8.8 Exercises
Chapter 8
Exercise 8.1
On January 1, Maverick Co. purchased 500 common shares of Western Ltd. for $50,000 plus a 1% commission of the transaction. On September 30, Western declared and paid a cash dividend of $2.25 per share. At year-end, the fair value of the shares was $108 per share. In early March of the following year, Maverick sold the shares for $57,000 less a 1% commission. The shares are not publicly traded, so Maverick will account for them using the cost method. Maverick follows ASPE.
Required:
- Describe the type of investment and how it would be reported.
- Prepare the journal entry for the purchase, the dividends received, and the sale, and any year-end adjustments, if required.
- Assume now that Maverick follows IFRS and the investment in shares is accounted for as FVNI investment. Prepare the journal entry for the purchase, the dividends received, any year-end adjusting entries and the sale.
- How would your answer to part (c) change if Maverick follows ASPE and the shares are traded on an active market?
Exercise 8.2
On January 1, 2020, Smythe Corp. invested in a 10-year, $25,000 face value 4% bond, paying $25,523 in cash. Interest is paid annually, every January 1. On January 3, 2028, Smythe sold all of the bonds for 101. Smythe’s year-end is December 31 and the company follows IFRS. At the time of purchase, Smythe intended to collect the contractual cash flows of interest and principle, and to hold the bonds to maturity.
Required:
- What is the effective interest rate for this bond, rounded to the nearest whole dollar? (Hint: this involves a net present value calculation as discussed in Chapter 6: Cash and Receivables.)
- What is the amount of the bond premium or discount? Indicate if it is a premium or a discount.
- Record all relevant entries for 2020, the January entry for 2021, and the entry for the sale in 2028, if Smythe classifies the investment as an AC investment. Round amounts to the nearest whole dollar.
- What is the total interest income and net cash flows for Smythe over the life of the bond? What accounts for the difference between these two amounts?
- Assume now that Smythe follows ASPE. How would the entries in part (c) differ? Use numbers to support your answer.
Exercise 8.3
On January 2, Terrace Co. purchased $100,000 of 10-year, 4% bonds from Inverness Ltd. for $88,580 cash. The effective interest yield for this transaction is 5.5%. The bonds pay interest on January 1 and July 1. Terrace’s business model is to hold and collect the contractual cash flows of interest and principal until maturity. The company follows IFRS and their year-end is December 31.
Required:
- What is the discount or premium, if any, for this investment? Explain why a premium or discount could occur when purchasing bonds.
- Record the bond purchase, the first two interest payments, and any year-end adjusting entries, rounding amounts to the nearest whole dollar.
- Record the entries from part (b), assuming now that Terrace follows ASPE and has chosen the alternative method to account for the premium or discount, if any.
Exercise 8.4
On January 2, Bekinder Ltd. purchased $100,000 of 10-year, 4% bonds from Colum Ltd. for $88,580 cash. The effective interest yield for this transaction is 5.5%. The bonds pay interest on January 1 and July 1. Terrace follows IFRS and classifies this investment as AC. Their year-end is September 30.
Required:
Record the first two interest payments and any adjusting entries, rounding amounts to the nearest whole dollar.
Exercise 8.5
On March 1, Imperial Mark Co. purchased 5% bonds with a face value of $20,000 for trading purposes. The bonds were priced in the trading markets at 101 to yield 4.87%, at the time of the purchase, and pay interest annually each July 1. At year-end on December 31, the bonds had a fair value of $21,000. Imperial Mark follows IFRS.
Required:
- What classification would Imperial Mark use to report this investment?
- Prepare the journal entries for the bond purchase, the first interest payment, and any year-end adjusting entries required. Round amounts to the nearest whole dollar.
- Assume now that Imperial Mark follows ASPE. How would Imperial Mark classify and report this investment? Prepare the journal entries from part (b) using the ASPE classification and the alternate method to amortize the premium. Assume that bond investment matures in ten years.
Exercise 8.6
Halberton Corp. purchased 1,000 common shares of Xenolt Ltd., a publicly traded company, for $52,800. During the year Xenolt paid cash dividends of $2.50 per share. At year-end, due to a temporary downturn in the market, the shares had a market value of
$50 per share. Halberton’s business model is to collect the dividend cash flows for now, and sell this investment if/when the share price reaches 54,000. Halberton follows IFRS and has elected to classify this investment as FVOCI equities, with recycling to best fit with their intentions to sell, but at a later date.
Required:
- How would Halberton report this investment?
- Prepare Halberton’s journal entries for the investment purchase, the dividend, and any year-end adjusting entries. Is the drop in market price due to an investment impairment?
- Prepare the sale entry if Halberton sells the investment one week into the next fiscal year for $54,200 cash.
- How would the answer for part (a) change if Halberton followed ASPE?
Exercise 8.7
The following are various transactions that relate to the investment portfolio for Zeus Corp., a publicly traded corporation. The portfolio is made up of debt and equity instruments all purchased in the current year and accounted for as investments for trading (FVNI). The investee’s year-end is December 31.
- On February 1, the company purchased Xtra Corp. 12% bonds, with a par value of
$500,000, at 106.5 plus accrued interest to yield 10%. Interest is payable April 1 and October 1. - On April 1, semi-annual interest was received on the Xtra bonds.
- On July 1, 9% bonds of Vericon Ltd. were purchased. These bonds, with a par value of $200,000, were purchased at 101 plus accrued interest to yield 8.5%. Interest dates are June 1 and December 1.
- On August 12, 3,000 shares of Bretin ACT Corp. were acquired at a cost of $59 per share. A 1% commission was paid.
- On September 1, Xtra Corp. bonds with a par value of $100,000 were sold at 104 plus accrued interest.
- On September 28, a dividend of $0.50 per share was received on the Bretin ACT Corp. bonds.
- On October 1, semi-annual interest was received on the remaining Xtra Corp. bonds.
- On December 1, semi-annual interest was received on the Vericon Ltd. bonds.
- On December 28, a dividend of $0.52 per share was received on the Bretin ACT Corp. shares.
- On December 31, the following fair values were determined: Xtra Corp. 101.75; Vericon Ltd. bonds 97; and Bretin ACT Corp. shares $60.50.
Required:
Prepare the journal entries for each of the items (a) to (j) above. The company wishes to record interest income separately from other investment gains and losses.
Exercise 8.8
On January 1, 2020, Verex Co. purchased 10% of Optimal Instrument’s 140,000 shares for $135,000 plus $1,750 in brokerage fees. Management accounted for this investment as a FVOCI. In October, Optimal declared a $1.10 cash dividend. On December 31, which is Verex’s year-end, the market value of the shares was $9.80 per share. On February 1, 2021, Verex sold 50% of the investment for $12 per share less brokerage fees of $580.
Required:
- Does Verex follow ASPE or IFRS, and why?
- Record all the relevant journal entries for Verex for this investment from purchase to sale.
Exercise 8.9
At December 31, 2020, the following information is reported for Jackson Enterprises Co.:
| Net income | $250,000 |
|---|---|
| Investments in FVOCI – carrying value | 320,000 |
| Investments in FVOCI – fair value | 350,000 |
| Accumulated Other Comprehensive Income, Jan 1. 2020 | 15,000 |
Required:
Calculate the Other Comprehensive Income (OCI) and total comprehensive income for the year ending December 31, 2020, and the December 31, 2020 ending balance for the Accumulated Other Comprehensive Income (AOCI). Ignore income taxes.
Exercise 8.10
On January 2, 2020, Bellevue Holdings Ltd. purchased 5%, 10-year bonds with a face value of $200,000 at par. This investment is accounted for at amortized cost. On January 4, 2021, the investee company was experiencing financial difficulties. As a result, Bellevue evaluated the investment and determined the following:
- The present value of the cash flows using the current market rate was $195,000
- The present value of the cash flows using the original effective interest rate was
$190,000
By June 30, 2021, the investee recovered from the financial difficulties and was no longer considered impaired.
Required:
Record all the impairment related transactions in 2020 and 2021 assuming Bellevue uses ASPE.
Exercise 8.11
On December 31, 2020, Camille Co. provided the following information as at December 31, 2020 about its investment accounts that it acquired for trading purposes:
| Accounts | Carrying Amount | Fair Value |
|---|---|---|
| ABC Ltd. shares | $15,000 | $17,500 |
| Warbler Corp. shares | 24,300 | 22,500 |
| Shickter Ltd. shares | 75,000 | 80,200 |
During 2021, Warbler Corp. shares were sold for $23,000 and 50% of the Shickter shares were sold for $42,000. At the end of 2021, the fair value of ABC shares was $19,200 and Shickter Ltd. was $41,000. Camille follows IFRS.
Required:
- Prepare the adjusting entry for December 31, 2020, if any.
- Prepare the entry for the Warbler and Shickter sales.
- Prepare the adjusting entry for December 31, 2021, if any.
- How would the entries in parts (a), (b), and (c) differ if Camille accounted followed ASPE?
Exercise 8.12
On September 30, 2019, FacePlant Inc. purchased a $225,000 face-value bond for par plus accrued interest. The bond pays interest each October 31 at 4%. Management’s investment business model is to hold for trading purposes. On December 31, 2019, the company year-end, the fair value published for bonds of similar characteristics and risk was 102.6. On March 1, 2020, FacePlant sold the bonds for 102.8 plus accrued interest. FacePlant follows IFRS.
Required:
- Prepare all the related journal entries for this investment. The company wants to report interest income separately from other gains and losses.
- Prepare a partial classified balance sheet and income statement for FacePlant, as at December 31, 2019.
- How would the answer to parts (a) and (b) change if FacePlant followed ASPE?
- What kinds of returns did this investment generate? (Hint: Consider all sources, such as interest income and gain/loss on sale of the investment.)
Exercise 8.13
Bremblay Ltd. owns corporate bonds that it accounts for using the amortized cost model. As at December 31, 2020, after an impairment review was triggered, the bonds have the following financial data:
| Par value | $500,000 |
|---|---|
| Amortized cost | 422,000 |
| Discounted cash flow at the current market rate | 400,000 |
| Discounted cash flows at the original historic rate | 390,000 |
| Bond, net realizable value | 395,000 |
The company does not use a valuation account.
Required:
- Prepare all relevant entries related to the impairment assuming the company follows ASPE. Is this reversible?
- Prepare all relevant entries related to the impairment assuming that the company follows ASPE but uses an asset valuation allowance account.
Exercise 8.14
On January 1, 2020, Helsinky Co. paid cash to acquire 8% bonds of Britanica Corp. with a maturity value of $250,000, to mature January 1, 2028. The bonds provide a 9% yield and pay interest each December 31. Helsinky purchased these bonds as part of its trading portfolio and accounts for the bonds as FVNI investments. On December 31, 2020, the bonds had a fair value of $240,000. Helsinky follows ASPE and has a December 31 year-end.
During 2021, the industry sector that Britanica operates in experienced some difficult times due to the drop in international market prices for oil and gas. As a result, by December 31, 2021, their debt was downgraded to the market price of 87.3. By December 31, 2022, the bond had a market price of 92.3. In 2023, conditions improved measurably, resulting in the bonds having a fair value on December 31, 2023 of 99.3.
Required:
- Prepare all of the relevant entries for 2020, 2021, 2022, and 2023, including any adjusting entries as required. Round entry amounts to the nearest whole dollar.
- If Helsinky had accounted for the investment at amortized cost, identify and describe the impairment model that the company would have used.
Exercise 8.15
On January 1, 2014, Billings Ltd. purchased 2,500 shares of Outlander Holdings for $87,500. During the time that this investment has been held by Billings, the economy and the investee company Outlander have experienced many good and bad times. In 2020, Outlander stated that it was experiencing a reduction in profits but was trying to get things to improve.
Required:
- Assume that Billings applies the cost method to this investment because there is no active market for Outlander shares. In 2019, Billings had a general sense that the value of its investment in Outlander had probably dropped by about 8.6% to $80,000. This was not enough to trigger an impairment evaluation as it was still uncertain. By 2020, seeing no improvement, Billings’ management completed an evaluation of the investment and estimated that the discounted cash flows from this investment was now $50,000.
Prepare the entries for 2019 and 2020, assuming that Billings follows ASPE. - Next, assume that Billings classifies the investment as a FVNI. By the end of 2019, the price of Outlander shares had fallen from $34.00 the previous year to $32.00. By 2020, the price had dropped to a 52-week low of $25.00 per share.
Prepare the entries for 2019 and 2020, assuming that Billings follows ASPE. - Finally, assume that Billings follows IFRS and had purchased the shares of Outlander because Billings wanted to collect the dividends and sell them to realize the change in the shares’ valuation. For this reason, Billings classified the investment as a FVOCI investment. How might the accounting treatment change due to a change to IFRS and FVOCI?
Exercise 8.16
On January 1, 2020, Sandar Ltd. purchased 32% of Yarder Co.’s 50,000 outstanding common shares at a price of $25 per share. This price is based on Yarder’s net assets. On June 30, Yarder declared and paid a cash dividend of $60,000. On December 31, 2020, Yarder reported net income of $120,000 for the year. At this time, the shares had a fair value of $23. Sandar’s year-end is December 31 and follows ASPE.
Required:
- Assuming that Sandar does not have any significant influence over Yarder, prepare all the 2020 entries relating to this investment using the FVNI classification.
- Prepare all the 2020 entries relating to this investment if it was classified as cost due to no active markets.
- Prepare all the 2020 entries relating to this investment assuming that Sandar has significant influence over Yarder. Sandar uses the equity method of accounting.
Exercise 8.17
The following T-account shows various transactions using the equity method. This investment of $290,000 is made up of 30% of the outstanding shares of another company who had a carrying amount of $900,000. The excess of the purchase price over the investment amount is attributable to capital assets in excess of the carrying values with the remainder allocated to goodwill. The investor company has significant influence over the investee company. Dividends for 15% of the investee’s net income are paid out in cash annually. The investee’s net assets have a remaining useful life of 10 years. The investor company follows IFRS.
Investment in Investee Company
$290,000
60,000
9,000
1,500
Required:
- What was the investee’s total net income for the year?
- What was the investee’s total dividend payout for the year?
- What is the investor’s share of net income?
- How much was the investor’s annual depreciation of the excess payment for capital assets?
- How much of the excess payment would be assigned to goodwill?
- How much are the investor’s share of dividends for the year?
Exercise 8.18
On January 1, 2019, Dologan Enterprises Ltd. purchased 30% of the common shares of Twitterbug Inc. for $380,000. These shares are not traded in any active markets. The carrying value of Twitterbug’s net assets at the time of the shares purchase was $1.2 million. Any excess of the purchase cost over the investment is attributable to unrecorded intangibles with a 10-year life.
During 2019, the following summary operations for Twitterbug occurred:
| Net income and Total comprehensive income | $50,000 |
|---|---|
| Dividends paid | 25,000 |
| Investment fair value | 400,000 |
During 2020, the following summary operations for Twitterbug occurred:
| Net loss and Total comprehensive loss | $15,000 |
|---|---|
| Dividends paid | 0 |
| Investment fair value | 360,000 |
| Investment recoverable amount | 370,000 |
Required:
- Prepare all the relevant entries for 2019 and 2020 assuming no significant influence. Assume that Dologan follows IFRS and accounts for the investment as a FVNI.
- How is the comprehensive income affected in 2019 and 2020 in part (a)?
- Prepare all the relevant entries for 2019 and 2020 assuming that Dologan can Exercise significant influence. Assume that Dologan follows IFRS.
- Calculate the carrying value of the investment as at December 31, 2020 assuming Dologan can Exercise significant influence and follows IFRS.
- How would your answer to part (c) be different if Twitterbug’s statement of comprehensive income included a loss from discontinued operations of $15,000 (net of tax) for 2019?
Exercise 8.19
On January 1, 2020, Chacha Holdings Ltd., a privately-held corporation that follows ASPE, purchased 35% of the common shares of Eugene Corp. for $600,000. With this purchase, Chacha now has significant influence over Eugene, who is a supplier of materials for Chacha’s production processes. Below is some information about the investee at the date the shares were purchased:
| Carrying value of assets subject to amortization | $900,000 |
|---|---|
| Carrying value of assets not subject to amortization (10 years useful life remaining on a straight-line basis) | 780,000 |
| Fair value of the assets subject to amortization | 1,050,000 |
| Liabilities | 225,000 |
Required:
Prepare all relevant entries for the investment based on the information provided above. Subsequently, the investee reported net income of $225,000 and dividends paid of $100,000. Assume that any excess of payment that is unexplained is attributed to goodwill.
Exercise 8.20
Below are details for several independent investments:
- Preferred shares were purchased from a publicly traded company because of their favourable dividend payout history. They are for sale, but management has no specific intention to sell at this time.
- On February 1, 2020, 10% or 1,400 shares of the total outstanding shares were purchased from another company that is a privately-held corporation. Management intends to acquire 30% of the total outstanding shares.
- The company has an investment in 10-year bonds which will mature in 5 more years. Management’s intention was to hold them until maturity but the company is short of cash, so a possibility exists that they may be sold in 2020, though that is not certain at this point.
- Common shares of a supplier company were purchased to strengthen their relation- ship. Management intends to hold this investment into the future.
- On January 1, 2020, a 4% bond that will mature in 6 years was purchased at market price of 92. When the price point reaches 103, management intends to sell the investment.
- Bonds that mature in 10 years were purchased with monies set aside for a new building purchase expected to occur in 10 years. The bonds will be sold once they mature.
- On March 1, 2020, bonds maturing in 2021 were purchased.
Required:
- What classification would each investment item be if the investor company follows APSE? How are impairments treated from an accounting perspective?
- What classification would each investment item be if the investor company follows IFRS?
Exercise 8.21
On January 1, 2020, Amev Ltd., an IFRS company, acquires a 3%, 5-year, bond at par for $1,150,000, which it intends to hold and collect the contractual cash flows of principal and interest. At year-end, management has determined that there is no significant increase in credit risk, but there is a 1% chance that the company will not collect 15% of the bond face value in the next 12 months.
Required:
Determine the investment’s classification and prepare the year-end journal entry. What is the carrying value of the bond?
Exercise 8.22
Referring to the data in Exercise 8.21, assume now that management estimates that there has been a significant increase in the credit risk and there is now a 6% chance that the Amev will not collect 50% of the bond face value over its life.
Required:
Prepare the year-end entry and determine the carrying value of the investment. What else has changed since the previous ECL valuation?
Exercise 8.23
Referring to the data in Exercise 8.21, prepare the year-end entry assuming that Amev classifies the investment as FVOCI and the fair value of the bond at year-end was 99.5, assuming the probabilities have not changes and there has been no significant change in credit risk.
Exercise 8.24
Elgin Company purchased 400 shares of Huron Inc for $13,200 on February 20, Y5.
Elgin paid a 1% commission on the share purchase.
On June 30, Y5, Huron declared and paid a dividend of $2.10 per share.
On December 31, Y5, the market value of Huron shares was $34.20 per share.
On January 20, Y6, Elgin sold all 400 shares of Huron for $36.75 per share.
Required:
Account for the above transactions using:
- The cost model
- The FVNI model
- The FVOCI model
Exercise 8.25
On January 1, Y3, Waterloo Corporation purchased 20% of the outstanding voting shares in Kitchener Corporation for $596,430.
At the time of purchase, Kitchener’s net assets were undervalued by $42,000 and had a remaining useful life of 10 years.
Both companies had a December 31 year-end. At the end of Y3, Kitchener reported a net income of $456,250.
Also, on December 31, Y3, the fair value of the investment in Kitchener shares was $1,370,000.
On July 1, Y3, Kitchener paid a cash dividend. Waterloo’s ownership entitles it to $28,000 of the dividend.
Required:
- Prepare the appropriate journal entries on the books of Waterloo Corporation. 20% represents significant influence in Kitchener.
- What amount would be reported on the balance sheet of Waterloo Corporation at the end of Y3?
Exercise 8.26
On Jan 1, Y3, Kingsmill Corporation purchased $70,000 of five-year, 8% bonds.
The bonds will yield a 10% return and classified the purchase a non-amortized cost method investment. The bonds pay interest semi-annually (June 30 and Dec 31).
Required:
- Assume Kingsmill follows IFRS, prepare the appropriate journal entries for the first two years if Kinsmill chose the effective interest method of amortization.
- Assume Kingsmill follows ASPE, prepare the appropriate journal entries for the first two years if Kingsmill chose the straight-line method of amortization.
Exercise 8.27
Cambridge Limited has one investment that is accounts for by using the FVOCI method.
The equity investment had an original cost of $70,000. To date, $2,500 of unrealized gain on fair-value adjustment has been recorded to other comprehensive income.
On June 15, Y6, when the market value of the equity investment was $73,000, Cambridge sold the equity investment.
Required:
Prepare all the related and necessary entries to record the sale of the investment
Exercise 8.28
Cambridge Limited has one investment that is accounts for by using the FVOCI method.
The bond (debt) investment had an original cost of $70,000. To date, $2,500 of unrealized gain on fair-value adjustment has been recorded to other comprehensive income.
On June 15, Y6, when the market value of the debt investment was $73,000, Cambridge sold the equity investment.
Required:
Prepare all the related and necessary entries to record the sale of the investment
Exercise 8.29
On January 1, Y2, Chatham Company purchased $300,000 12% bonds 5-year bonds.
The bonds will yield the investors 10%. Interest is paid annually (on January 1).
The fair value of the bonds at December 31 of each year end are:
| Y2 | $320,500 |
|---|---|
| Y3 | $309,000 |
Chatham accounts for these bonds using the FV-OCI method.
Required:
Prepare a bond amortization schedule and prepare all required and necessary journal entries for Y2 and Y3.
