bonds FVNI 5 under credit. Interest income 328 under credit. Interest receivable 667 under credit. For Cash: (20,000 × 5%), For Interest income: (20,200 × 4.87% × 4 ÷ 12)Interest accrual using the effective interest rate (IFRS):General journal. Dec 31: Interest receivable 500 under debit. Investment in bonds FVNI 8 under credit. Interest income 492 under credit. For Interest receivable: (20,000 × 5% × 6 ÷ 12), for Interest income: ((20,200 − 5) × 4.87% × 6 ÷ 12)Fair value adjustment at year-end:General jounral. Dec 31. Investment in bonds FVNI 813 under debit. Unrealized holding gian in FVNI bonds 813 under credit. For Investment in bonds: (21,000−(20,200− 5 − 8))

c. If Imperial Mark follows ASPE, it would classify the investment in bonds as Short- Term Trading Investments, FVNI, and report it as a current investment since management intends to sell it. The alternate method to amortize the premium is using straight-line method. The premium to amortize is the face value minus the investment cost over the life of the bond or (20,000 − 20,200) = 200 ÷ 112 months = 1.79 per month. The interest income at year-end would be the investment amount at the face rate of interest minus the premium amortized using SL for that reporting period.Investment purchase:
General journal. Investment in bonds FVNI 20,200 under debit. Interest receivable 667 under debit. Cash 20,867 under credit For Investment in bonds: (20,000 × 101), for Interest receivable: ((20,000 × 5%) × 8 ÷ 12), for Cash: (20,000 × 101) + unearned interest from July 1 to Feb 28Interest payment using straight-line amortization of premium:General journal. Jul 1. Cash 1,000 under debit. Investment in bonds -FVNI 7 under credit. Interest income 326 under credit. Interest receivable 667 under credit. For Cash: (20,000 × 5%), for Investment in bonds: ($1.79 × 4 months), for Interest income: ((20,000 × 5%) − 7 − 667)Interest accrual using straight-line method (ASPE):General jounral. Dec 31. Interest receivable 500 under debit. Investment in bonds FVNI 11 under credit. Interest income 489 under credit. Unrealized holding gain in FVNI bonds . . . (21,000 − (20,200 − 7 − 11))Fair value adjustment at year-end:General journal. Dec 31. Investment in bonds FVNI 818 under debit. Unrealized holding gain in FVNI bondsUnrealized holding gain in FVNI bonds . . . (21,000 − (20,200 − 7 − 11)) 818 under credit


Exercise 8.6

a. Halberton would classify this as an investment in shares – FVOCI equities, without recycling, which is a special irrevocable election. Even though it may be for sale, there is no specific intention as to exactly when it will be sold, so it does not fit the business model for shares that are being actively traded. The investment will be reported as a long-term asset because it is unknown when it will be sold.

b. Purchase of investment:General journal. Investment in shares - FVOCI 52,800 under debit. Cash 52,800 under credit.Dividend payment:General journal. Cash 2,500 under debit. Dividend revenue 2,500 (1,000 × $2.50)Fair-value adjustment through OCI:General journal. Unrealized loss on FVOCI investments - OCI 2,800 under debit. Investment in shares FCOVI 2,800 under credit. ((1,000 × $50) − 52,800)The drop in price is not due to investment impairments, it is due to market fluctuations. For this reason, it is a fair value adjustment through OCI. Had the credit risk for this investment increased due to increased expected defaults, management would have revised the ECL and adjusted the investment and loss accounts (to net income due to impairment) accordingly.

c. Sale entries – step 1 – first, record the fair value change to the investment and OCI:General journal. Investment in shares FVOCI 4,200 under debit. Unrealized gain on FVOCI investments - OCI 4,200 under credit. (54,200 − 50,000)Step 2 – record the cash proceeds and remove the investment:General journal. Cash 54,200 under debit. Investment in shares FVOCI 54,200 under creditNOTE – steps 1 and 2 can be combined as shown in the chapter illustrations. They have been separated here for illustration purposes. Either method is acceptable.
Step 3 – remove the OCI amount that related to the investment sold:General journal. AOCI 1,400 under debit. Retained earnings 1,400 under credit. (54,200 − 52,800) To reclassify investment sold from AOCI to retained earnings.

d. If Halberton followed ASPE, this investment would likely be classified as a short- term trading investment with fair value adjustments at each reporting date, since the investment for shares appears to have active market prices and the investment is for sale (though no specific intention to sell exists at the moment). If the shares were not publicly traded, then the investment would likely be classified as an Other Investment – at cost, with no fair value adjustments.


Exercise 8.7

General journal. Cash 54,200 under debit. Investment in shares FVOCI 54,200 under credit

Sept 1 Cash under debit 109,000 Loss on sale of investment Cash under debit 1,703 Interest income under credit 4,428 Investments – FVNI – Xtra Corp. bonds under credit 106,275 e. For Cash: (($100,000 × 104) + (100,000 × 12% × 5 ÷ 12)), for Investments in Xtra Corp. bonds: (532,500 − 1,125 × (100,000 ÷ 500,000)), for Loss on sale: ((532,500 − 1,125) × 20% = 106,275 carrying value to Apr 1 − (5,000 − 4,428)), for Interest income: (532,500 − 1,125 amort = 531,375 CV × 5% semi-annual market rate × 20% × 5/6 months from Apr 1 to Sept 1 = 4,428) Sept 28 Cash Cash under debit 1,500 Dividend revenue under credit 1,500 f. For Cash: (3,000 × $0.50) Oct 1 Cash Cash under debit 24,000 Interest income under credit 21,255 Investment – Xtra bonds under credit 2,745 g. For Cash: ($400,000 × 12% × 6 ÷ 12), for Interest income: ((532,500 − 1,125 − 106,275) × 10% × 6.12) Dec 1 Cash under debit 9,000 Investment – Vericon bonds under credit 346 Interest receivable under credit 1,500 Interest income under credit 7,154 h. For Cash: ($200,000 × 9% × 6 ÷ 12), for Investment in Vericon bonds: (9,000−1,500− 7,154), for Interest income: (202,000×8.5%× 5 ÷ 12) Dec 28 Cash under debit 1,560 Dividend revenue under credit 1,560 i. (3,000 × $0.52) Dec 31 Investments – Bretin ACT shares Cash under debit 4,500 Unrealized gain on FVNI investments (net income) under credit 4,500 j. ($181,500 FV − $177,000) Dec 31 Interest receivable ((400,000 × 12% × 3 ÷ 12)) under debit 12,000 Investments – Xtra bonds under credit 1,441 Interest income ((532,500 − 1,125 − 106,275 − 2,745 =422,355 × 10% × 3 ÷ 12)) under credit 10,559 j. To accrue interest income to Dec 31

General journal. Dec 31 Unrealized loss in Xtra bonds under debit 13,914 Investments – Xtra bonds under credit 13,914 j. To adjust to fair value (422,355−1,441 = 420,914 CV−(400,000×1.0175)) Dec 31 Interest receivable ((200,000 × 9% × 1 ÷ 12)) under debit 1,500 Investments – Vericon bonds under credit 72 Interest income ((202,000−346) = 201,654×8.5%×1÷12) under credit 1,428 j. To accrue interest income to Dec 31 Dec 31 Unrealized loss in Vericon bonds under debit 7,582 Investments – Vericon bonds under credit 7,582 j. To adjust to fair value (202,000 − 346 − 72) = 201,582 CV − (200,000 × 0.97)

NOTE – An alternative treatment is to debit interest income at the date of purchase of the bonds instead of interest receivable. This procedure is correct, assuming that when the cash is received for the interest, an appropriate credit to interest income is recorded. Consistency is key.


Exercise 8.8

a. Verex follows IFRS because only IFRS companies can account for investments using the FVOCI classification. In this case, the FVOCI is without recycling because these are equities.

b. Purchase of investment:General journal. Jan 1. Investment in shares - FVOCI 126,750 under debit. Cash 136,750 under credit (135,000 + 1,750)Cash dividend declared:General journal. Oct. Cash 15,400 under debit. Dividend revenue 15,400 under credit. (140,000 × 10% × $1.10)Year-end fair value adjusting entry:General journal. Dec 31. Investment in shares FVOCI 450 under debit. Unrealized gain in FVOCI investment OCI 450 under credit. (137,200 − 136,750)Sale entries – step 1 – first, record the fair value change to the investment and OCI:General journal. Feb 1. Investment in shares - FVOCI 14,820 under debit. Unrealized gain on FVOCI investment OCI 14,820 under credit. (7,000 × $12 − $580) − (7,000 × 9.80)Step 2 – record the cash proceeds and remove the investment:General journal. Feb. 1. Cash 83,420 under debit. Investment in shares - FVOCI 83,420 under credit. (7,000 × $12) − $580Step 3 – reclassify the OCI amount related to the investment sold from AOCI to OCI:General journal. Feb 1. ACOI 15,045 under debit. Retained earnings 15,045 under credit. ((450 × 50%) + 14,820)NOTE – steps 1 and 2 are combined in the chapter illustrations. They have been separated here for illustration purposes.


Exercise 8.9

Other Comprehensive Income (OCI) = unrealized holding gain in FVOCI investments = $350,000 − 320,000 = $30,000

Comprehensive Income (CI) = net income + OCI = $250,000 + 30,000 = $280,000

Accumulated Other Comprehensive Income (AOCI) = AOCI opening balance + OCI = $15,000 + 30,000 = $45,000


Exercise 8.10

Entry for impairment:

General journal. Jan 4 2021. Loss on impairment 5,000 under debit. Investment in bonds at amoritized cost 5,000 under credit. ($200,000 − 195,000)

Note: For ASPE, the impaired value is the higher of the discounted cash flow using the current market interest rate and the net realizable value (NRV) either through sale or by exercising the company’s rights to collateral. Since the NRV information is not available, the discounted cash flow using the current market interest rate is the measure used to determine impairment.

Entry for impairment recovery:

General journal. Jun 30 2021. Investment in bonds at amortized cost 5,000 under debit. Recovery of loss on impairment 5,000 under credit.


Exercise 8.11

  1. General journal. Investement in shares FVNI 5,900 under debit. Unrealized gain on shares 5,900 under credit. (15,000 + 24,300 + 75,000) − (17,500 + 22,500 + 80,200)
  2. General journal. 2021. Cash 65,000 under debit. Gain on the sale of shares 2,400 under credit. Investment in shares - Warbler 22,500 under credig. Investment in shares - Shickter 50% 40,100 under credit. For Cash: (23,000 + 42,000)
  3. General journal. Dec 31 2021. Investment in shares FVNI 2,600 under debit. Unrealized gain on shares 2,600 under credit (17,500 + 40,100) − (19,200 + 41,000)
  4. If Camille followed ASPE, these equity investments would be classified as FVNI since there appears to be an active market for these shares. The entries would be the same as those shown for parts (a), (b), and (c). No impairment measurements are required since the investments are already accounted for using fair values.

Exercise 8.12

  1. Sept 30 2019 Investments in bonds – FVNI under debit 225,000 Interest receivable under debit 8,250 Cash under credit 233,250 For Interest receivable: ($225,000 × 4% × 11 ÷ 12) Oct 31 2019 Cash under debit 9,000 Interest receivable under credit 8,250 Interest income under credit 750 For Cash: (225,000 × 4%) Dec 31 2019 Interest receivable under debit 1,500 Interest income under credit 1,500 Investments in bonds – FVNI under debit 5,850 Unrealized gain on investments (net income) under credit 5,850 For Interest receivable: ($225,000× 4%× 2÷12), for Unrealized gain: ((225,000 × 102.6) − 225,000) Mar 1 2020 Cash under debit 234,300 Interest receivable under credit 1,500 Interest income under credit 1,500 Investment in bonds – FVNI under credit 230,850 Gain on sale of bonds under credit 450 For Cash: (225,000 × 102.8 + 3,000), for Interest income: (225,000 × 4% × 2 ÷ 12), for Investment in bonds: ($225,000 + 5,850)
  2. Partial Balance Sheet
    As at December 31, 2019
    Current assets
    Interest receivable $ 1,500
    Investments in bonds – FVNI (225,000 + 5,850) 230,850
    Partial income statement
    For the Year Ended December 31, 2019
    Other income
    Interest income (750 + 1,500) $2,250
    Unrealized gain on FVNI investments   5,850
  3. ASPE requires separate reporting of interest income from net gains or losses recognized on financial instruments (CPA Canada Handbook, Part II, Accounting Standards for Private Enterprises, Section 3856.52) whereas IFRS can choose to dis- close whether the net gains or losses on financial assets measured at fair value and reported on the income statement include interest and gains or losses, but it is not mandatory. (For purposes of this text, the preferred treatment for either standard is to separate unrealized gains/loss, interest income and dividend income separately since some of the information is required when completing the corporate tax returns for either ASPE or IFRS companies.)
  4. The overall returns generated from the bond investment was $10,050, calculated as follows:

    Interest Oct 31, 2019

    Interest accrued Dec 31, 2019

    Unrealized gain to Dec 31, 2019

    Interest accrued Mar 1, 2020

    Gain on sale of bonds Mar 1, 2020

    Total investment returns (income and gains)

    $ 750

    1,500

    5,850

    1,500

    450

    10,050

    This return represents a 10.72% annual return on the investment [($10,050 ÷ 5 months × 12) ÷ $225,000]. This return is more than anything the company might be able to earn in a typical savings account.


Exercise 8.13

  1. December 31, 2020 entry:General journal. Loss on impairment 22,000 under debit. Bond investment at amortized cost 22,000 under credit ($422,000 − $400,000)Under ASPE, the carrying amount is reduced to the higher of the discounted cash flow using a current market rate or the bond’s net realizable value NRV. Impairment reversals are permitted under ASPE for both debt and equity instruments.
  2. December 31, 2020 entry:General journal. Loss on impairment 22,000 under debit. allowance for bond investment impairment 22,000 under credit ($422,000 − $400,000)The investment account remains at its current carrying amount and it is offset by the credit balance in the asset valuation allowance account.

Exercise 8.14

a. Purchase of bonds:General journal. Jan 1 2020. Investment in bonds FVNI 236,163 under debit. Cash 236,163 under credit. Present value calculation: PV = (20000 PMT, 8 N, 9 I/Y, 250000 FV) = $236,163Interest payment:General journal. Dec 31 2020. Cash 20,000 under debit. Investment in bonds FVNI 1,255 under debit. Interest income 21,255 under credit (236,163 × 9%)Fair value adjustment:General journal. Dec 31 2020. Investment in bonds FVNI 2,582 under debit. Unrealized gain on invesment (net income) 2,582 under credit. (236,163 + 1,255) = 237,418 carrying value−240,000 fair value = 2,582Interest payment:General journal. Dec 31 2021. Cash 20,000 under debit. Investment in bonds FVNI 1,368 under debit. Interest income 21,368 under credit. (236,163 + 1,255 = 237,418 × 9%)Fair value adjustment:General journal. Dec 31 2021. Unrealized loss on investement (net income) 23,118 under debit. Investment in bonds FVNI 23,118 under credit. (236,163 + 1,255 + 2,582 + 1,368 = 241,368 carrying value − (250,000 × 87.3) market value = 23,118Interest payment:General journal. Dec 31 2022. Cash 20,000 under debit. Investment in bonds FVNI 1,491 under debit. Interest income 21,491 under credit (236,163 + 1,255 + 1,368 = 238,786 × 9%)Fair value adjustment:General journal. Dec 31 2022. Investment in bonds FVNI 11,009 under debit. Unrealized gain on investment 11,009 under credit. (236,163 + 1,255 + 2,582 + 1,368 − 23,118 + 1,491) = 219,741 carrying value−(250,000× 92.3) market value = 11,009Interest payment:General journal. Dec 31 2023. Cash 20,000 under debit. Investment in bonds FVNI 1,625 under debit. Interest income 21,625 under credit. (236,163+1,255+1,368+1,491 = 240,277× 9%)Fair value adjustment:General journa. Dec 31 2023. Investment in bonds FVNI 15,875 under debit. Unrealized gain on investment 15,875 under credit. (236,163 + 1,255 + 2,582 + 1,368 − 23,118 + 1,491 + 11,009 + 1,625) = 232,375 carrying value − (250,000 × 99.3) market value = 15,875

  1. b. Part (a) uses a fair values to measures for FVNI investments and are re-measured to their FV at each year-end. No, separate impairment measurement if required because they are already at their fair values. If Helsinky had accounted for this investment at amortized cost, the impairment model would change to an incurred loss model. When there is objective evidence that the expected future cash flows have been significantly reduced, an impairment loss is measured and recognized as follows:

The loss is measured as the difference between the carrying amount and higher of the present value of the revised expected cash flows, dis- counted at the current market discount rate and the estimated net realizable value of the investment.

The impairment losses can be reversed if the investment values increase.


Exercise 8.15

a. Dec 31, 2019: No entry as there was no trigger or loss event in 2019.General journal. Dec 31 2020. Loss on impairment 37,500 under debit. Other investments 37,500 under credit. ($87,500 − 50,000)b.

General journal. Dec 31 2019. Unrealized Gain or loss (net income) 5,000 under debit. Investments -FVNI 5,000 under credit. ($34 − $32) × 2,500 shares. Dec 31 2020. Unrealized gain or loss (net income) 17,500 under debit. Investments FVNI 17,500 under credit ($32 − $25) × 2,500 shares

c. For an investment in equities classified as FVOCI, there are no impairment evaluations required because the investment is remeasured to its fair value each reporting date and the gains/losses upon sale are reclassified from AOCI to retained earnings. Had the investment been a debt investment and classified as FVOCI, such as bonds, an impairment evaluation would be required initially upon acquisition and based on either a 12-month or lifetime ECL valuation. This is because the gains/losses are recycled through net income upon sale. Any impairment loss would be immediately recorded to net income in this case and not to OCI.


Exercise 8.16

a. Since Yarder’s shares were quoted in an active market, Sandar is required to apply the FVNI classification to account for its investment. If the shares were not quoted in an active market, the cost method would have been required.FVNI – where the shares are traded in an active market:General journal. Jan 1 2020 Investments FVNI 400,000 under debit. Cash 400,000 under credit. (50,000 × 32%) = 16,000 shares × $25 Jun 30 2020. Cash 19,200 under debit. Dividend revenue 19,200 under credit. ($60,000 × 32%). Dec 31 2020 Unrealized gain or loss 32,000 under debit. Investments FVNI 32,000 under credit. ($25 − 23) × 16,000 shares

b. Cost method – where there is no active market for the shares:General journal. Jan 1 2020. Other investments at cost 400,000 under debit. Cash 400,000 under credit. (50,000 × 32%) = 16,000 shares × $25. June 30 2020 Cash 19,200 under debit. Dividend revenue 19,200 under credit ($60,000 x 32%)Dec 31, 2020: No entry required.

c. Equity method:General journal. Jan 1 2020. Significant influence investments 400,000 under debit. Cash 400,000 under credit (50,000 × 32%) = 16,000 shares × $25. June 30 2020. Cash 19,200 under debit. Significant incluence investments 19,200 under credit. ($60,000 × 32%). Dec 31 2020 Significant invluence investments 38,400 under debit. Investment income of loss 38,400 under credit. ($120,000 × 32%)NOTE: Even though Sandar has significant influence over the operations of Outlander, companies that follow ASPE have a choice between the equity method and the held-for-trading (active market), or the equity method and the cost method (no active markets).


Exercise 8.17

  1. Investee’s total net income = $60,000 ÷ 30% =  $200,000
  2. Investee’s total dividend payout = $200,000 × 15% =  $30,000
  3. Investor’s share of net income = $200,000 × 30% = $60,000
  4. Investor’s annual depreciation of the excess  payment for net capital assets is the only other credit amount recorded in the T-account for $1,500
  5. Goodwill = $900,000 × 30% = 270,000 − 290,000 = 20,000 − (1,500 × 10 years) = 5,000 to goodwill
  6. Investor’s share of dividends = $30,000 × 30% = $9,000

Exercise 8.18

a. 2019:General journal. Investments - FVNI 38,000 under debit. Cash 380,000 under credit. Cash 7,500 under debit. Divident Revenue (net income) 7,500 under credit. ($25,000 × 0.30). Intestments FVNI 20,000 under debit. Unrealized Gain of Loss (net income) 20,000 under credit. ($400,000 - $380,000).2020:General journal. Unrealized gain or loss (net income) 40,000 under debit. Investments FVNI 40,000 under credit. ($400,000 − 360,000)

b. Recall that comprehensive income is:

Net income + Other Comprehensive Income (i.e., unrealized fair value gains/losses from FVOCI investments) = Comprehensive Income

With this in mind, comprehensive income will be the same amount as net income because there is no Other Comprehensive Income (OCI) amount to report as the investment is classified as FVNI with unrealized gains and losses due to fair value adjustments being recorded to net income. Had the investment been classified as FVOCI, then the $20,000 fair value change would have been reported as OCI and not in net income, thus increasing comprehensive income by $20,000 more than net income in 2019, and by $40,000 in 2020.

c. 2019:General Journal. Investment in associate 380,000 under debit. Cash 380,000 under credit. Cash 7.500 under debit. Investment in associate 7,500 under credit. ($25,000 × 0.30). Investment in associate 15,000 under debit. Investment income or loss 15,000 under credit ($50,000 x 0.30) Investment income or loss 2,000 under debit. Investment in associate 2,000 under credit. ($380,000 − 360,000 = 20,000 ÷ 10 years)

NOTE: there is no entry to adjust the investment to its fair value under the equity method.

2020:

General Journal. Investment income or loss 4,500 under debit. Investment in associate 4,500 under credit. ($15,000 x 0.30). Investment income or loss 2,000 under debit. Investment in associate 2,000 under credit.NOTE: there is no entry to adjust the investment to its fair value under the equity method.

d. Carrying amount of the investment:

Cost

Dividend received in 2019

Income earned in 2019 (15,000 – 2,000)

Loss incurred in 2020 (4,500 + 2,000)

Carrying amount at December 31, 2020

Fair value of investment at December 31, 2020

$380,000

(7,500)

13,000

(6,500)

$379,000

$360,000

e. For part (c), if the investee had reported a loss from discontinued operations, all entries would stay the same except for the entry recording the 2019 share of income. This entry would change to reflect the investor’s share of the loss from discontinued operations separately from its share of the loss from continuing operations because separate reporting of discontinued operations is a reporting requirement for IFRS and ASPE.2019:General journal. Investment in associate 15,000 under debit. Investment loss-loss on discontinued operations 4,500 under debit. Investment income or loss 19,500 For Investment in associate: (50,000 × 30%), for Investment loss: (15,000 × 30%)Income Statement details:

Income from continuing operations

Loss from discontinued operations

Net income

$ 65,000

(15,000)

$ 50,000


Exercise 8.19

General journal. Significant influence investment 600,000 under debit. Cash 600,000 under credit.

Cost of 35% investment

Carrying values:

Assets ($900,000 + 780,000)

Liabilities

 

Excess paid over share of carrying value

 

 

$1,680,000

225,000

1,455,000 × 35%

$90,750

$600,000

 

 

 

509,250

$90,750

Excess of $90,750 allocated to:

Assets subject to amortization

[($1,050,000 − $900,000) × 35%]

Residual to goodwill

52,500

38,250

$90,750

 

 

 

General journal. Cash 35,000 under debit. Significant influence investment 35,000 under credit ($100,000 x 0.35). Significant incluence investment 78,750 under debit. Investment income or loss 78,750 under credit. (@225,000 x 0.35) Investment income or loss 5,250 under debit. Significant influence investment 5,250 under credit. ($52,500 / 10)


Exercise 8.20

a) ASPE b) IFRS
i. FVNI since an active market exists. No separate impairment evaluation needed since investment is adjusted to fair value. FVOCI without recycling, with unreal- ized gain/loss through OCI since there is no specific intention to sell for trading purposes. No separate impairment evaluation needed since investment is adjusted to fair value and not recycled through net income.
ii. Other investment in equities at cost, since no active market exists. No fair value adjustments are done. Impairment adjustment is possible if a trigger event occurs. Impairment reversal is possible. When 30% is obtained, management will need to re-measure. FVOCI without recycling, with unrealized gain/loss through OCI since there is a long-term strategy regarding this investment. No separate impairment evaluation needed since investment is adjusted to fair value and not recycled through net income. When 30% is obtained, management will need to reclassify to investment in associates, if significant influence exists.
iii. Other investment at amortized cost since the intention was to originally hold to maturity. No fair value adjustments are done. Impairment adjustment is possible if a trigger event occurs. Impairment reversal is possible. Amortized cost since this investment has been accounted for since the initial purchase at amortized cost. Impairment evaluation is done based on an assessment of probability-based estimated default scenarios and +/- adjustments going forward until bond has
matured.
iv. Other investment in equities at cost. The FV of the shares is not a factor as they are being held to improve business relations. No fair value adjustments are done. Impairment adjustment is possible if a trigger event occurs. Impairment reversal is possible. Likely FVOCI without recycling with unrealized gain/loss through OCI since there is no intention to actively trade them. No separate impairment evaluation needed since investment is adjusted to fair value and not recycled through net income.
v. FVNI since the bonds trade on the market. Management intent is to sell as soon as the market price increases. No separate impairment evaluation needed since investment is adjusted to fair
value.
FVNI. No separate impairment evaluation needed since investment is adjusted to fair value.
vi. Other investments at amortized since the intention is to hold to maturity. No fair value adjustments are done. Impairment adjustment is possible if a trigger event occurs. Impairment reversal is possible. At amortized cost since this investment will be held until maturity. Impairment evaluation is done based on an assessment of probability-based estimated default scenarios and +/- adjustments going forward until bond has matured.
vii. FVNI since management intends to sell them within one year. No separate impairment evaluation needed since investment is adjusted to fair value. FVNI since management intent is to sell within one year. No separate impairment evaluation needed since investment is adjusted to fair value.

Exercise 8.21

The intent is to hold the investment and to collect interest and principal until maturity, so the classification should be amortized cost.

General journal. Loss on impairment (NI) 1,725 under debit. Investment in bonds, amortized cost 1,725 under credit.

(1,150,000 × 0.01 × 0.15) = 1,725 ECL over the next 12 months

Carrying value of the investment in bonds is (1,150,000 − 1,725) = $1,148,275


Exercise 8.22

Loss on impoarment (NI) 32,775 under debit. Investment in bonds, amortized cost 32,775 under credit.

(1,150,000 × 0.06 × 0.50) = 34,500 ECL over the investment’s lifetime

1,150,000 − 34,500 = 1,115,500 probability-based fair value − 1,148,275 carrying value = 32,775 impairment

Carrying value of the investment in bonds is therefore 1,115,500.

The ECL increase is deemed to be significant by management and as a result, the ECL has changed from a 12-month ECL to the investment’s lifetime (Lifetime ECL).


Exercise 8.23

General Journal. Loss on impairment (NI) 1,725 under debit. Unrealized gain/loss (OCI) 4,025 under debit. Investment in bonds amortized cost 5,750 under credit. For Unrealized gain/loss: (1,150,000 × (1 − 0.995) = 5,750 − 1,725)


Exercise 8.24

1. Cost Model

Feb 20, Y5 Investments - Huron Inc 13,332
Cash 13,332
purchase of investment + commission ($13,200 × 1.01)
Jun 30, Y5 Cash 840
Dividend Revenue 840
400 shares × $2.10 per share
Jan 20, Y6 Cash 14,700
Gain on disposal of investments 1,368
Investments - Huron Inc 13,332
cash received = 400 shares × $36.75 per share

2. FVNI Model

Feb 20, Y5 FV-NI Investments - Huron Inc 13,200
Transaction fee expense 132
Cash 13,332
commission (an expense for FV-NI investments) = $13,200 × 1%
Jun 30, Y5 Cash 840
Dividend Revenue 840
400 shares × $2.10 per share
Dec 31, Y5 FV-NI Investments - Huron Inc 480
Unrealized gain on FVNI Investments 480
fair value (at Dec 31) 13,680
carrying value 13,200
GAIN 480
Jan 20, Y6 Cash 14,700
FV-NI Investments - Huron Inc 13,680
Gain on sale of FV-NI Investments 1,020
cash received = 400 shares × $36.75 per share

3. FVOCI Model

Feb 20, Y5 FV-OCI Investments - Huron Inc 13,332
Cash 13,332
purchase of investment + commission ($13,200 × 1.01)
Jun 30, Y5 Cash #colspan# 840
Dividend Revenue 840
400 shares × $2.10 per share
Dec 31, Y5 FV-OCI Investments - Huron Inc 348
Unrealized gain on FVOCI Investments 348
fair value (at Dec 31) 13,680
carrying value 13,332
GAIN 348
Jan 20, Y6 Cash 14,700
FV-NI Investments - Huron Inc 13,680
Gain on sale of FV-OCI Investments 1,020
record sale
Jan 20, Y6 Accumulated other comprehensive income 1,368
Retained earnings 1,368
since investments are equity investments and have been sold, must close the AOCI to retained earnings (no recycling).

Exercise 8.25

1. Journal Entries

Date

Debit

Credit

1/1/Y3 Investment in Associate 596,430
Cash 596,430

Date

Debit

Credit

7/1/Y3 Cash 28,000
Investment in Associate 28,000

Date

Debit

Credit

12/31/Y3 Investment Income or Loss 840
Investment in Associate 840
undevalued assets $42,000
% owned by Waterlook 20%
8,400
useful life 10 years
additional depreciation 840

Date

Debit

Credit

12/31/Y3 Investment in Associate 91,250
Investment Income or Loss 91,250
share of net income $456,250 × 20% ownership

2. Balance in “Investment in Associate” at December 31, Y3

Initial investment $596,430
Dividends received -28,000
Additional depreciation -840
Share of net income 91,250
Investment in Associate (Dec 31,Y3) $658,840

Exercise 8.26

1. IFRS – Effective Interest

PV -$64,595
Rate 5% (interest is semi-annual)
Nper 10 (interest is semi-annual)
Pmt 2,8000 $70,000 × 8% × 1/2
FV 70,000
Type 0 for bonds - always type 0 (interest at end of period)

Date

Cash

Interest Revenue

Amortization

Carrying Value

Jan 1, Y3 64,595
Jun 30, Y3 2,800 3,230 430 65,025
Dec 31, Y3 2,800 3,251 451 65,476
Jun 30, Y4 2,800 3,274 474 65,950
Dec 31, Y4 2,800 3,297 497 66,447
Jun 30, Y5 2,800 3,322 522 66,969
Dec 31, Y5 2,800 3,348 548 67,519
Jun 30, Y6 2,800 3,376 576 68,094
Dec 31, Y6 2,800 3,405 605 68,698
Jun 30, Y7 2,800 3,435 635 69,333
Dec 31, Y7 2,800 3,467 667 70,000
Jan 1, Y3 Bond Investment - at Amortized Cost $64,595
Cash $64,595
June 30, Y3 Cash 2,800
Bond Investment - at Amortized Cost 430
Interest Revenue 3,230
Dec 31, Y3 Cash 2,800
Bond Investment - at Amortized Cost 451
Interest Revenue 3,251
June 30, Y4 Cash 2,800
Bond Investment - at Amortized Cost 474
Interest Revenue 3,274
Dec 31, Y4 Cash 2,800
Bond Investment - at Amortized Cost 497
Interest Revenue 3,297

2. ASPE – Straight Line

Face value of bonds 70,000
Present value of bonds 64,595
Difference 5,405
Number of periods 10
Semi-annual amortization $541
Jan 1, Y3 Bond Investment - at Amortized Cost $64,595
Cash $64,595
June 30, Y3 Cash 2,800
Bond Investment - at Amortized Cost 541
Interest Revenue 3,341
Dec 31, Y3 Cash 2,800
Bond Investment - at Amortized Cost 541
Interest Revenue 3,341
June 30, Y4 Cash 2,800
Bond Investment - at Amortized Cost 541
Interest Revenue 3,341
Dec 31, Y4 Cash 2,800
Bond Investment - at Amortized Cost 541
Interest Revenue 3,341

Exercise 8.27

June 15, Y6 Cash 73,000
Unrealized gain - OCI investment 500
FV-OCI Investment 72,500
FV-OCI investment $70,000 original cost + $2,500 unrealized gain
June 15, Y6 Accumulated Other Comprehensive Income 3,000
Retained Earnings 3,000
since this is an equity investment, no recycling - AOCI closes to retained earnings
AOCI = $2,500 prior unrealized gain + $500 unrealized gain at time of sale

OR

1st entry can be broken into two steps:

June 16, Y6 FV-OCI Investment 500
Unrealized gain - OCI investment 500
FV-OCI investment = $72,500 value on books - fair value at time of sale = $73,000
June 15, Y6 Cash 73,000
FV-OCI Investment 73,000

Exercise 8.28

June 15, Y6 Cash 73,000
Unrealized gain - OCI investment 500
FV-OCI Investment 72,500
FV-OCI investment $70,000 original cost + $2,500 unrealized gain
June 15, Y6 Accumulated Other Comprehensive Income 3,000
Retained Earnings 3,000
since this is an equity investment, no recycling - AOCI closes to retained earnings
AOCI = $2,500 prior unrealized gain + $500 unrealized gain at time of sale

OR

1st entry can be broken into two steps:

June 16, Y6 FV-OCI Investment 500
Unrealized gain - OCI investment 500
FV-OCI investment = $72,500 value on books - fair value at time of sale = $73,000
June 15, Y6 Cash 73,000
FV-OCI Investment 73,000

Exercise 8.29

PV -322,745
Rate 10%
Nper 5
Pmt 36,000
FV 300,000
Type 0

1. Amortization Schedule

Date

Cash

Interest Revenue

Amortization

Carrying Value

Jan 1, Y2 322,745
Jan 1, Y3 36,000 32,274 3,726 319,019
Jan 1, Y4 36,000 31,902 4,098 314,921
Jan 1, Y5 36,000 31,492 4,508 310,413
Jan 1, Y6 36,000 31,041 4,959 305,455
Jan 1, Y7 36,000 30,545 5,455 300,000

2. Journal Entries

Jan 1, Y2 FV-OCI Investment - bonds 322,745
Cash 322,745
record initial investment
Dec 31, Y2 Interest Receivable 36,000
Interest Revenue 32,274
FV-OCI Investment - bonds 3,726
to accrue for interest earned for Y2 (cash to be received Jan 1, Y3)
Dec 31, Y2 FV-OCI Investment - bonds 1,481
Unrealized gain on OCI Investments 1,481
Fair value 320,500 given
Carrying value 319,019 from amortization schedule above
Gain 1,481
Jan 1, Y3 Cash 36,000
Interest Receivable 36,000
Dec 31, Y3 Interest Receivable 36,000
Interest Revenue 31,902
FV-OCI Investment - bonds 4,098
to accrue for interest earned for Y3 (cash to be received Jan 1, Y4)
Dec 31, Y3 Unrealized loss on OCI Investment 7,402
FV-OCI Investment - bonds 7,402
Fair value 309,000 given
Carrying value 316,402 FV @ Dec 31, Y2 - Y3 amortization ($320,500 - 4,098)
Loss 7,402

 


  1. 25,523 × 3.745%
  2. rounding

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