Chapter 8

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

c. To purchase the investment:
To receive the cash dividends:
Year-end adjusting entry to fair value for FVNI investments:For sale of investment:
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.

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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:
   

   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.

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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. 

3. 

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Exercise 8.4

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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:Payment of interest using the effective interest rate (IFRS):Interest accrual using the effective interest rate (IFRS):Fair value adjustment at year-end:

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:
Interest payment using straight-line amortization of premium:Interest accrual using straight-line method (ASPE):Fair value adjustment at year-end:

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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:Dividend payment:Fair-value adjustment through OCI: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:Step 2 – record the cash proceeds and remove the investment:NOTE – 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:

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.

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Exercise 8.7

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.

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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:Cash dividend declared:Year-end fair value adjusting entry:Sale entries – step 1 – first, record the fair value change to the investment and OCI:Step 2 – record the cash proceeds and remove the investment:Step 3 – reclassify the OCI amount related to the investment sold from AOCI to OCI:NOTE – steps 1 and 2 are combined in the chapter illustrations. They have been separated here for illustration purposes.

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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

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Exercise 8.10

Entry for impairment:

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:

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Exercise 8.11

1. 
2. 
3. 
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.

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Exercise 8.12

1. 

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.

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Exercise 8.13

1. December 31, 2020 entry: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:The investment account remains at its current carrying amount and it is offset by the credit balance in the asset valuation allowance account.

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Exercise 8.14

a. Purchase of bonds:Interest payment:Fair value adjustment:Interest payment:Fair value adjustment:Interest payment:Fair value adjustment:Interest payment:Fair value adjustment:

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.

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Exercise 8.15

a. Dec 31, 2019: No entry as there was no trigger or loss event in 2019.b.

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.

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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:

b. Cost method – where there is no active market for the shares:Dec 31, 2020: No entry required.

c. Equity method: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).

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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

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Exercise 8.18

a. 2019:2020:

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:

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

2020:

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

d. Carrying amount of the investment:

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:Income Statement details:

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Exercise 8.19

 

 

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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.

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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.

(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

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Exercise 8.22

(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).

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Exercise 8.23

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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).

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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

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Exercise 8.26

1. IFRS – Effective Interest

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

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

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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

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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

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Exercise 8.29

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