chapter 12 · web viewinvestments in associates are normally accounted for using the equity method....

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

Suggested TimeCase 11-1 Quinn Inc.

11-2 MacKay Industries Limited11-3 Northern Energy Limited

Assignment 11-1 Investment classification............................................ 2511-2 Investment classification............................................ 2511-3 removed 11-4 Amortized cost method – debt investment (W*)....... 4011-5 Amortized cost versus fair value

method – debt investment...................................... 4011-6 Amortized cost method and

fair value– debt investment.................................... 4511-7 Fair value method – comprehension.......................... 2011-8 Investments – interpretation....................................... 2011-9 Fair value – debt and equity investments .................. 3011-10 Fair value method...................................................... 3511-11 Fair value method ..................................................... 1511-12 Fair value method (W*)............................................. 3511-13 Fair value method...................................................... 3511-14 Fair value method...................................................... 2011-15 Decline in value......................................................... 1511-16 Impairment................................................................. 2511-17 Reclassification.......................................................... 2011-18 Basket purchase of securities..................................... 2011-19 Investments and foreign currency ............................. 2011-20 Equity method – explanation and calculation............ 2011-21 Long-term equity investment, cost and equity methods compared, entries (W*)............................... 3011-22 Equity method............................................................ 3011-23 Equity method............................................................ 3011-24 Equity method............................................................ 30

11-25 Consolidation – explanation (W*)............................. 2011-26 Statement of cash flow .............................................. 2511-27 Statement of cash flow............................................... 3511-28 Comprehensive investments...................................... 4511-29 Comprehensive investments...................................... 4511-30 Comprehensive investments...................................... 45

*W The solution to this assignment is on the text Web site andin the Study Guide. The solution is marked WEB.

©2011 McGraw-Hill Ryerson Ltd. All rights reservedSolutions Manual to accompany Intermediate Accounting, Volume 1, 5th edition 11-1

Questions

1. Companies invest in the securities of other enterprises to invest idle cash or create active trading portfolios. Alternatively, the investments may create long-term relationships that will generate earnings, establish strategic alliances, and/or set up legal frameworks in which to operate.

2. Debt investments can be classified as amortized cost (AC) or FVTPL. Equity investments can be classified as FVTPL, FVTOCI, or cost (in limited circumstances.) If the equity investment is strategic in nature, it may be classified as an associate, a subsidiary, or a joint venture.

Amortized cost debt investments are recorded at cost and interest is recognized as revenue using the effective interest method, as time passes. Interest revenue will include a share of premium or discount.

FVTPL investments are adjusted to fair value at each reporting date. Both realized and unrealized gains and losses are included in earnings. Dividend revenue is recognized when declared and interest income is recognized using the effective interest method. FVTOCI investments are accounted for using the fair value method, as above, except that unrealized gains and losses are recorded in other comprehensive income and the cumulative amount is part of an equity reserve. Realized gains and losses may be transferred to retained earnings on disposition, but not reclassified through earnings.

The cost method is only used for equity investments, under IFRS, if fair value is not estimable, in which case cost is used as a surrogate for fair value, with appropriate attention paid to the risk of impairment. Investments are carried at cost, and dividends reported in investment income as declared. The cost method is more widely used under ASPE.

Associates are accounted for using the equity method, where the investor’s pro-rata share of associate earnings, adjusted for various factors, is recorded as investment revenue. Joint ventures are also accounted for using the equity method (proportionate consolidation is also permitted.) Subsidiaries are consolidated, or added to the parent’s results, subject to certain adjustments.

3. FVTPL is primariy different from FVTOCI in the classification of recognized changes in the fair value of investments. In FVTPL, gains and losses are included in earnings, but in FVTOCI the amounts are excluded from earnings, included instead in other comprehensive income and the equity reserve account OCI. Realized amounts may be transferred from OCI to retained earnings at the company’s choice. Transaction costs are expensed for FVTPL but are capitalized as part of investment cost for FTOCI.

©2011 McGraw-Hill Ryerson Ltd. All rights reserved11-2 Solutions Manual to accompany Intermediate Accounting, Volume 1, 5th edition

The difference in the treatment of changes in fair value means that earnings have the potential to be more volatile under FVTPL. However, whether the gains and losses are included in retained earnings (FVTPL) or in an equity reserve for OCI (FVTOCI), total equity is the same.

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

An associate is accounted for using the equity method. The investor records, as investment income, their pro-rata share of investee earnings after depreciation of fair value increments, elimination of intercorporate unrealized profits and, potentially, write-off of goodwill. Dividends are recorded as a reduction in the investment account, so the investment balance reflects cost plus unremitted earnings.

5. Control exists when an investor has the power to govern the financial and operating poicies of a subsidiary so as to obtain benefits from its operation. Percentage share ownership is the primary factor, with control established at 50% plus one share. This should be viewed as the ability to appoint the majority of the Board of Directors.

A subsidiary is accounted for through consolidation. The parent and subsidiary accounts are added together. Intercompany transactions, balances, and unrealized profits are eliminated. Goodwill and other fair value increments confirmed by the purchase are recognized. If the subsidiary is not wholly-owned, a non-controlling interest is also recognized.

6. Joint control is the distinguising feature of a joint venture. The investors must all agree to major decisions. Joint ventures are accounted for with the equity method, where the investor records, as investment income, their pro-rata share of investee earnings after depreciation of fair value increments, elimination of intercorporate unrealized profits and, potentially, write-off of goodwill. Dividends are recorded as a reduction in the investment account, so the investment balance reflects cost plus unremitted earnings. (Proportionate consolidation is also permitted for joint ventures.)

7. Fair value is estimated with reference to market prices in an active market. Bid prices are used. When trading is light, recent bid prices are acceptable if there are no intervening events that would affect value. In the absence of a market price, fair value must be estimated, through reference prices, adjusted for elements that are different. Valuation models may also be used; the model must incorporate all factors that market participants consider when establishing prices.


8. a) Entry to record investment in Sugar Company bonds on 1 August 20x4:

Amortized cost investment: Sugar Co. bonds............................. 43,200Cash........................................................................................ 43,200

b) Entry to record accrual of interest revenue on 31 December 20x4:

Accrued interest receivable ($50,000 x 6% x 5/12)..................... 1,250Amortized cost investment: Sugar Co. bonds ($1,440 - $1,250) 190

Investment revenue: interest ($43,200 x 8% x 5/12)............ 1,440Fair value is not relevant for an amortized cost investment.

9. An impairment may be indicated by:

a. Significant financial difficulty;b. A breach of contract, such as failure to pay required interest or principal on

outstanding debt;c. Concessions granted because of financial difficulties;d. Probable bankruptcy or financial reorganization;e. Disappearance of an active market for the investment because of financial

difficulties.f. Observable data that indicate decreased cash flow for the investee.

Other useful information might include the performance of the investee in comparison to budget, technological risks, the health of the economy in general, the performance of competitors, any evidence of financial distress apparent in transactions with third parties, and any evidence of internal fraud or external litigation.

An impairment loss for an AC investment or a cost investment is recorded as a loss in earnings in the current period. Such losses can be reversed if fair values recover because of an event in subsequent periods.

For a FVTPL investment, all the negative (and positive) changes in fair value are recorded in earnings when the changes in fair value occur, so there are no special impariment rules. For a FVTOCI investment, all the negative (and positive) changes in fair value are recorded in OCI, so again, no special impairment rules apply.


10. a) Entry on 15 March 20x4 to record the investment:

FVTOCI investment: Zenics common........................................ 2,000Cash........................................................................................ 2,000

b) Entry on 31 December 20x4, to record fair value:

OCI: holding loss on Zenics common......................................... 100FVTOCI investment: Zenics common .................................. 100

c) Entry on 5 June 20x5, to record sale of Zenics Common:

Cash.............................................................................................. 2,200FVTOCI investment: Zenics common.................................. 1,900

OCI: Holding gain on FVTOCI investment......................... 300

The company may reclassify the OCI amounts now that they are realized: OCI: Holding gain on FVTOCI investment .............................. 200

Retained earnings .................................................................. 200

11. The following amounts would be included in: OCI - SCI OCI –SFP Earnings

20x1 $ 10,000 $ 10,000 $ 020x2 40,000 50,000 020x3 20,000 70,000 020x3 (70,000)* (to RE) 0

* This transfer means that the ending balance is 0

12. The following amounts would be included in: OCI - SCI OCI –SFP Earnings

20x1 $ 0 $ 0 $ 50,00020x2 0 0 30,00020x3 0 0 40,000

13. The $456,800 value reported as an asset for FVTOCI investments is the fair value of the investments at year-end. If accumulated other comprehensive income includes an unrealized gain of $169,000, then the investments increased $169,000 in value while they were held. The cost of the investments is therefore $287,800 ($456,800 - $169,000).

14. When the investment is sold, the change in value for the year is included in earnings. In the year of the sale, a loss of $30,000 will be included. A $35,000 gain would have been recorded in prior years.


15. a) Entry to record the investment:

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

b) Entry to record change in fair value and exchange rate:

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

Foreign exchange loss ($50,000 x (1.12 - $1.09)........................ 1,500Investment revenue: unrealized holding gain: IBM ($50,000 x 1.09) = $54,500 - $56,680.................................. 2,180................................................................................................

16. Purchase price......................................................................................

$100,000Fair value of net assets acquired ($250,000 + $20,000)............. $270,00030% acquired (30% of fair value)............................................... 81,000

Goodwill............................................................................. $ 19,000

17. R’s share of earnings ($80,000 x .3)........................................... $24,000Additional depreciation - capital assets ($20,000 x .3)/10....... ( 600)

Investment revenue ............................................................ $23,400

18. Investor’s share of Machine’s income ($225,000 x .35)............ $78,750Intercompany profit ($50,000 x .35).......................................... (17,500)

Investment revenue ............................................................ $61,250

19. Equity-based income, and consolidated earnings, are usually less than the simple total of investor earnings plus the appropriate percentage of the investee’s income because:

a. Fair values inherent in the purchase price are subsequently amortized, reducing earnings.

b. Inter-company profits that are not yet confirmed by subsequent transactions with outside parties are eliminated.

c. If goodwill values are impaired, the write-down will reduce investment revenue.


20. An investment may be transferred from amortized cost to FVTPL when the business model used to manage the investments changes. An AC investment may not become a FVTOCI investment, since this category only includes equity investments, and also because designation of FVTOCI may only happen at initial recognition.

21. Under ASPE, passive share investments that are traded in active markets must be accounted for at fair value through profit and loss, which means that gains and losses are recorded in earnings when fair values change. However, other investments may be classified as FVTPL. All other passive investments are accounted for using the cost method, or amortized cost if the investment is in bonds. If an investment in shares is strategic, it may be an associate, subsidiary or joint venture. For an associate company, either the cost method or the equity method may be used. For a subsidiary, cost, equity or consolidation can be used, and for a joint venture, cost, equity or proportionate consolidation can be used. However, FVTPL must be used instead of cost for these strategic share investments if there are share prices quoted in active markets.

These alternatives are much different than the alternatives under IFRS, reflecting the fact that private company financial statements are intended for a different user group. The financial statements are used for different kinds of decisions, and investment accounting is tailored to the needs of the decision-makers.


Cases

Case 11-1Quinn Inc.

Overview

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

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

Analysis and conclusions

1. Revenue recognition

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

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

Entry #A1 (Exhibit 1) reverses this transaction.


2. Procurement Inc. shares

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

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

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

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

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

3. PZQ shares

These shares are in a public company, and are presumably traded in an active market for which there are quoted prices. The company reportedly acquired the shares for short-term profit. However, the investment was not designated as FVTOCI on acquisition, if IFRS were being considered. The investment would be required to be FVTPL under ASPE. Therefore, under any scheme of investment reporting, it would seem that this investment should be in the FVTPL category. It is reported at fair value, which is $16 per share, or $80,000. Under the FVTPL category, gains and losses are included in income. However, Beson has included this adjustment in an


equity reserve. This is incorrect for this investment. Once again, the entry made by Beson has had a positive impact in earnings and therefore the price that would be paid for Beson’s shares.

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

Revised financial statements

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


Exhibit 1Quinn Inc.Adjusting journal entries31 December 20x8

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

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

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

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

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

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

The financial statements reflect entry A1.

B. Procurement Inc.

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

C. PZQ Ltd.

I/S: Unrealized holding loss: PZQ shares.............................. 50,000 Reserve: OCI: unrealized holding loss: PZQ shares.... 50,000


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

As originally reported

Adjustments Revised 2008, unaudited

Assets

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

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

Capital assets, net of amortization

50,000 50,000

$817,000 $772,000

Liabilities

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

$662,900 $736,100

Shareholders’ equity

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

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

31,800

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


Case 11-2MacKay Industries Limited

Overview

MacKay Industries Ltd. is a family business (third generation); an industry leader in the leather furniture business. Financial statements are used to determine bonuses for managers, file tax returns, inform family members about the business, and also likely to satisfy lenders. To be ethically “fair” to managers, financial results should reflect performance, but that has little to do with accounting for investments. Managers should likely be awarded a bonus on income before investment revenue, because they are not involved with investment policy. Mr. MacKay should change the bonus scheme accordingly. Tax policy is set by the Income Tax Act; all that is left are the shareholders and the creditors. These investors are likely interested in cash flow. Mr. MacKay has choice over investment policy because the company is private. IFRS compliance is not assumed; the additional leeway granted to private companies is assumed to be desirable. ASPE is therefore the source of GAAP for this company. Simplicity is a major criteria for accounting policy choice, but family members would want relevant information because they are not directly invoved in the business.

Short-term investments

Short-term investments are traded in active markets; fair value is obtained from stock market quotes, and should be readily determinable. These investments should be accounted for through fair value through profit and loss (FVTPL), and are adjusted for fair value annually. Changes in fair value are incuded in earnings, whether realized or not. This reflects the performance of the investments, and their value at the reporting date, so is relevant information for financial statement users.

Hyperion

The cost of this investment is $172,000 (4,000 x $43); fair value ranged between $132,000 and $140,000 (@ $33 - $35) this past year. The shares are thinly traded but have a quoted price. FVTPL must be used for equity investments traded in active markets under ASPE (or if designated as FVTPL.) Otherwise, the cost method is used.

One can argue that the cost method should be used for this investment. Only 20,000 to 40,000 shares change hands annually; this might represent very few trades to the extent that the market is not considered active. This would justify use of the cost method. The number of trades and the compartive “activity” must be investigated. However, even if the cost method were used, an impairment loss might have to be recognized. Since this is the first year for a material decline in fair value, this might be premature.

Alternatively, the investment might be accounted for through fair value through profit and loss (FVTPL), and adjusted to fair value annually, with the loss in fair value included in earnings. This would be required if trading is considered to be active or if the


investment were designated as FVTPL. If this is the case, there is no argument about whether the loss is an impairment loss; the decline in value is recorded. When (if) fair values improve, the loss can be reversed.

The activity of the market must be investigated before a conclusion is reached. However, use of the cost method seems justified based on the information provided (thin trading).

Overall, it might be appropriate for the user groups, Mr. MacKay’s family and creditors, to be provided the fair value of the investment in the financial statements. This can be provided in supplementary disclsoure.

Mr. MacKay intends to keep the investment until fair values improve, and seems to have a five-year time horizon in mind. The investment is accordingly classified as long-term.

March Ltd.

The long-term account receivable from March Ltd. is only an asset to MIL if it has probable future economic value. Will it be collected? At present, its collectability is contingent on March’s successful completion of research. No evidence is present to imply that there is probable future cash flow. Thus, the receivable would not qualify as an asset. This can be considered an impairment.

Therefore, MIL must write-off the account receivable to comply with GAAP.

If GAAP is not a concern, MIL can do as it likes but should certainly disclose the facts.

The only way to avoid a write-off under GAAP is to have security for the receivable - Mr. MacKay, the major shareholder of March, may wish to provide a personal guarantee. Note that Mr. MacKay personally owns the shares of March Ltd. and March Ltd. is not a subsidiary of MacKay Ltd., although a non-GAAP combined statement could be prepared if users wished.

Kusak Ltd.

The Kusak bond, as a passive investment in a bond, is accounted for using the amortized cost method.

If management (Mr. MacKay) wishes, the investment can be designated as FVTPL. Kusac is a public company, and the bond is publicly traded, so it would appear to have a quoted price. FVTPL would provide information about fair value on the face of the SFP. If the investment were FVTPL, changes in fair value would be included in earnings.

This decision is entirely up to the company. If cost is used, fair value should be disclosed to inform shareholders.


DML Corp.

DML is a public company that is thinly traded. The meaning of this must be further investigated, because an active market has significant implications for this type of investment. MacKay owns 2% of the voting shares of DML Corp. and has one seat on the 18-member board. While Mr. MacKay is enjoying the experience, significant influence is not proven and the investment is not an associate.

The investment might be accounted for using the cost method or using FVTPL. The latter may only be used if trading is “active” rather than “thin”. Trading patterns must be further investigated, but the cost method is appropriate based on the evidence provided.

Fair value, supported by thin trading, indicates that the investment is worth $140,000 - $180,000. Under the cost method, the decline in value would only affect earnings if it were an impairment. Fair value should be disclosed.


Case 11-3Northern Energy Limited

Overview

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

Issues

Accounting for investments

Analysis

Nico Investments Ltd. common shares

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

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

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

However, one could argue that the ability of NEL to control the investee’s activities is limited by the shareholder agreement. Therefore, control is not present. Significant influence, which requires use of the equity method, might be more appropriate.


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

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

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

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

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

Canner Ltd. non-voting preference shares

Preference shares have no voting rights, although a seat on the Board indicates friendly relationships. While it is tempting to consider the investment for significant influence, the maximum and minimum investment revenue flowing from these shares is the dividend entitlement. The accounting alternatives are FVTPL or the cost method. (The investment might be designated FVTOCI, but gains and losses should be modest, given the fixed returns, and so there seems no reason to exclude changes in value from earnings.)

If the fair value method is used, the investment is valued at fair value, unrealized gains and losses are recorded in earnings, and dividend income is recorded as declared. If the cost method is used (appropriate only if fair value is not ascertainable), the investment is valued at cost and dividends declared are recognized as investment revenue.

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


Later Corp. common shares

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

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

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

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

Placement Resources Corp. common shares

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

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

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

If NEL were to use FVTPL, then the investment is valued at fair value, unrealized gains and losses are recorded earnings, and dividends are recorded as income when declared. Although the shares are thinly traded, valuation models can be used to substantiate values suggested by actual trading, however thin. If FVTOCI is used, the only difference is that


holding gains and losses are excluded from earnings and included in a separate equity reserve account, other comprehensive income.

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

Trufeld Trucking 8% bonds

Bonds convey no voting rights, and even with friendly relationships and a seat on the Board of Directors. The two alternatives for bond accounting are amortized cost and FVTPL.

If the FVTPL method is used, the bonds are valued at fair value, unrealized gains and losses are recorded in earnings, and interest revenue is recorded as time passes as for the amortized cost method, below.

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

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

Lu Trucking common shares

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

Therefore, the investment could be classified as FVTPL or accounted for using the cost method. Cost is appropriate if fair value cannot be ascertained. In FVTPL, investments


are carried at fair value, unrealized gains and losses are recorded in earnings, and dividends are recorded as income when declared. (The investment might also be classified as FVTOCI, which would be different only in that holding gains and losses would bypass earnings and be recorded in an equity reserve and OCI. )

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

Further investigation is needed, but if a value is not estimable, then the cost method should be used, as in the past. Given the problems of marketability, the investment must be reviewed for possible impairment.

Continued use of the cost method would result in asset valuation at original cost, and the regular dividends reported as earnings. The possible new investors of NEL would have their information needs (likely cash flow) met with this approach, as long as the investment was carefully evaluated for impairment.


Assignments

Assignment 11-1

Requirement 1 Investment Classification & Accounting Method

1. Bonds AC investment (Managed for p and i payments; no need to hold to maturity)Recorded at amortized cost; interest revenue measured through effective interest method

2. Common Shares FVTPLCost only if no fair value available. Valuation should be possible – “thinly traded” is at least some evidence. An unpopular value is still a value!

FVTPL (unrealized gains and losses included in earnings.)

3. Common Shares Joint venture by virtue of common control.Equity method * (* or proportionate consolidation)

4. Bonds FVTPL (Not managed for p and i)FVTPL (unrealized gains and losses included in earnings; interest revenue measured through the effective interest method)Note: would be amortized cost if fair value not ascertainable but valuation models are fairly straight-forward for bonds (PV)

5. Common Shares Associate, probably. Need to verify that the investor has influence on Board, but seats on Board, plus intercompany transactions usually provide evidence of influence.Equity method

6. Common Shares FVTOCI investment (must be designated as such by management on acquisition)Wish to avoid earnings with gains and losses.FVTOCI (gains and losses included in OCI.)

7. Common Shares Subsidiary by virtue of voting control over the

Board. (Not negated by the presence of an active minority shareholder).Consolidation


Requirement 2 Investment Classification & Accounting Method

1. Bonds Passive bond investment with fair value set in a public market Amortized cost (might be designated FVTPL?)

2. Common Shares Passive investment with inactive market

Cost method

3. Common Shares Joint venture by virtue of common control.Choice of cost*, equity method or proportionate consolidation*FVTPL must be used instead of cost if actively traded.

4. Bonds Passive bond investment with no active market Amortized Cost method

5. Common Shares Significant influence, probably. Choice of cost*, or equity method*FVTPL must be used instead of cost if actively traded.

6. Common Shares Passive investment with fair value set in a public market FVTPL; not possible to bypass earnings under ASPE

7. Common Shares Subsidiary

Choice of cost*, equity or consolidation*FVTPL must be used instead of cost if actively traded.


Assignment 11-2Investment Classification & Accounting Method

1. Common Shares FVTPL investment. Not strategic; active market. FVTPL (Valued at fair value, changes in fair value are included in earnings)

2. Bonds AC investment (held for p and I payments only)

Amortized cost; interest revenue measured through effective interest method

3. Common Shares Joint venture by virtue of common control.Equity method (Valued at cost plus unremitted earnings; investment revenue is pro-rata share of earnings, adjusted)(*proportionate consolidation is also allowed)

4. Common Shares FVTOCI, probably. Investor wishes to avoid earnings; category must be designated by management. 5% is well short of 20% which is the benchmark for associate (equity method required). On the other hand, if the investor has demonstrated influence on Board, since the largest shareholder usually has clout... FVTOCI (Valued at fair value, changes in fair value

are included OCI and an equity reserve) 5. Common Shares Cost, probably. Fair value is not available and valuation

models are assumed to be unworkable. No significant influence (not an associate) despite holding 30% because the rest of the Board is concentrated in one family. These assumptions must be verified through investigation.Cost because fair value is not available

6. Common Shares Associate. Strong significant influence is not control. The shareholder does not have a majority of the Board of Directors. However, 45% ownership is clearly enough for significant influence, there are inter-company ties and the investor is influential on the Board. Equity method (Valued at cost plus unremitted earnings; investment revenue is pro-rata share of earnings, adjusted)

7. Strip bonds FVTPL investment (market value is available; investment not held for p and i payments only.) FVTOCI would keep gains and losses out of earnings but not available for bonds.FVTPL (Valued at fair value, changes in fair value


are included in earnings)

Assignment 11-3 - removed

Assignment 11-4 (WEB)

Requirement 1

Principal $600,000 x (P/F, 2.5%,6 ) (.86230) = $ 517,380Interest $16,500* (P/A, 2.5%, 6) (5.50813) = 90,884Fair value $608,264

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

Requirement 2

Effective interest amortization

Period

CashPayment

2.5% InterestRevenue Amortization

BondCarrying Value

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

* $15,037 - $2 rounding

Requirement 3

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

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

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


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

Investment in debt securities: Old bonds....................... 1,359


Investment revenue: Interest ......................................... 15,141


Requirement 4

Straight-line amortization

PeriodCashPayment

InterestRevenue

Straight lineAmortization*

BondCarrying Value

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

* $8,264/6

Requirement 5

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


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


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



Assignment 11-5

Requirement 1

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

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

Requirement 2


Period

CashPayment

3% InterestRevenue

AmortizationBondCarrying Value

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

Requirement 3

First period revenue:Cash........................................................................................ 10,000Investment in debt securities: Gentron bonds........................ 1,403


Second period revenue:Cash........................................................................................ 10,000Investment in debt securities: Gentron bonds........................ 1,445


Third period revenue:Cash........................................................................................ 10,000Investment in debt securities: Gentron bonds........................ 1,488


Fourth period revenue:Cash........................................................................................ 10,000Investment in debt securities: Gentron bonds........................ 1,533



Requirement 4

First period revenue 20x5 (no change):Cash........................................................................................ 10,000Investment in debt securities: Gentron bonds........................ 1,403


Second period revenue 20x5 (no change)::Cash........................................................................................ 10,000Investment in debt securities: Gentron bonds........................ 1,445


Adjustment for fair value, 20x5Investment in debt securities: Gentron bonds ($385,000 - $382,940 (see table))......................................... 2,060

Investment revenue: Unrealized holding gain: Gentron bonds 2,060........................................................................................

Third period revenue 20x6 (no change)::Cash........................................................................................ 10,000Investment in debt securities: Gentron bonds........................ 1,488


Fourth period revenue 20x6 (no change)::Cash........................................................................................ 10,000Investment in debt securities: Gentron bonds........................ 1,533


Adjustment for fair value, 20x6Investment in debt securities: Gentron bonds ($391,500 – ($385,000 + $1,488 + $1,533))......................... 3,479

Investment revenue: Unrealized holding gain: Gentron bonds 3,479........................................................................................

Requirement 5 20x6 20x5

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

b) FVTPL investment Investment in Gentron bond $391,500 $ 385,000

This value represents fair value


Assignment 11-6

Requirement 1

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

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

Requirement 2


Period

CashPayment

3 % InterestRevenue Amortization

BondCarrying Value

0 $1,007,7891 $31,000 $30,234 $ 766 1,007,0232 31,000 30,211 789 1,006,2343 31,000 30,187 813 1,005,4214 31,000 30,163 837 1,004,5845 31,000 30,138 862 1,003,7226 31,000 30,112 888 1,002,8347 31,000 30,085 915 1,001,9198 31,000 30,058 942 1,000,9779 31,000 30,023* 977 1,000,000

* $30,029 - $6 rounding error

Requirement 3

20x7 entries:1 MayInvestment in debt securities: Fox Corp. bonds .................... 1,007,789

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

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

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


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

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

20x8 entries:1 May

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

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


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


Requirement 4

1 FebruaryInterest receivable (1/6 of $31,000)....................................... 5,167


Cash ($1,000,000 x .99) + $10,333 + $5,167........................ 1,005,500Investment revenue: loss on sale of bond.............................. 15,002

Interest receivable........................................................... 15,500Investment in debt securities: Fox Corp. bonds *......... 1,005,002* $1,005,421 - $279 - $140

Requirement 5

20x7 entries:

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

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

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



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


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

Investment revenue: Unrealized holding gain: Fox Corp. bonds . . 43,240

Under the cost method, the bond would be reported at amortized cost, or $1,006,760. Using FVTPL, the bond is reported at fair value, or $1,050,000.


Assignment 11-7

Requirement 1

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

Requirement 2

The reported values are presumably fair values. Fair values are estimated with reference to quoted (bid) price in active markets. Recent transactions can be extrapolated to ascertain fair value, or valuation models can be used.

Requirement 3

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

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

Requirement 4

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

Requirement 5

No gain or loss is reported in earnings for Star Co. shares because the investment is classified as FVTOCI. A further gain of $129,900 ($1,500,000 - $1,370,100) would be reported in OCI (equity reserve), bringing the balance to $280,200.

A gain of $300 ($435,000 - $434,700) would be reported on the Comet Co. shares.


Assignment 11-8

Requirement 1

Cash equivalents are money market investments with a term of 90 days or shorter on initial investment. They have little risk of price fluctuation because of this short term.

Requirement 2

To be classified as AC, the bonds must have been held under a business model with the objective of collecting cash flows for principal and interest, and the bonds must have fixed payment for principal and interest. Since most bonds have fixed payment schedules, the difference between the bonds classified as AC and those classified as FVTPL is simply the strategy that management has in relation to the investment.

Requirement 3

The gain means that fair value has increased. This happens when market interest rates fall, since a lower interest rate is used in the present value model for fair value.

Requirement 4

Investments may be classified as FVTPL if they have a determinable fair value and are not designated in any other category. It is a catch-all. To date, unrealized gains of $110,000 and unrealized losses of $96,500 have been included in income because of these investments, which is a net change to income of $13,500 (gain).

FVTPL investments are current if they are expected to be realized during the company’s normal operating cycle or within twelve months.

Requirement 5

The equity reserve account (OCI) is caused by unrealized gains and losses from the FVTOCI investments. This amount is an $81,000 loss to date. Requirement 6

The difference between cost and carrying value for an investment in an associate is caused by the investor’s share in unremitted earnings. That is, the associate has earned earnings in excess of dividends declared while it has been held by the investor.

Investment revenue is measured as the investor’s pro-rata share of earnings, adjusted for amortization/impairment of fair values established in the purchase price and also adjusted for intercompany unconfirmed profits.


Assignment 11-9

Requirement 1

1 July 20x4: Investment in debt securities: High Range bonds ($150,000 x .98)....147,000Accrued interest receivable (1)............................................................. 3,750

Cash................................................................................................. 150,750

(1) Accrued interest ($150,000 x .05 x 6/12) = 3,750

Investment in equity securities: Brownstone shares (6,000 x $16)..... 96,000Cash................................................................................................. 96,000

Requirement 2

31 December 20x4: a) Bond interest:

Cash ($150,000 x .05)..................................................................... 7,500Investment in debt securities: High Range bonds (given).............. 106

Accrued interest receivable (above).......................................... 3,750Investment revenue: interest.................................................... 3,856

b) Fair value Investment in debt securities: High Range bonds (1)..................... 1,394

Investment revenue: unrealized holding gain........................... 1,394

(1) Fair value @.99 = $148,500 – ($147,000 + $106)

Investment revenue: unrealized holding loss (1) ........................... 24,000Investment in equity securities: Brownstone shares ............... 24,000

(1) Fair value @ $12 = $72,000 - $96,000

Requirement 3

Presentation of items and amounts in 20x4 financial statements:

Earnings: 20x4Investment revenue: interest ................................................................ $ 3,856Unrealized holding gain (loss) ($24,000 - $1,394)............................... (22,606)

Statement of financial position:Investment in debt securities, at fair value............................................$148,500Investment in equity securities, at fair value........................................ 72,000

Requirement 4


31 December 20x5: a) Bond interest:

Cash ($150,000 x .05)..................................................................... 7,500Investment in debt securities: High Range bonds (given).............. 235

Investment revenue: interest.................................................... 7,735

Dividend:Cash (6,000 x $0.50)....................................................................... 3,000

Investment revenue: dividends................................................. 3,000

b) Fair value Investment revenue: unrealized holding loss (1)............................ 3,235

Investment in debt securities: High Range bonds .................... 3,235

(1) Fair value @.97 = $145,500 – ($148,500 + $235)

Investment in equity securities: Brownstone shares (1)................ 9,000Investment revenue: unrealized holding gain........................... 9,000

(1) Fair value @ $13.50 = $81,000 - $72,000

Requirement 5

Presentation of items and amounts in 20x5 financial statements:

Earnings: 20x5Investment revenue: interest ................................................................ $ 7,735Investment revenue: dividend............................................................... 3,000Unrealized holding gain (loss) ($9,000 - $3,235)................................. 5,765

Statement of financial position:Investment in debt securities, at fair value............................................$145,500Investment in equity securities, at fair value........................................ 81,000


Assignment 11-10

Requirement 1

1 November 20x8 – to record acquisition of investments:

Investment in Lin Co. shares................................................................ 30,000Investment in Waldron Co. shares........................................................ 6,000

Cash............................................................................................... 36,000

Requirement 2

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

Investment in Waldron Co. shares........................................................ 1,200Investment revenue: unrealized holding loss: Lin Co. shares............... 4,000

Investment revenue: unrealized holding gain: Waldron Co. shares 1,200Investment in Lin Co. shares......................................................... 4,000

Calculation:

Company Shares Cost Market

Lin 1,000 @ $30 = $30,000 @ $26 = $26,000 $4,000 lossWaldron 600 @ $10 = 6,000 @ $12 = 7,200 1,200 gain

$33,200Requirement 3

Earnings, 20x8Net unrealized losses on

FVTPL investments ($4,000 - $1,200)...................................... $2,800 loss

Statement of financial position, 31 December 20x8

FVTPL investments, at fair value.................................................. $33,200


Requirement 4

2 March 20x9 - To record dividends received:Cash (1,000 shares x $1.00) + (600 shares x $.50)............................... 1,300

Investment revenue: dividends...................................................... 1,300

1 October 20x9 - To record sale of 200 shares of Waldron stock:Cash (200 shares x $12.50)................................................................... 2,500

Investment in Waldron Co. shares (200 shares x $12).................. 2,400Investment revenue: gain on sale of investment............................ 100

31 December 20x9 - Adjusting entry to record fair value:Investment in Waldron Co. shares........................................................ 400Investment revenue: unrealized holding loss: Lin Co shares................ 3,000

Investment revenue: unrealized holding gain: Waldron Co. shares 400Investment in Lin Co shares.......................................................... 3,000

Calculation:Company Shares Carrying value Fair value

Lin 1,000 @ $26 = $26,000 @ $23 = $23,000 3,000 lossWaldron 400 @ $12 = 4,800 @ $13 = 5,200 400 gain

$28,200Requirement 5

Earnings, 20x9:Investment revenue........................................................................ $1,300Realized gain on sale of investment.............................................. $ 100Unrealized loss on FVTPL investments ($3,000 - $400).............. $2,600 (loss)

Statement of financial position, 31 December 20x9FVTPL investments, at fair value.................................................. $28,200

Requirement 6

Earnings, 20x9:Investment revenue........................................................................ $ 1,300

Statement of financial position, 31 December 20x9FVTOCI, at fair value.................................................................... $28,200Other comprehensive income (equity) ($2,800 - $100 + $3,000 - $400).................................................... $5,300 dr


The company would begin the year with OCI of $4,000 dr. for Lin shares and $1,200 cr. for Waldron shares. This would change by the $100 cr. gain on Waldron shares sold, the $3,000 dr. loss on Lin shares held and the 400 cr. gain on remaining Waldron shares.


Assignment 11-11

Requirement 1

Earnings, 20x5:Investment revenue: dividends (1,000 x $2) + (6,000 x $1)......... $ 8,000Commission expense ($800 + $500 + $500)............................ ….. $ 1,800Realized loss, Kelowna Ltd (1)..................................................... $ 13,500

lossRealized gain, Burnaby Corp. (2)............................................ … . $1,600 gainUnrealized gain, Burnaby (3)........................................................ $9,600 gainUnrealized loss, Wilton ($18,000 - $16,000)............................... $ 2,000 loss

(1) Kelowna: Proceeds: ......................................................... $54,000 Carrying value.....................................................67,500

$13,500 loss

(2) Burnaby: Proceeds: ......................................................... $19,200 Carrying value ($52,800 x 2,000/6,000)...............17,600

$1,600 gain

(3) Burnaby: Fair value: (4,000 x $11.20)............................. $44,800 Carrying value ($52,800 x 4,000/6,000)...............35,200

$9,600 gain

Requirement 2

Statement of financial position, 31 December 20x5Burnaby Corp, 4,000 shares (@$11.20)........................................ $44,800Wilton Ltd, 500 shares................................................................... 16,000

Requirement 3

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



Requirement 1

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

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

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

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

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

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

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

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

e) Cash .......................................................................................... 40,000Investment revenue: dividends (10,000 x $4)....................... 40,000

f) Accrued interest receivable ($400,000 x .09 x 2/12)..................... 6,000Investment income: interest.................................................. 6,000

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

FVTOCI investment: Front Corp shares....................................... 480FVTOCI investment in Ledrow Corp. shares ............................... 16,600

OCI: Unrealized holding gain: Front Corp. shares..................... 480

OCI: Unrealized holding gain: Ledrow Corp shares.................. 16,600

Computations:Cost/

Investment Quantity Carrying Value Market Unrealized G/L

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

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

$990,000 $17,080 gain


Requirement 2

20x2 Earnings:

Revenue from investments:Investment revenue ($40,000 + $6,000 - $8,000)...............................$ 38,000

20x2 Statement of financial position:

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

FVTOCI investments..................................................................................$990,000FVTPL investment...................................................................................... 392,000

Equity reserve: unrealized holding gain: OCI............................................ 17,080 gain

Requirement 3

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

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

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

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

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

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

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

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

e) Cash .......................................................................................... 40,000Investment revenue: dividends (10,000 x $4)....................... 40,000

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


g) FVTPL investment: Front Corp shares.......................................... 7,000Investment revenue: holding loss: Container bonds...................... 8,000FVTPL investment: Ledrow Corp. shares .................................... 40,000

Investment revenue: holding gain: Front Corp. shares............... 7,000FVTPL investment: Container Bonds ....................................... 8,000

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

Computations:Cost/

Investment Quantity Carrying Value Market Unrealized G/L

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

$1,382,000 $39,000 gain

20x2 Earnings:

Revenue from long term investments:Investment revenue..............................................................................$46,000Commission expense........................................................................... 29,920Investment holding gain ($40,000 + $7,000 - $8,000)........................ 39,000

20x2 Statement of financial position:

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

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

Note: Retained earnings is higher under this alternative.


Assignment 11-13

Requirement 1

a. Dividend:Cash (20,000 x $0.60)..................................................................... 12,000

Investment revenue: dividends................................................. 12,000

b. Sale of shares:Cash ................................................................................................182,000

Investment in equity securities: Finance Resources shares (1). 176,250Investment revenue: gain on sale.............................................. 5,750(1) $352,500 X 10,000/20,000

c. Interest:Cash ($700,000 x .04)..................................................................... 28,000Investment in debt securities: Provincial Railroads bonds (given). 2,310

Investment revenue: interest.................................................... 30,310

d. Purchase shares:Investment in equity securities: Credit Pacific (4,000 x $58)........232,000

Cash........................................................................................... 232,000

e. Fair value:

Investment revenue: unrealized holding loss (1) ........................... 56,250Investment in equity securities: Finance Resources shares .... 56,250

(1) Fair value @ $12 = $120,000 - $176,250 (10,000/20,000 x $352,500)

Investment in debt securities: Provincial Railroads bonds (1)........ 4,690Investment revenue: unrealized holding gain........................... 4,690

(1) Fair value = $695,000 – ($688,000 + $2,310)

Investment in equity securities: Remote Mines shares (1)............. 29,500Investment revenue: unrealized holding gain........................... 29,500

(1) Fair value @ $2.10 = $189,000 – $159,500

Investment in equity securities: Credit Pacific Ltd shares (1)........ 4,000Investment revenue: unrealized holding gain........................... 4,000

(1) Fair value @ $59 = $236,000 – $232,000

Requirement 2


20x3 Earnings:Investment revenue: interest ................................................................$ 30,310Investment revenue: dividend............................................................... 12,000Investment revenue: gain on sale.......................................................... 5,750Investment revenue:unrealized holding gain (loss) ($56,250 - $4,690 - $29,500 - $4,000).................................................. (18,060)

Requirement 3

a. Dividend (no change):Cash (20,000 x $0.60)..................................................................... 12,000

Investment revenue: dividends................................................. 12,000b. Sale of shares:

Cash ................................................................................................182,000Investment in equity securities: Finance Resources shares (1). 176,250OCI: realized holding gain........................................................ 5,750

(1) $352,500 x 10,000/20,000

OCI: holding gains ($5,750 + $43,250 (($352,500 - $266,000) opening x 10,000/20,000)))...................... 49,000

Retained earnings...................................................................... 49,000

c. n/a (Common share investment only required)

d. Purchase shares:Investment in equity securities: Credit Pacific (4,000 x $58)........232,000

Cash........................................................................................... 232,000

e. Fair value:OCI: Unrealized holding loss (1) .................................................. 56,250

Investment in equity securities: Finance Resources shares .... 56,250(1) Fair value @ $12 = $120,000 - $176,250 (10,000/20,000 x $352,500)

Investment in equity securities: Remote Mines shares (1)............. 29,500OCI: Unrealized holding gain................................................... 29,500...................................................................................................

(1) Fair value @ $2.10 = $189,000 – $159,500

Investment in equity securities: Credit Pacific Ltd shares (1)........ 4,000OCI: Unrealized holding gain................................................... 4,000...................................................................................................

(1) Fair value @ $59 = $236,000 – $232,000)

Earnings:Investment revenue: dividends ............................................................$ 12,000


Assignment 11-14

Requirement 1Cost method

20x2 20x3 20x4EarningsDividend revenue $5,200 $8,400 $ --Fees and commissions -- -- --Gain on sale (1) 6,450

Statement of financial positionInvestment (4,000 x $34) + $800 $136,80

0$136,800 --

OCI: Unrealized holding gain/(loss) -- -- --(1) cost of $136,800 versus net proceeds $143,250 ((4,000 x $36) - $750)

FVTPL method20x2 20x3 20x4

EarningsDividend revenue $5,200 $8,400 $ --Fees and commissions 800 750Holding gains (losses)(1) (8,000) 24,000 (8,000)

Statement of financial positionInvestment ($32; $38) $128,00

0$152,000 --

OCI: Unrealized holding gain/(loss) -- -- --(1) 4,000 x ($34 - $32); ($32-$38); ($38-36)

FVTOCI method20x2 20x3 20x4

EarningsDividend revenue $5,200 $8,400 $ --Fees and commissions -- -- --Holding gains (losses)(2) -- -- --

Statement of financial positionInvestment ($32; $38) $128,00

0$152,000 --

OCI: Unrealized holding gain/(loss)(1) (8,800) 15,200 6,450 Transfer to RE -- -- (6,450)

0(1) 20x2: $136,800 - $128,000 = 8,800loss ;


20x3: ($152,000 - $128,000) = $24,000 + ($8,800); 20x4: ($143,250 - $152,000) = ($8,750) + $15,200

Requirement 2

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


Assignment 11-15

Requirement 1

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

Use of cost is inappropriate if fair value is lower than cost, with the result that the asset is overvalued. In this case, the failed contract bid is an indication of decline in value. From the chapter:

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

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

Requirement 320x5 20x6 20x7 20x8

Earnings: Holding loss (50%) ($425,250) Gain on sale ($425,250 - $477,100) $51,850

Statement of financial position: FVTPL investment $850,500 $425,250 $425,250 ---

Evidence to support the lower fair value is propmarily the loss of the cotract bid. Internal budgets or valuations from the investee or the fair value of comparable companies might be available. Share transactions would be useful but likely unavailable because the company is private.

Requirement 420x5 20x6 20x7 20x8

Earnings: -- -- -- --

Statement of financial position: FVTOCI investment $850,500 $425,250 $425,250 ---Equity reserve: OCI holding gainsNote: could be transferred to RE after realization in 20x8

(425,250) (425,250) (373,400)*

Assignment 11-16


Requirement 1

Principal $360,000 x (P/F, 5%,10 ) (.61391) = $ 221,008Interest $14,400* (P/A, 5%, 10) (7.72173) = 111,193Fair value $332,201

*$360,000 x 4%


Period

CashPayment

5 % InterestRevenue Amortization

BondCarrying Value

0 $332,20120x4 $14,400 $16,610 $ 2,210 334,41120x5 14,400 16,721 2,321 336,73220x6 14,400 16,837 2,437 339,16920x7 14,400 16,958 2,558 341,727

Requirement 2

1 January 20x4AC investment in debt securities: Friendly bonds ................ 332,201

Cash................................................................................ 332,201

31 December 20x4Cash........................................................................................ 14,400AC investment in debt securities: Friendly bonds................. 2,210


31 December 20x5Investment loss: decline in value/impairment........................ 164,411

AC investment in debt securities: Friendly bonds.......... 164,411($170,000 - $334,411)


Requirement 3

31 December 20x6AC investment in debt securities: Friendly bonds ................ 40,000

Investment revenue: impairment reversal ..................... 40,000 ($210,000 - $170,000)

Requirement 4

31 December 20x6AC investment in debt securities: Friendly bonds ................ 169,169

Investment revenue: impairment reversal ..................... 169,169 ($339,169 max amortized value per table - $170,000)

The new customers and contracts are assumed to be an event that justifies reversing the impairment.

Note that this $169,169 amount is higher than the $164,411 impairment in requirement 2. This reflects reinstatement of discount amortization that would have been recorded as part of interest revenue in 20x6.


Assignment 11-17

Requirement 1

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

Requirement 2

Goldhar shares were purchased for $954,700 ($920,000 + $34,700).

Requirement 3

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

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

Requirement 4

The investment is recorded at its fair value, or $1,568,500. The unrealized gain of $112,500 is included in earnings.

Requirement 5

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


Assignment 11-18

Requirement 1

Required entry at acquisition of investments at 1 December 20x9:

Investment: Serial Corporation common shares.................................. 69,768Investment: TY Drilling Corporation preferred shares........................ 489,022Investment: Carbon Corporation common shares................................ 87,210

Cash ....................................................................................... 646,000

Computations:Total

Market Market Allocated Cost Corp. Stock Shares Value Value Percent Total Per Share

Serial Common 18,000 $4 $ 72,000 10.8 $ 69,768* $ 3.876TY Preferred 24,000 21 504,000 75.7 489,022* 20.376CarbonCommon 30,000 3 90,000 13 .5 87,210 * 2.907

$666,000 100 $646,000

* Allow for rounding

Requirement 2

Without a fair value for the Carbon shares, one would record Serial and TY shares at fair value ($72,000 and $504,000, respectively), and Carbon shares at the residual, $70,000 ($646,000 less $576,000).


Assignment 11-19

Requirement 1

1 July FVTPL investment – bond............................................1,080,000Cash ($1,000,000 x $1.08)...................................... 1,080,000

Requirement 2

14 June FVTPL investment - Gerstan Ltd ($124,000 x 1.09).... 135,160Commission expense ($1,700 x 1.09)........................... 1,853

Accounts payable……………………………….. ((20,000 x $6.20) + $1,700) = $125,700 x $1.09... 137,013

1 August Accounts payable.......................................................... 137,013Foreign exchange loss................................................... 2,514

Cash $125,700 x $1.11............................................ 139,527

Requirement 3

31 Dec FVTPL investment - Gerstan Ltd................................. 14,640Investment revenue: unrealized holding gain ........ 14,640

Fair value = 20,000 x US$7 = US $140,000 x 1.07 = $149,800 $149,800 - $135,160 = $14,640

This change in value includes a change in the exchange rate of ($2,480) (($1.09 - $1.07) x $124,000) and a change in the value of the shares of $17,120 ($149,800 – ($124,000 x 1.07)). The two amounts are not separately recognized.

31 Dec FVTPL investment – bond (1)...................................... 32,800Foreign exchange loss ($1,000,000 x ($1.08 - $1.07). . 10,000

Unrealized holding gain: bond (2).......................... 42,800(1) $1,000,000 x 1.04 = 1,040,000 x 1.07 = $1,112,800

$1,112,800 - $1,080,000 = $32,800(2)$1,000,000 x 1.07 = $1,070,000; $1,112,800 - $1,070,000 = $42,800


(3) Assignment 11-20

Requirement 1

Significant influence is present when the investee has the power to participate in financial and operating policy decisions of the investee, even though the investor does not control the investee. In this case, 35% is well over the 20% benchmark for significant influence. However, since the remaining 65% of the shares are owned by members of the founder, Loffer may be shut out and have no influence. Countering this suspicion is the fact that Loffer has two members on the Board, who feel they have been influential. Finally, Loffer is a supplier and thus has regular dealings with the company. Significant influence seems present, and the investment is an associate.

Requirement 2

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

Requirement 3

Investment earnings begin with Loffer’s 35% share of earnings but then is adjusted by amortization of the patent value that Loffer effectively bought. Since Loffer is a supplier, if there are intercompany profits unconfirmed with transactions with Ming’s customers, these also have to be eliminated. Finally, if there was goodwill inherent in the purchase price, and it was impaired, this would also be adjusted. This is to appropriately measure all aspects of the price paid and the intercompany dealings before investment revenue is reported.


Requirement 4

Purchase price for 35% ownership $575,000Book value of assets $500,000Less: Liabilities (100,000)Net assets 400,000Proportion purchased x 35%

140,000Excess $435,000

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

Requirement 5

Investment account:Investment Account (Equity Method)

Cost 575,00020x6 Rev.(1) 26,500 20x6 Div.(2) 14,000 Bal. 587,500

(1) $200,000 earnings x 35% = $70,000 less patent amortization; $435,000/10 years (2) $40,000 x 35%

This $587,500 is not fair value. It is cost plus unremitted earnings.



Requirements 1 and 2

Entries and Other Information

Requirement 1Cost Method

Is Appropriate

Requirement 2Equity MethodIs Appropriate

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

Cash14,600

14,60014,600

14,600

b) Goodwill Computation:

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

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

Total fair value of net identifiable assetsProportion purchased

FMV purchasedGoodwill

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

Not applicable $ 2,000

$14,600

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

12,600$ 2,000

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

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

$2,940

No entry2,940

2,940

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

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

2,0002,000

2,000

2,000

Requirement 3

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


Assignment 11-22

Requirement 1

a) Entry at date of acquisition:Investment in DC Corp. (3,000 shares)................................ 80,000

Cash.......................................................................... 80,000

b) Amount of goodwill purchased: $30,000

Computation of goodwill:Purchase price for 20% ownership $80,000Fair value of identifiable assets ($150,000 + $140,000) $290,000Less: Liabilities (40,000)Total fair value of identifiable net assets 250,000Proportion purchased x 20%Fair value of 20% of identifiable net assets purchased 50,000Goodwill $30,000

Proportion of investee assets adjusted to fair value:Land ($150,000 - $140,000) x 20% . $2,000Assets subject to depreciation ($140,000 - $100,000) x 20% 8,000Additional depreciation ($8,000/10) $ 800

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

Investment in DC Corp............................................ 2,200Investment revenue (DC earnings)………………. 2,200

($15,000 x 20% = $3,000) - $800

Dividends:Cash ($10,000 x 20%)................................................ 2,000

Investment in DC Corp.................................... 2,000

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

Investment in DC Corp................................................ 5,400Investment revenue.................................................. 5,400

$31,000 x 20% = $6,200 - $800

Dividends:Cash ($12,000 x 20%)........................................................ 2,400

Investment in DC Corp................................................ 2,400


Requirement 2

Fair value is $75,000 at the end of 20x5 and $78,000 at the end of 20x6. Book value is higher. No write-down to fair value is necessary unless the decline in fair value is permanent. Requirement 3

Investment account:Investment Account (Equity Method)

Acq. 80,00020x5 Rev. 2,200 20x5 Div. 2,00020x6 Rev. 5,400 20x6 Div. 2,400 Bal. 83,200

Requirement 4

If the cost method were used, the investment would be reported at its $80,000 cost. Investment revenue would be dividends declared, $2,000 in 20x5 and $2,400 in 20x6.


Assignment 11-23

Requirement 1

Computation of goodwill:Purchase price (for 40 percent ownership) .............................. $ 598,000

Fair value of 40 percent of identifiable net assets purchased:Total fair value of assets................................................................$1,820,000Total fair value of liabilities.......................................................... (657,000 )

Total fair value of net assets purchased....................................$1,163,000Proportionate part purchased......................................................... x 40%Fair value of 40 percent of the identifiable net assets purchased........................................................................... 465,200Goodwill purchased ...................................................................... $ 132,800

Goodwill will affect investment revenue only if/when it is impaired or the business unit is sold.

Requirement 2

Computation of investment revenue:Share of earnings ($245,000 x 40%)......................................... 98,000

Adjustments to fair value for 20X5 expenses:Fair value differential for capital assets ($305,000 - $65,000)......$240,000Premium’s percentage (40%)........................................................ 96,000Annual depreciation (5 years) ....................................................... (19,200 )

Investment revenue ........................................................................... $ 78,800

Requirement 3

Investment Account (Equity Method) Acq. 598,000Revenue 78,800 Dividends 36,000 * Bal. 640,800

* ($90,000 x .4)


Assignment 11-24

Requirement 1

An investment is accounted for using the equity method if significant influence is present; the power to participate in the strategic financial and operating decisions of the investee. In addition to the level of share owndership, representation on the Board of Directors, participation in policy-making processes, material inter-company transactions, interchange of management personnel and provision of technical information are all indications of significant influence.

Requirement 2

Purchase price (40%): ............................................... $120,000Fair value of assets less liabilities:

Book value ( assets – liabilities = equity)...... $170,000 Fair value excess related to land.................... 20,000

190,000Fair value of 40% of net assets purchased................. 40% 76,000Goodwill.................................................................... $ 44,000

Requirement 3

Investee income:Long-term investment in Son Inc. shares ..................................... 5,000

Investment revenue .................................................................. 5,000

40% of earnings ($72,500 x .40) $ 29,000Less: goodwill impairment ($44,000 x .5) (22,000)Less: 40% of unconfirmed upstream inter-company profit ($5,000 x .4) (2,000)Investment revenue $ 5,000

Requirement 4

Balance in investment account:Cost................................................................ $120,000 Plus: Investment revenue............................ 5,000 Less: dividend (40% of $60,000)................... (24,000)

$101,000



Requirement 1

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

Requirement 2

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

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

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

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

not accruing to the parent.

Requirement 3

The following accounts disappear from the unconsolidated financial statements:

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

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

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

4. Inter-company sales See #3.

Requirement 4

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


Assignment 11-26

a. InvestingPurchase of common shares......................................................................

($108,000)

b. OperatingDeduct: non-cash change in fair value..................................................... ($42,000)

c. InvestingPurchase of common shares...................................................................... ($65,000)

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

e. OperatingDeduct: investment revenue (($150,000 x 7%) + $3,000)............................ ($13,500)Add: interest received................................................................................... $10,500*

* Cash from investment revenue must be shown separately on the CFS.

f. OperatingDeduct: non-cash investment revenue..........................................................($87,000)*Add: dividends received............................................................................... $26,000*

*Or shown net, ($61,000)

g. OperatingDeduct: gain on sale of shares ................................................................. ($30,000)

InvestingSale of common shares.............................................................................. $180,000

h. Not recorded separately on CFS: part of cash

i. Not recorded separately on CFS: part of cash


Assignment 11-27

CFS disclosures:Operating activities

Less: Discount amortization on long-term bond investment (1).. . $ (5,700)

Less: Unrealized holding gain, FVTPL investments (2)................ (125,000)Less: Equity-based Investment revenue, Falcon (3)...................... (211,100) Plus: Dividends received from Falcon (given).............................. 60,000

Investing activitiesPurchase of FVTOCI investments (4).............................................. (216,300)Proceeds on sale of FVTOCI investments....................................... 57,100

(1) $515,000 - $509,300 = $5,700. If cash received is known, the required disclosure is to list cash received from investment revenue.

(2) $675,000 versus $550,000; no other reason for change is given(3) ($950,000 - 60,000) = $890,000 - $1,101,100 = $211,100(4) Change in OCI: $32,100 + recognized on sale of FVTOCI investment, $20,900

($57,100 - $36,200) = $53,000 vs actual $35,900 = $17,100 unrealized fair value decrease

Opening investment balance, $887,000, less $36,200 sold = $850,800 - $17,100 decrease in value = $833,700 Actual balance is $1,050,000 Difference represents acquisitions= $216,300


Assignment 11-28

(a) AC investment: Emera bonds 733,296 Cash 733,296Present value: $700,000 x (PV1, 2.5%, 11)) + $21,000 x (PVA 2.5%,11)) = $733,296

(b) FVTOCI investment: Talcon shares (300,000 x $0.75) + $4,500 229,500 Cash 229,500

(c) Equity investment: Ball Ltd shares 3,000,000 Cash 3,000,000

Purchase price (25% of company) $3,000,000Fair value of identifiable assets* $15,930,000Less: liabilities 9,600,000Total fair value of net assets acquired 6,330,000Fair value of 25% share 1,582,500Goodwill $1,417,500

*$14,700,000 + ($7,980,000 - $6,750,000)

For part (f):Investment revenue, in earningsShare of net loss ($475,000 x .25 x 3/12) $ (29,688)Less: Depreciation of fair value increment($7,980,000 - $6,750,000)/10 $123,000Investor portion 0.25Partial year (3/12) 0.25 (7,688)

$ (37,376)

(d) FVTPL investment: Ontario Electric bonds …… 200,000Accrued interest receivable ($200,000 x 2/12 x 8%) 2,667 Cash 202,667


(e) Cash (300,000 x $0.05) 15,000 Investment revenue: dividends 15,000

(f) Refer to calculation in (c)

Investment loss: Share of Ball Co. losses 37,376 Equity investment: Ball Co. shares 37,376

(g) Accrued interest receivable ($700,000 x 6% x 6/12) 21,000 Investment revenue: interest ($733,296 x 5% x 6/12) 18,332 AC investment: Emera bonds 2,668Carrying value: $733,296 - $2,668 = $730,628

Accrued interest receivable ($200,000 x 8% x 2/12) 2,667 Investment revenue: interest 2,667

(h) OCI: Unrealized holding loss: Talcon shares (300,000 x $0.62 = $186,000 - $229,500)……………………………. 43,500 FVTOCI investment: Talcon shares…………………… 43,500

Investment revenue: Unrealized holding loss: Ontario Electric bonds ($200,000 x 98.5% less $200,000)………….

3,000

FVTPL investment: Ontario Electric bonds……………. 3,000

20x7 entries

(a) Cash 21,000 Accrued interest receivable 21,000

(b) Cash ($200,000 x 6/12 x 8%) 8,000 Accrued interest receivable ( $2,667 + $2,667) 5,334 Investment revenue: interest 2,666

(c) Cash (300,000 x $1.20 less $7,900) 352,100 FVTOCI investment: Talcon shares 186,000 OCI: realized gain on sale of investments 166,100

OCI: holding gains ($166,100 - $43,500)…………………. 122,600 Retained earnings………………………………………. 122,600

(d) Cash ($700,000 x 6% x 6/12) 21,000 Investment revenue: interest ($730,628 x 5% x 6/12) 18,266 AC investment: Emera bonds 2,734Carrying value: $730,628 - $2,734 = $727,894


(e) Cash ($200,000 x .99) - $565 + ($200,000 x .08 x 5/12) 204,102Commission expense……………………………………….. 565 Investment revenue: gain on sale of FVTPL investments 1,000 Investment revenue: interest ($200,000 x .08 x 5/12)……… 6,667 FVTPL investment in Ontario Electric bonds 197,000

(f) FVTPL investment:Vulture shares (16,000 x $5.50) ………. 88,000Commission expense……………………………………….. 1,650 Cash 89,650

(g) Investment loss: Share of Ball Co. losses 210,950 Equity investment: Ball Ltd shares 210,950

Investment revenue, in earningsShare of earnings ($79,200 x .25) $19,800Less: Goodwill impairment (200,000)Less: Depreciation of fair value increment($7,980,000 - $6,750,000)/10 $123,000Investor portion 0.25 (30,750)

$(210,950)

(h) Accrued interest receivable ($700,000 x 6% x 6/12) 21,000 Investment revenue: interest ($727,894 x 5% x 6/12) 18,197 AC investment: Emera bonds 2,803

(i) FVTPL investment: Vulture shares 24,000 Investment revenue: unrealized holding gain: Vulture shares ($7 x 16,000 = $112,000 - $88,000)……………….. 24,000


Assignment 11-29

Requirement 1

EarningsInvestment revenue: dividend income $ 35,400 (30,000 x $0.50) + (20,000 x $1) + (1,000 x $0.40)Investment revenue: Interest revenue 3,750 ($50,000 x 10% x 9/12)Gain on sale of FVTPL investments ………………………..($640,000 - $448,000) - ($52,000 - $51,400)

191,400

Commission expense on FVTPL transactions …………………($3,800 + $3,000 + $500)

(7,300)

Long-term Investment revenue: equity income in V 124,200 ($450,000 x .30) less $10,800AC investment revenue: interest revenue……………………… 9,803($97,836 x 5% = $4,892; discount amort of $392) + (($97,836 + $392) x 5% = $4,911; discount amortization of $411) Unrealized gain recognized on X Co. shares…………………($195,000 - $134,200)

60,800

Unrealized loss on W shares ………………………………….($66,500 - $25,000)

(41,500)

Other comprehensive income Gain on sale of P Co shares $3,000

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

Requirement 2

Statement of financial positionFVTPL investment W Ltd. 1,000 shares $ 25,000 X Co. 300,000 shares 195,000

Long-term investments V Ltd. 45,000 shares, equity method $ 2,568,100 ($2,578,900 - (45,000 x $3) + $124,200 T Co. bonds, $100,000 par value, 9 % bond, semi-annual interest, due 30 June 20x8 ($97,836 + $392 + $411) $ 98,639

Equity reserve: holding gains on FVTOCI investment ($81,000 + $3,000) $84,000


Assignment 11-30

Requirement 1

a. Cash ($8,400 - $500)..................................................................... 7,900OCI: holding gain..................................................................... 650Investment in equity securities: Rafuse Ltd (1,000 shares x $7.25) 7,250

Fair value of shares recorded = $25,375/ 3,500 = $7.25

Investment revenue realized holding loss on AFS investment...... 100OCI: holding loss ($650 gain and loss ($2,625 x 1,000/3,500)) 100................................................................................................... 100

b. Investment in Giordani Ltd shares................................................. 224,000Cash .......................................................................................... 224,000

Net assets = $675,000 - $270,000 = $405,000Goodwill = $224,000 – ($405,000 x 1/3) = $89,000

c. Cash (2,500 shares x $1.00) + (6,200 x $3.00).............................. 21,100Investment revenue: dividends................................................. 21,100

d. Cash ($500,000 x 3%)................................................................... 15,000Investment in bonds: Russell Corp bonds (given)......................... 546

Investment revenue: interest..................................................... 10,546Interest receivable (given)......................................................... 5,000

e. Interest receivable ($500,000 x 6% x 2/12)................................... 5,000Investment in bonds: Russell Corp bonds (given)......................... 277

Investment revenue: interest..................................................... 5,277

Cash ($500,000 x 102%) + $5,000................................................ 515,000Investment in bonds: Russell Corp bonds

($491,250 + $546 + $277)................................................ 492,073Investment revenue: gain on sale

of investment ($510,000 vs $492,073)............................. 17,927Interest receivable..................................................................... 5,000

f. Cash ($57 x 4,000) - $1,700)......................................................... 226,300Commission expense..................................................................... 1,700

Gain on sale of investments ($57 - $51) x 4,000...................... 24,000

Investment in equity securities: Wood Corp. (4,000 shares x $51) 204,000

Carrying value of shares = $316,200/ 6,200 = $51


g. Cash............................................................................................... 8,000Investment in Giordani Ltd shares............................................ 8,000

Investment in Giordani Ltd shares................................................. 141,875Investment revenue: equity in earnings.................................... 141,875

$435,000 x 1/3 = $145,000 less ($75,000 x 1/3 = $25,000 / 8)

h. Investment in Wood Corp. shares ($54 - $51) x 2,200.................. 6,600Investment revenue: unrealized holding gain: Wood Corp. shares 6,600

Investment in Rafuse shares ($10 - $7.25) x 2,500....................... 6,875OCI: unrealized holding gain: Rafuse shares............................ 6,875

No entry for Giordani; fair value is not recorded for significant influence investments.


chapter 12 · web viewinvestments in associates are normally accounted for using the equity method....

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