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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

CHAPTER 9

INVESTMENTS

CHAPTER STUDY OBJECTIVES

1. Understand the nature of and basic accounting for investments, including which types of
companies have significant investments. This chapter deals with investments in basic debt and
equity instruments of other companies. Debt instruments such as bonds generally carry contractual
rights to receive principal and interest payments. Equity instruments such as shares may carry
contractual rights to receive dividends (depending on the type of share) and may also carry voting
rights and/or rights to receive residual assets upon windup of a company. Care must be taken to
determine exactly what rights the investments entitle the holder to as this will help determine the
accounting. Not all companies carry significant investments. It depends on the business model.
Examples of types of companies that generally carry significant investments are financial institutions,
insurance companies, and pension funds. There are three basic models for accounting for
investments: the cost/amortized cost model, the FV-NI model, and the FV-OCI model

2. Explain and apply the cost/amortized cost model of accounting for investments. At acquisition,
the cost of the investment is recognized as its fair value plus transaction costs. If the investment is a
debt instrument, any premium or discount is amortized to interest income. Holding gains are
recognized only when realized, as are holding losses, unless the investment is impaired. The
investment is reported at its cost or amortized cost as either a current asset or a long-term
investment, depending on its maturity and management’s intention to hold it. ASPE uses this model
for most investments excluding equity investments where an active market exists for trading the
shares and derivatives. IFRS 9 uses this model for debt instruments where the entity’s business model
is to hold the investments to maturity.

3. Explain and apply the fair value through net income model of accounting for investments. At
acquisition, the investment is recognized at its fair value, with transaction costs being expensed. At
each reporting date, the investment is revalued to its current fair value, with holding gains and losses
recognized in net income. Dividend and interest income is also recognized in net income. If the
investment is not held for trading purposes, any interest income is reported separately and is adjusted
for discount or premium amortization. If held for trading or other current purposes, the investment is
reported as a current asset. ASPE uses this for equity instruments where there is an active market and
derivatives. IFRS 9 uses this model for all investments not accounted for under the cost/amortized
cost model or the FV–OCI model. ASPE and IFRS both allow any investment to be accounted for using
FV–NI under the fair value option.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

4. Explain and apply the fair value through other comprehensive income model of accounting for
investments. At acquisition, the investment is recognized at fair value plus transaction costs. At each
reporting date, the investment is revalued to its current fair value, with the holding gains or losses
reported in other comprehensive income. On disposal, the accumulated holding gains or losses are
either recycled to net income (debt securities) or transferred directly to retained earnings (equity
securities). Investments are reported as current or long-term assets, depending on marketability and
management intent. ASPE does not allow this method. IFRS 9 allows this method for certain equity
investments and debt securities where the business model is achieved by both holding to maturity
and selling (depending on the investment and circumstances).

5. Explain and apply the incurred loss, expected loss, and fair value loss impairment models. The
three impairment loss models differ in the timing of the recognition of impairment losses and the
discount rate used. Under the incurred loss approach, a triggering event is required before a loss is
recognized and measured, and the revised cash flows are discounted using either the historical or a
current market rate. Under the expected loss approach, no triggering event is required, and revised
cash flows and impairment losses are determined on a continual basis. The discount rate is the
historical/original rate. Using the fair value loss model, the asset is written down to fair value taking
into account market information (refer back to Chapters 2 and 3). ASPE and IFRS use the incurred loss
model for all cost/amortized cost investments, although the post-impairment carrying values are
measured differently. IFRS 9 uses the expected loss model for all cost/amortized cost investments as
well as FV-OCI debt securities. Under IFRS 9, impairment losses on FV–OCI equity investments are not
recognized in net income. Where the FV–NI model is used, there is no need to specifically assess
impairment because the investment is continually revalued to fair value and any gains or losses are
booked to income.

6. Explain the concept of significant influence and apply the equity method. Significant influence is
the ability to have an effect on strategic decisions made by an investee’s board of directors, but not
enough to control those decisions. The equity method, sometimes referred to as one-line
consolidation, is used because income is recognized by the investor as it is earned. The investor’s
income statement will reflect the performance of the investee company. Under this method, the
investment account is adjusted for all changes in the investee’s book value and for the amortization of
any purchase discrepancy. IFRS requires use of the equity method for its associates (investees a
company can significantly influence). ASPE provides a policy choice: either the equity method or the
cost method, except that associates with a quoted price in an active market cannot be accounted for
at cost. Instead, the FV–NI model can be used.

7. Explain the concept of control and when consolidation is appropriate. Control relates to the
ability to direct the strategic decisions of another entity and to generate returns for your own benefit
or loss. When one company controls another, it controls all the net assets of that entity and is
responsible for all its revenues and expenses. Therefore, all of the subsidiary’s assets and liabilities,
and revenues and expenses, are reported by the parent investor on a line-by-line basis in consolidated
financial statements. The interests of the noncontrolling shareholders in the subsidiary company are
reported separately as noncontrolling interest. Under IFRS, all subsidiaries are consolidated. ASPE, on

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

the other hand, allows consolidation or a choice of the equity or cost method. Investments in
companies with shares traded in an active market cannot be reported using the cost method, but may
use FV–NI.

8. Explain how investments are presented and disclosed in the financial statements, noting how
this facilitates analysis. The objectives of disclosure are to provide information so users can assess
the significance of the financial asset investments to the entity’s financial position and performance,
the extent of risks to which the company is exposed as a result, and how those risks are managed. As a
result, the investments are identified on the statement of financial position according to how they are
classified for accounting purposes, with the income statement reporting information on the returns
by method of classification. Extensive disclosure is required, particularly under IFRS, on the entity’s
risk exposures and how it manages those risks.

9. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the
near future. The differences are noted in Illustrations 9-7, 9-19 9-11, 9-12 and 9-13. There are
significant differences, partly because ASPE has adopted a more simplified approach.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

MULTIPLE CHOICE

Answer No. Description

c 1. Debt securities
b 2. Investment in debt instruments
c 3. Equity instruments
d 4. Definition of equity security
b 5. Accounting for investments
a 6. Valuation of debt instruments
a 7. Transaction costs
a 8. Motivation for debt investment
c 9. Measurement of investments
d 10. Cost model for debt securities
a 11. Holding gains under cost model
c 12. Equity investments and the cost model
b 13. Recognition of interest for bond investment
b 14. Amortization of premium or discount
a 15. Recording amortization of bond discount
b 16. Accounting for investments in associates
b 17. Amortization of premium or discount
c 18. Accrued interest treatment
b 19. Acquisition of long-term investment in bonds
a 20. Recording purchase of bonds
c 21. Carrying value of long-term investment in bonds – cost model
d 22. Carrying value of long-term investment in bonds – cost model
a 23. Calculation of income from long-term investment in bonds
b 24. Calculation of income from long-term investment in bonds
c 25. Determine gain on disposal of bond investment
c 26. Cost model of accounting for share investment
b 27. Recognition of interest income from bond
d 28. Calculation of bond discount to be amortized
d 29. Carrying value of long-term investment in bonds
b 30. Net carrying value of bonds
a 31. FV–NI model
a 32. FV–NI model
c 33. Holding gains with FV–NI model
d 34. FV–NI model and transaction costs
c 35. Accounting method for investment
d 36. Temporary investments in equity securities
a 37. Year-end adjustments for FV–NI investment
c 38. Accounting for fair value adjustments
d 39. Valuation of marketable equity securities
b 40. Valuation of marketable equity securities
b 41. Application of cost model to an investment
b 42. Unrealized gains and losses with FV–OCI
c 43. Classification of comprehensive income
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c 44. FV–OCI with recycling

b 45. Inclusions in OCI
d 46. Accumulated other comprehensive income
a 47. The concept of “recycling”
a 48. Accounting method for investment
d 49. Recognition of investment disposals
b 50. Accounting for fair value adjustments
a 51. Accounting for impairment losses
c 52. Indications for potential impairment
d 53. Impairment – incurred loss model
b 54. Impairment – expected loss model
c 55. Impairment – fair value loss model
c 56. Amortized cost of a bond
a 57. Accounting for a controlling interest
a 58. Equity investments and significant influence
b 59. Conditions for using the equity method
a 60. Significant influence
d 61. Degree of control
a 62. Recording of dividends received under the equity method
c 63. Recognition of earnings of investee using the equity method
c 64. Effect of using the cost method in error
c 65. Accounting for investments in associates
c 66. Accounting for investments in associates
d 67. Investor paying more than book value
b 68. Equity investments traded in active market
a 69. Equity method of accounting for share investment
b 70. Equity method of accounting for share investment
c 71. Equity method of accounting for share investment
b 72. Equity method of accounting for share investment
b 73. Equity method of accounting for share investment
a 74. Balance of investment account using the equity method
c 75. Investment income recognized under the equity method
c 76. Balance of investment account using the equity method
b 77. Balance of investment account using the equity method
c 78. Investment income recognized using the equity method
c 79. Investment income recognized under the equity method
a 80. Balance of investment account using the equity method
c 81. Sale of share investment
d 82. Calculate acquisition price of an investment in associate
c 83. Implications of control
a 84. Investing in subsidiaries
d 85. Accounting for subsidiary
b 86. Reporting model for control
a 87. Description of investee corporation
d 88. Classification as current assets
b 89. Objectives of disclosure requirements

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b 90. Disclosures for private entities

a 91. Consolidation under IFRS and ASPE
c 92. Reporting of equity method
d 93. Financial disclosures regarding acquisitions
c 94. Differences in disclosure for IFRS and ASPE
c 95. Transaction costs under IFRS and ASPE
d 96. Treatment of interest and dividend income under IFRS and ASPE

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

EXERCISES

Item Description
E9-97 Investment in debt securities at a discount
E9-98 Shares acquired on margin
E9-99 Fair value of bonds
E9-100 Cost/amortized cost model – ASPE versus IFRS 9
E9-101 Investment in shares of other entities – cost model
E9-102 Motivation for investments
E9-103 Types of companies that have investments
E9-104 Types of companies that have investments
E9-105 Application of cost/amortized cost method
E9-106 Investment in debt securities at a premium
E9-107 Investment in debt securities at a premium
E9-108 Investments in debt securities
E9-109 Cost and equity methods
E9-110 Fair value through net income method
E9-111 Cost and equity methods
E9-112 Fair value through other comprehensive income investments – entries
E9-113 Significant influence
E9-114 Accounting for investment under APSE
E9-115 Significant influence
E9-116 Investment in equity securities
E9-117 True-false questions
E9-118 Accounting entries for acquisition
E9-119 Accounting entries for acquisition

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PROBLEMS

Item Description
P9-120 Transaction costs
P9-121 Accounting for bonds – amortized cost model
P9-122 Accounting for debt investments purchased at a discount – FV–NI model
P9-123 Temporary investments – FV–NI model
P9-124 Year-end adjustments for temporary investments
P9-125 Accounting for debt investment purchased at premium – FV–NI model
P9-126 Accounting for investments – FV–NI model
P9-127 Long-term investment – FV–NI model
P9-128 Equity method (ASPE)
P9-129 Equity method – IFRS

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MULTIPLE CHOICE—Conceptual

1. Which of the following is NOT a debt security?

a) convertible bonds
b) commercial paper
c) loans receivable
d) government treasury bills
Answer: c

2. An investment in an entity's debt instruments makes that investor a(n)

a) owner of the issuing entity.
b) creditor of the issuing entity.
c) parent company.
d) subsidiary.

Answer: b

3. Which of the following is NOT an equity instrument?

a) common shares
b) preferred shares
c) convertible bonds
d) put options

Answer: c
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4. Any contract that is evidence of a residual interest in an entity’s assets is called a(n)
a) debt security.
b) liability.
c) derivative.
d) equity security.

Answer: d

5. How investments are accounted for does NOT usually depend on

a) the type of investment.
b) whether the investments are bought on margin.
c) management intent.
d) company strategy.

Answer: b

6. The price of a debt instrument is quoted as a percentage of its

a) face or par value.
b) fair market value.
c) book value.
d) present value.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

Answer: a

7. Generally, transaction costs are

a) capitalized when investments are accounted for using a cost-based model.
b) capitalized when investments are accounted for using a fair value model.
c) always expensed.
d) never expensed.

Answer: a

8. Which of the following is NOT a motivation for investment in debt and equity instruments issued by
other companies?
a) to assist those companies in meeting financial obligations
b) the returns provided by the investments
c) to have a special relationship, with a supplier, for example
d) to exercise influence or control over the operations of the investee

Answer: a

9. When it comes to measuring investments, which of the following statements is true?

a) Companies are required to measure at cost/amortized cost.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

b) Companies are required to measure at fair value.

c) Both cost/amortized cost and fair value are permitted in appropriate circumstances.
d) The company may report using whichever method best aligns with their financial reporting
objectives.

Answer: c

10. When the cost model is applied to an investment in debt securities, such as bonds, it is referred to
as the
a) equity method.
b) fair value through net income model.
c) fair value through other comprehensive income model.
d) amortized cost model.

Answer: d

11. Under the cost/amortized cost model, holding gains are

a) recognized in net income only when realized.
b) recognized in other comprehensive income.
c) recognized depending on management's intention.
d) not recognized at all.

Answer: a

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12. Equity investments that are accounted for under the cost model will result in
a) recognition of dividend income only when actually received.
b) expensing transaction costs when incurred.
c) recognition of a gain or loss in net income at disposal.
d) recognition of a gain or loss in other comprehensive income at disposal.

Answer: c

13. To calculate the amount of interest to recognize each period for a bond investment (unless it held
for trading purposes),
a) ASPE requires the use of the effective-interest method.
b) IFRS requires the use of the effective-interest method.
c) IFRS allows the use of either the effective-interest or the straight-line method.
d) ASPE requires the use of the straight-line method.

Answer: b

14. The premium or discount on bonds accounted for under the cost/amortized cost model is
a) amortized over the expected holding period.
b) amortized over the life of the bond.
c) not amortized.
d) treated as a transaction cost.

Answer: b

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

15. A bond is purchased at a discount and will be accounted for under the amortized cost model. The
entry to record the amortization of the discount includes a
a) debit to the investment account.
b) debit to “Gain from Discount.”
c) debit to Interest Income.
d) credit to the investment account.

Answer: a

16. Under ASPE, for accounting for investments in associates,

a) the cost method must be used for all such investments.
b) the fair value method can be used for shares quoted in an active market.
c) the investor may use the cost method for one investment and the fair value for another.
d) the fair value method must be used for all such investments.

Answer: b

17. In practice, under the cost/amortized cost method and ASPE, any discount or premium on a bond
investment is
a) required to be recognized and reported separately, and amortized using the effective-interest rate
method.
b) not recognized or reported separately; amortized using either the straight-line or effective-interest
method.
c) not recognized or reported separately; amortized using the effective-interest method.
d) required to be recognized and reported separately, and amortized using the straight-line method.

Answer: b

Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Financial Reporting

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

Bloomcode: Knowledge
AACSB: Analytic

18. An interest-bearing investment is sold mid-way through the year. At the time of sale, how is the
accrued interest typically treated?
a) The seller forfeits the right to any interest payment, and loses on the investment sale.
b) The original issuer (investee) must settle the interest owing before the sale can be completed.
c) The purchaser pays the seller an amount equal to the accrued interest since the last payment date.
d) At the next interest payment date, the original issuer (investee) splits the interest payments
amongst anyone who held the investment over the period.

Answer: c
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

19. On August 1, 2020, Franklin Inc. acquired $ 120,000 (face value) 10% bonds of Machu Corporation
at 102 plus accrued interest. The bonds were dated May 1, 2020, and mature on April 30, 2023, with
interest payable each October 31 and April 30. The bonds will be held to maturity. Assuming the
amortized cost model is used, the entry to record the purchase of the bonds on August 1, 2020 is
a) Bond Investment at Amortized Cost.................. 125,400
Cash.............................................................. 125,400
b) Bond Investment at Amortized Cost.................. 122,400
Interest Income................................................... 3,000
Cash.............................................................. 125,400
c) Bond Investment at Amortized Cost.................. 125,400
Interest Income............................................ 3,000
Cash.............................................................. 122,400
d) Bond Investment at Amortized Cost................... 120,000
Premium on Bonds.............................................. 5,400
Cash.............................................................. 125,400

Answer: b

Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Dr. Bond Investment at Amortized Cost: $ 120,000 × 1.02 = $ 122,400
Dr. Interest Income: $ 120,000 ×.10% × 3 ÷ 12 = $ 3,000
Cr. Cash: $ 122,400 + $ 3,000 = $ 125,400

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

20. On August 1, 2020, Peterson Corp. acquired 20, $ 1,000, 8% bonds at 95 plus accrued interest. The
bonds were dated May 1, 2020, and mature on April 30, 2020, with interest paid semi-annually on
October 31 and April 30. The bonds will be held to maturity. Assuming the amortized cost model is
used, the entry to record the purchase of the bonds on August 1, 2020 is
a) Bond Investment at Amortized Cost.................. 9,500
Interest Income................................................... 200
Cash.............................................................. 9,700
b) Bond Investment at Amortized Cost.................. 9,700
Cash.............................................................. 9,700
c) Bond Investment at Amortized Cost.................. 9,500
Interest Receivable.............................................. 200
Cash.............................................................. 9,700
d) Bond Investment at Amortized Cost.................. 10,000
Interest Income................................................... 200
Discount on Debt Securities....................... 500
Cash.............................................................. 9,700

Answer: a

Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Dr. Bond Investment at Amortized Cost: 10 × $ 1,000 ×.95 = $ 9,500
Dr. Interest Income: $ 10,000 × 8% × 3 ÷ 12 = $ 200
Cr. Cash: $ 9,500 + $ 200 = $ 9,700

21. On October 1, 2020, Barrick Corp. purchased 800, $ 1,000, 9% bonds for $ 792,000, which included
$ 12,000 accrued interest. The bonds, which mature on February 1, 2029, pay interest semi-annually
on February 1 and August 1. The bonds will be held to maturity. Barrick uses the straight-line method
of amortization. The bonds, which are accounted for under the amortized cost model, should be
reported in the December 31, 2020 balance sheet at a carrying value of
a) $ 792,240.
b) $ 780,000.
c) $ 780,600.
d) $ 792,000.

Answer: c

Difficulty: Hard
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Finance

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

CPA: Financial Reporting

Bloomcode: Application
AACSB: Analytic
Feedback: $ 780,000 + ($ 20,000 × 3÷100) = $ 780,600
22. On November 1, 2020, Jepson Ltd. purchased 300 of the $ 1,000 face value, 9% bonds of Carly
Corp., for $ 316,000, which included accrued interest of $ 4,500. The bonds, which mature on January
1, 2025, pay interest semi-annually on March 1 and September 1. The bonds will be held to maturity.
Assuming that Jepson uses the straight-line method of amortization and that the bonds are
accounted for under the amortized cost method, the carrying value of the bonds should be shown on
Jepson's December 31, 2020, statement of financial position at
a) $ 316,000.
b) $ 300,000.
c) $ 311,500.
d) $ 311,040.

Answer: d

Difficulty: Hard
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 316,000 – $ 4,500 = $ 311,500
$ 311,500 – ($ 11,500 × 2 ÷ 50) = $ 311,040

23. On November 1, 2020, Fluck Corp. purchased 10-year, 9%, bonds with a face value of $ 360,000, for
$ 324,000. An additional $ 10,800 was paid for the accrued interest, which is paid semi-annually on
January 1 and July 1. The bonds mature on July 1, 2027 and will be held to maturity. Fluck uses the
straight-line method of amortization and the amortized cost method for these bonds. Ignoring income
taxes, the amount to be reported in Fluck’s 2020 income statement as a result of this investment is
a) $ 6,300.
b) $ 6,000.
c) $ 5,400.
d) $ 4,800.

Answer: a

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Feedback: ($ 360,000 ×.045) – $ 10,800 + ($ 36,000 × 2÷80) = $ 6,300

24. On October 1, 2020, Berlin Corp. purchased 250, $ 1,000, 9% bonds for $ 260,000. An additional $
7,500 was paid for the accrued interest, which is paid semi-annually on December 1 and June 1. The
bonds mature on December 1, 2024 and will be held to maturity. Berlin uses the straight-line method
of amortization and the amortized cost model for these bonds. Ignoring income taxes, the amount to
be reported in Berlin's 2020 income statement as a result of this investment is
a) $ 3,750.
b) $ 5,025.
c) $ 5,625.
d) $ 6,225.

Answer: b

Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($ 250,000 ×.09 × 3 ÷ 12) – ($ 10,000 × 3÷50) = $ 5,025

25. During 2020, Brandon Inc. purchased 2,000, $ 1,000, 9% bonds. The bonds mature on March 1,
2025, and pay interest on March 1 and September 1. The carrying value of the bonds at December 31,
2020 was $ 1,960,000. On September 1, 2021, after the semi-annual interest was received, Brandon
sold half of these bonds for $ 988,000. Brandon uses straight-line amortization and has accounted for
the bonds under the amortized cost model. The gain on the sale is
a) $ 11,200.
b) $ 8,000.
c) $ 4,800.
d) $ 0.

Answer: c

Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Discount amortization: $ 40,000 × 8 ÷ 50 = $ 6,400
($ 1,960,000 + $ 6,400) ÷ 2 = $ 983,200; $ 983,200 – $ 988,000 = $ 4,800 gain

26. On January 2, 2020, Fidel Corp. purchased 200 of the 1,000 outstanding common shares of Rindu

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Ltd. for $ 60,000. During 2020, Rindu declared total cash dividends of $ 10,000 and reported net
income for the year of $ 40,000. If Fidel uses the cost model to account for its investment in Rindu,
Fidel’s Investment in Rindu Ltd. account at December 31, 2020 should be
a) $ 68,000.
b) $ 66,000.
c) $ 60,000.
d) $ 58,000.

Answer: c

Use the following information for questions 27–28.

On July 1, 2020, Harry Ltd. purchased $ 200,000 (par value) of Prince’s 8% bonds. Because the market
rate was 9%, Harry purchased them for $ 186,992. The bonds pay interest semi-annually on December
31 and June 30. Harry uses the amortized cost model and the effective-interest method to recognize
interest income on bond investments.

27. Rounding values to the nearest dollar (if necessary), the entry to recognize receipt of the first
interest payment on December 31, 2020 will include a
a) debit to Cash of $ 9,000.
b) credit to Interest Income of $ 8,415.
c) debit to Cash of $ 8,415.
d) credit to Interest Income of $ 8,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Interest income = $ 186,992 x 9% x 6 ÷ 12 = $ 8,415 rounded

28. Rounding values to the nearest dollar (if necessary), the bond discount to be amortized on
December 31, 2020 is
a) $ 8,415.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

b) $ 8,000.
c) $ 7,585.
d) $ 415.

Answer: d

Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Cash received $ 8,000; interest income $ 8,415; discount amortized $ 415

29. On October 1, 2020, Moray Ltd. purchased 500 of the $ 1,000 face value, 8% bonds of Eel Ltd. for $
585,000, including accrued interest of $ 10,000. The bonds, which mature on January 1, 2027, pay
interest semi-annually on January 1 and July 1. Moray used the straight-line method of amortization and
appropriately recorded the bonds as long-term. On Moray's December 31, 2021 balance sheet, the
carrying value of the bonds would be
a) $ 575,000.
b) $ 570,000.
c) $ 568,000.
d) $ 560,000.

Answer: d

Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 585,000 – $ 10,000 = $ 575,000
15
$ 575,000 – ($ 75,000 ×—––) = $ 560,000
75

30. On January 1, 2020 Limoyo Corporation purchased 600 of $ 1,000 face value, 8% bonds of Leon
Company, for $ 553,668, to yield 10%. The bonds, which mature on January 1, 2025, pay interest semi-
annually on January 1 and July 1. Assuming that Limoyo uses the straight-line method of amortization
and that the bonds are accounted for under the amortized cost method, the net carrying value of the
bonds should be shown on Limoyo’s December 31, 2020, statement of financial position at
a) $ 557,351.
b) $ 562,934.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

c) $ 600,000.
d) $ 553,668.

Answer: b
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/ Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Calculation: ($ 600,000 – $ 553,668) / 10 = $ 4,633.20 = semi-annual amortization
Value after 2 amortization periods = $ 553,668 + ($ 4,633.20 x 2) = $ 562,934

31. The fair value through net income (FV–NI) model is sometimes referred to as
a) the fair value through profit or loss (FVTPL).
b) held for trading.
c) discontinued operations.
d) available for sale.

Answer: a

Difficulty: Easy
Learning Objective: Explain and apply the fair value through net income model of accounting for
investments.
Section Reference: Measurement - Fair Value through Net Income (FV–NI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

32. Regarding the reporting of investment income under the FV–NI method, for companies reporting
in accordance with ASPE, which of the following statements is true?
a) Interest income must be separated from net gains or losses recognized on financial instruments.
b) Holding gains and losses are always tracked separately from interest and dividend income.
c) Interest income must be separated from dividends recognized on financial instruments.
d) None of these are true.

Answer: a

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33. Under the fair value through net income model, holding gains are
a) recognized in other comprehensive income only.
b) recognized in either net income or other comprehensive income.
c) recognized in net income only.
d) ignored.

Answer: c

34. The fair value through net income model requires that
a) investments are measured at fair value.
b) transaction costs are expensed.
c) investments are measured at fair value and transaction costs are capitalized.
d) investments are measured at fair value and transaction costs are expensed.

Answer: d

35. In January 2020, Haddock Ltd. had purchased an investment for $ 150,000. By December 31, 2020,
the fair market value of that investment had increased by $ 20,000. Assuming this gain was included in
the company's 2020 net income, which accounting method did Haddock use to account for this
investment?
a) cost
b) fair value through other comprehensive income (FV–OCI)
c) fair value through net income (FV–NI)
d) equity

Answer: c

Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for
investments.

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Section Reference: Measurement - Fair Value through Net Income (FV–NI) Model
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
36. On its December 31, 2020, balance sheet, Red Corp. reported a short-term investment in equity
securities, under the fair value through net income model, at $ 330,000. At December 31, 2021, the fair
value of the securities was $ 350,000. What should Red report on its 2021 income statement as a result
of the increase in fair value of the investments during 2021?
a) $ 0.
b) loss on investments of $ 20,000.
c) unrealized gain of $ 20,000.
d) investment income of $ 20,000.

Answer: d

Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for
investments.
Section Reference: Measurement - Fair Value through Net Income (FV–NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 350,000 – $ 330,000 = $ 20,000

37. George Inc. owns bonds that are accounted for under the fair value through net income model. On
December 31, 2020, the bonds have a carrying value of $ 124,365. The fair value at that date is $
123,000. The entry to record the year-end adjustment is
a) Investment Income or Loss........................................... 1,365
FV–NI Investments................................................. 1,365
b) Unrealized Gain or Loss OCI 1,365
FV–NI Investments................................................. 1,365
c) FV–NI Investments......................................................... 1,365
Investment Income or Loss................................... 1,365
d) No adjustment is required.

Answer: a

Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for
investments.
Section Reference: Measurement - Fair Value through Net Income (FV–NI) Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 124,365 – $ 123,000 = $ 1,365 unrealized holding loss

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

38. At December 31, 2020, Silicon Corp.’s stock investment portfolio, which is being accounted for by
the fair value through net income (FV–NI) model, shows a general ledger balance of $ 318,600. It is
determined that the fair value of the securities is actually $ 326,200. The entry to adjust the portfolio
to fair value will include a
a) debit to Investment Income or Loss of $ 7,600.
b) credit to Cash of $ 7,600.
c) debit to FV–NI Investments of $ 7,600.
d) credit to FV–NI Investments of $ 7,600.

Answer: c

39. Masma Corp. began operations in 2020. An analysis of Masma’s equity securities portfolio acquired
in 2020 shows the following totals at the end of the year. Masma accounts for these investments using
the fair value through net income (FV–NI) model.
Total cost $ 182,400
Total fair market value 153,600
Based on this information, what amount should Masma report in its 2020 income statement for
“Investment Income or Loss”?
a) $ 12,800 loss
b) $ 16,000 gain
c) $ 28,800 gain
d) $ 28,800 loss

Answer: d

40. At December 31, 2020, Platinum Corp. has the following equity securities (no significant influence)
that were purchased earlier in 2020, its first year of operation:

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

Cost Market
Security A $ 50,000 $ 51,875
B 70,000 77,500
Totals $ 120,000 $ 129,375
If the investments are being accounted for under the fair value through net income (FV–NI) model, the
total book value of the investment accounts should
a) be decreased by $ 9,375.
b) be increased by $ 9,375.
c) be decreased by $ 20,000.
d) remain unchanged.

Answer: b

41. Application of the cost model to the investment one company makes in another entity’s shares is
straightforward and includes all of the following EXCEPT
a) recognize the cost of the investment at the fair value of shares acquired.
b) unless impaired, report the investment at its fair value at each balance sheet date.
c) recognize dividend income when the entity has a claim to the dividend.
d) when the shares are disposed of, derecognize them and report a gain or loss on disposal in net
income.

Answer: b

42. Under the fair value through other comprehensive income model, unrealized gains and losses are
a) recognized in net income.
b) recognized in other comprehensive income.
c) recognized in either net income or other comprehensive income.
d) ignored.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

Answer: b

43. Accumulated comprehensive income is included as part of

a) retained earnings.
b) net income.
c) shareholders’ equity.
d) unearned revenue.

Answer: c

44. Under the fair value through other comprehensive income model, with recycling, previously
unrealized holding gains and/or losses to the date of disposal are
a) ignored.
b) transferred to retained earnings.
c) transferred to net income.
d) transferred to “Unrealized Gain or Loss – OCI.”

Answer: c

45. Other comprehensive income does NOT include

a) comprehensive income.
b) net income.

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c) unrealized gains resulting from the application of the fair value through other comprehensive
income model.
d) unrealized losses resulting from the application of the fair value through other comprehensive
income model.

Answer: b

46. Accumulated other comprehensive income includes

a) current year's net income.
b) all previous debits to other comprehensive income.
c) all previous credits to other comprehensive income.
d) all previous debits and credits to other comprehensive income.

Answer: d

47. The concept of recycling within the context of investments

a) refers to the transfer of previously unrealized gains or losses to net income.
b) refers to the switch of income between different investments categories.
c) should be used in the fair value through net income model.
d) should not be used in the fair value through other comprehensive income model.

Answer: a

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48. Salmon Corporation purchased an investment in 2020 (an equity investment without significant
influence). The purchase price of $ 94,000 included transaction costs of $ 1,000. Assuming the
transaction costs were capitalized and Salmon follows IFRS, which accounting method did Salmon
use to account for this investment?
a) amortized cost
b) fair value through net income (FV–NI)
c) fair value through other comprehensive income (FV–OCI)
d) equity

Answer: a

49. Realized gains and losses on investment disposals are recognized in net income for all investment
instruments EXCEPT those classified as
a) FV–NI.
b) FV–OCI with recycling.
c) cost/amortized cost.
d) FV–OCI without recycling.

Answer: d

Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of
accounting for investments.
Section Reference: Measurement - Fair Value through Other Comprehensive Income (FV–OCI) Model
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

50. At December 31, 2020, Swift Current Inc. has the following portfolio of common shares in which it
does not have significant influence:
Cost Fair Value
Apple Corp. $ 100,000 $ 120,000
Chester Inc. 200,000 205,000
Dooley Ltd. 300,000 500,000
$ 600,000 $ 825,000

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Assuming Swift Current uses the fair value through other comprehensive income (FV–OCI) model to
account for this portfolio of investments, the most informative entry to record the year-end
adjustment is
a) FV–OCI Investments....................................................... 225,000
Unrealized Gain or Loss–OCI................................. 225,000
b) FV–OCI Investment in Apple Corp................................. 20,000
FV–OCI Investment in Chester Inc................................. 5,000
FV–OCI Investment in Dooley Ltd................................. 200,000
Unrealized Gain or Loss–OCI on Apple Corp........ 20,000
Unrealized Gain or Loss–OCI on Chester Inc........ 5,000
Unrealized Gain or Loss–OCI on Dooley Ltd. 200,000
c) Unrealized Gain or Loss–OCI on Apple Corp................ 20,000
Unrealized Gain or Loss–OCI on Chester Inc................ 5,000
Unrealized Gain or Loss–OCI on Dooley Ltd................ 200,000
FV–OCI Investment in Apple Corp......................... 20,000
FV–OCI Investment in Chester Inc......................... 5,000
FV–OCI Investment in Dooley Ltd......................... 200,000
d) Unrealized Gain or Loss–OCI......................................... 225,000
FV–OCI Investments............................................ 225,000

Answer: b

Difficulty: Medium
Learning Objective: Explain and apply the fair value through other comprehensive income model of
accounting for investments.
Section Reference: Measurement - Fair Value through Other Comprehensive Income (FV–OCI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 120,000 – $ 100,000 = $ 20,000 gain for Apple
$ 205,000 – $ 200,000 = $ 5,000 gain for Chester
$ 500,000 – $ 300,000 = $ 200,000 gain for Dooley

51. Accounting of impairment losses is required for investments that are measured using the
a) cost/amortized cost model.
b) FV–NI model.
c) FV–OCI model.
d) All of these (all of these models require a method of accounting for impairment).

Answer: a

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Bloomcode: Knowledge
AACSB: Analytic

52. Which of the following situations would NOT necessarily indicate the potential impairment of the
underlying securities?
a) The issuing entity is experiencing major financial difficulties.
b) The issuing entity is unable to pay its liabilities.
c) The issuing entity has temporarily halted dividend payments in order to retain cash for future
expansion.
d) The issuing entity is undergoing a major reorganization.

Answer: c

Difficulty: Medium
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment
models.
Section Reference: Measurement - Impairment Models
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic

53. Assuming the revised amount and timing of cash flows for an investment can be reasonably
determined, the incurred loss impairment model uses which discount rate?
a) the investor’s internal rate of return
b) the historical interest rate
c) the current market rate
d) either the historical rate or the current market rate

Answer: d

54. Assuming the revised amount and timing of cash flows for an investment can be reasonably
determined, the expected loss impairment model uses which discount rate?
a) the investor’s internal rate of return
b) the historical interest rate
c) the current market rate
d) either the historical rate or the current market rate

Answer: b

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Difficulty: Easy
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment
models.
Section Reference: Measurement - Impairment Models
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
55. The fair value loss impairment model
a) is used for all investments that are not accounted for as FV–NI.
b) requires a separate impairment test.
c) calculates the impairment loss as the difference between the asset’s fair value and its current
carrying amount.
d) calculates the impairment loss as the difference between the asset’s original cost and its current
carrying amount.

Answer: c

56. On November 1, 2020, Mack Co. purchased a 5-year, 8% bond with a face value of $ 200,000. The
purchase price of $ 184,556 was consistent with a 10% yield. Interest is payable semi-annually on
January 1 and July 1. The bonds mature on January 1, 2022. The amortized cost of the bond on the
maturity date is
a) $ 185,556.
b) $ 195,000.
c) $ 200,000.
d) $ 190,000.

Answer: c

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

57. When one corporation has a controlling interest in another corporation whose shares are not
actively traded, under ASPE, the investment is accounted for using
a) either the consolidation method or the equity method or the cost method.
b) the consolidation method.
c) either the consolidation method or the equity method.
d) either the consolidation method or the equity method or the cost method or the FV–OCI method.

Answer: a
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

58. The accounting for investments in another entity's equity instruments depends mainly on
a) the level of influence the investor is able to exert.
b) the level of influence the investor actually exerts.
c) the quality of earnings of the investee.
d) whether the investee pays dividends.

Answer: a

Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

59. When a public company holds between 20% and 50% of the outstanding common shares of an
investee, which of the following statements applies?
a) The investor should always use the equity method to account for its investment.
b) The investor should use the equity method to account for its investment unless circumstances
indicate that it is unable to exercise "significant influence" over the investee.
c) The investor must use the cost method unless it can clearly demonstrate the ability to exercise
"significant influence" over the investee.
d) The investor should always use the cost method to account for its investment.

Answer: b

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AACSB: Analytic

60. An investor who owns 15% of an entity's voting shares can

a) potentially have influence over the investee if the shares are widely held.
b) always be assumed to have little or no influence over the investee.
c) be assumed to be using the cost model.
d) be assumed to always use the equity method.
Answer: a

61. An investor who owns 11% of an entity's voting shares

a) must use the equity method.
b) would be likely to prepare consolidated statements.
c) may have significant influence over the investee if the shares are closely held.
d) may have significant influence over the investee if the shares are widely held.

Answer: d

62. Olde Corp. accounts for its investment in the common shares of Young Inc. under the equity
method. Olde Corp. should record a cash dividend received from Young as
a) a reduction of the carrying value of the investment.
b) additional paid-in capital.
c) an addition to the carrying value of the investment.
d) dividend income.

Answer: a

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63. Under the equity method of accounting for investments, an investor recognizes its share of the
earnings in the period in which the
a) investor sells the investment.
b) investee declares a dividend.
c) earnings are reported by the investee in its financial statements.
d) investee pays a dividend.

Answer: c

64. Jabba Inc. owns 35% of Hutt Corp., and has significant influence over Hutt. During the calendar
year 2020, Hutt reported net income of $ 300,000 and paid dividends of $ 30,000. Jabba mistakenly
recorded these transactions using the cost method rather than the equity method of accounting.
What effect would this have on Jabba’s investment account, net income, and retained earnings,
respectively?
a) understate, overstate, overstate
b) overstate, understate, understate
c) understate, understate, understate
d) overstate, overstate, overstate

Answer: c

65. When an investor is using the equity method and receives dividends from the investee, the journal
entry will include a
a) credit to Dividend Revenue.
b) credit to Retained Earnings.
c) credit to the Investment account.
d) debit to the Investment account.

Answer: c

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Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
66. When an investor is using the equity method and the investee reports a net loss, the journal entry
will include a
a) debit to the Investment account.
b) debit to Retained Earnings.
c) credit to the Investment account.
d) credit to Investment Income or Loss.

Answer: c

67. When an investor, using the equity method, pays more than its share of the investee’s book value,
the difference is
a) ignored.
b) accounted for on the investor’s books by a debit to Goodwill.
c) accounted for on the investee’s books by a debit to Goodwill.
d) requires that the investor’s Investment account and any investment income from the associate be
adjusted over time.

Answer: d

68. Current IFRS rules for equity investments that are traded in an active market require that they
a) can be accounted for under the cost model.
b) can be accounted for under the fair value through net income model.
c) should generally be accounted for under the fair value through other comprehensive income
model.
d) cannot be accounted for under the fair value through net income model.

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Answer: b

Use the following information for questions 69–72.

The summarized balance sheets of Thunder Bay Corp. and Fort William Corp. at December 31, 2020,
are as follows:
THUNDER BAY CORP.
Balance Sheet
December 31, 2020
Assets........................................................................................................ $ 400,000

Liabilities................................................................................................... $ 50,000
Common shares....................................................................................... 200,000
Retained earnings.................................................................................... 150,000
Total equities............................................................................................ $ 400,000

FORT WILLIAM CORP.

Balance Sheet
December 31, 2020
Assets........................................................................................................ $ 300,000

Liabilities................................................................................................... $ 75,000
Common shares....................................................................................... 185,000
Retained earnings.................................................................................... 40,000
Total equities............................................................................................ $ 300,000

69. If Thunder Bay acquired a 20% interest in Fort William on December 31, 2020, for $ 65,000 and the
equity method of accounting for the investment were used, the amount of the debit to Investment in
Fort William Corp. would have been
a) $ 65,000.
b) $ 60,000.
c) $ 45,000.
d) $ 37,000.

Answer: a

Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates

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CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 65,000, acquisition cost

70. If Thunder Bay acquired a 30% interest in Fort William on December 31, 2020, for $ 75,000 and the
equity method of accounting for the investment were used, the amount of the debit to Investment in
Fort William Corp. would have been
a) $ 90,000.
b) $ 75,000.
c) $ 67,500.
d) $ 60,000.

Answer: b

71. If Thunder Bay acquired a 20% interest in Fort William on December 31, 2020, for $ 45,000, and
during 2021 Fort William reported net income of $ 25,000 and paid a total cash dividend of $ 10,000,
applying the equity method would give a debit balance in the Investment in Fort William Corp.
account at the end of 2021 of
a) $ 37,000.
b) $ 45,000.
c) $ 48,000.
d) $ 50,000.

Answer: c

72. If Thunder Bay acquired a 30% interest in Fort William on December 31, 2020, for $ 67,500 and
during 2021 Fort William reported net income of $ 25,000 and paid a total cash dividend of $ 30,000,
applying the equity method would give a debit balance in the Investment in Fort William Corp.

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account at the end of 2021 of

a) $ 67,500.
b) $ 66,000.
c) $ 62,500.
d) $ 58,500.

Answer: b

Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 67,500 + ($ 25,000 ×.3) – ($ 30,000 ×.3) = $ 66,000

73. On January 2, 2020, Fidel Corp. purchased 200 of the 1,000 outstanding common shares of Rindu
Ltd. for $ 60,000. During 2020, Rindu declared total cash dividends of $ 10,000 and reported net
income for the year of $ 40,000. If Fidel uses the equity method of accounting for its investment in
Rindu, Fidel’s Investment in Rindu Ltd. account at December 31, 2020 should be
a) $ 68,000.
b) $ 66,000.
c) $ 60,000.
d) $ 58,000.

Answer: b

Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 60,000 + ($ 40,000 ×.2) – ($ 10,000 ×.2) = $ 66,000

Use the following information for questions 88–89.

During calendar 2020, Davel Corp. reported net income of $ 45,000 and paid total cash dividends of $
15,000. Ryan Inc. owns 2,250 of the 7,500 outstanding shares of Davel and exercises significant
influence.

74. What amount should Ryan show in the investment account at December 31, 2020 if the beginning
of the year balance in the account was $ 60,000?
a) $ 69,000

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

b) $ 73,500
c) $ 60,000
d) $ 90,000

Answer: a

75. How much income from its investment in Davel should Ryan report in 2020?
a) $ 45,000
b) $ 15,000
c) $ 13,500
d) $ 22,500

Answer: c

76. On December 31, 2020, Ryan Corp. acquired a 40% interest in Gosling Corp. for $ 315,000. During
2021, Gosling reported net income of $ 200,000 and paid total cash dividends of $ 50,000. Assuming
Ryan uses the equity method, at December 31, 2021, the balance in the investment account should be
a) $ 395,000.
b) $ 295,000.
c) $ 375,000.
d) $ 255,000.

Answer: c

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Feedback: $ 315,000 + ($ 200,000 x 40%) - ($ 50,000 x 40%) = $ 375,000

Use the following information for questions 77–78.

Red Corp. owns 3,000 of the 10,000 outstanding common shares of Grey Corp. and exercises
significant influence. During 2020, Grey reported net income of $ 120,000 and paid total cash
dividends of $ 40,000.

77. If the beginning 2020 balance in the Investment in Grey Corp. account was $ 180,000, the balance
at December 31, 2020 should be
a) $ 260,000.
b) $ 204,000.
c) $ 180,000.
d) $ 132,000.

Answer: b

78. Red Corp. should report investment revenue for 2020 of

a) $ 12,000.
b) $ 24,000.
c) $ 36,000.
d) $ 48,000.

Answer: c

Use the following information for questions 79–81.

On January 1, 2020, Abalone Ltd. acquired 30% of Flounder Corp.'s common shares for $ 240,000.
During 2020, Flounder reported net income of $ 100,000 and paid total dividends of $ 60,000.
Abalone's 30% interest in Flounder gives Abalone the ability to exercise significant influence over their

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operating and financial policies. During 2021, Flounder reported net income of $ 150,000 and paid
total dividends of $ 30,000 on April 1 and $ 40,000 on October 1. On July 1, 2021, Abalone sold half of
its shares in Flounder for $ 158,000 cash.

79. Before income taxes, what income should Abalone include in its 2020 income statement as a result
of this investment?
a) $ 100,000
b) $ 60,000
c) $ 30,000
d) $ 18,000

Answer: c

80. The carrying amount of this investment in Abalone's December 31, 2020, statement of financial
position should be
a) $ 252,000.
b) $ 240,000.
c) $ 270,000.
d) $ 275,000.

Answer: a

81. The gain on disposal of this investment in Abalone's 2021, income statement should be
a) $ 8,000.
b) $ 20,750.
c) $ 25,250.
d) $ 32,000.

Answer: c

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Difficulty: Hard
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: $ 252,000 – ($ 30,000 × 30%) + ($ 150,000 × 50% × 30%) = $ 265,500
$ 158,000 – ($ 265,500 ÷ 2) = $ 25,250

82. On January 1, 2020, Scallop Corp. purchased 25% of Prawn Corp.'s common shares; no goodwill
resulted from the purchase. Scallop correctly uses the equity method to account for this investment at
equity. The Investment in Associate account related to the Scallop investment was reported on the
December 31, 2020, statement of financial position at $ 360,000. Prawn had reported net income of $
225,000 for calendar 2020, and paid dividends totalling $ 90,000 during 2020. How much did Scallop
pay for its 25% interest in Prawn?
a) $ 393,750
b) $ 382,500
c) $ 360,000
d) $ 326,250

Answer: d

Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $ 360,000 – ($ 225,000 × 25%) + ($ 90,000 × 25%) = $ 326,250

83. When one corporation has control over another corporation, the investor corporation
a) is referred to as an associate.
b) is referred to as the subsidiary.
c) can determine the investee’s strategic operating and financing policies.
d) must have obtained at least 50% of the investee’s issued common shares.

Answer: c

Difficulty: Easy
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments - Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

84. An investor that has subsidiaries

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a) is required to prepare consolidated financial statements under IFRS.

b) is required to prepare consolidated financial statements under ASPE.
c) does not have to prepare consolidated financial statements under IFRS.
d) ignores the noncontrolling interest on the consolidated financial statements.

Answer: a
Difficulty: Easy
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments - Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

85. If a parent company owns 90% of a subsidiary’s outstanding shares, the parent should generally
account for the subsidiary's income under the
a) cost/amortized cost model.
b) fair value through net income model.
c) fair value through other comprehensive model.
d) consolidation method.

Answer: d

86. When the investor has control over the investee, the reporting model to be used is the
a) cost model.
b) consolidation model.
c) market value model.
d) equity method.

Answer: b

87. When one corporation acquires control of another entity, the investor corporation is referred to as
the parent and the investee corporation as the

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a) subsidiary.
b) joint venture.
c) associate.
d) child.

Answer: a

88. Under IFRS, which of the following is NOT a condition for an investment to be classified as current?
a) It is held primarily for trading purposes.
b) It is a cash equivalent.
c) It must be expected to be sold or realized within 12 months from the statement of financial position
date.
d) It must be accounted for under the cost model.

Answer: d

Difficulty: Easy
Learning Objective: Explain how investments are presented and disclosed in the financial statements,
noting how this facilitates analysis.
Section Reference: Presentation, Disclosure, and Analysis
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

89. The objectives of disclosures required for investments in debt and equity investments do NOT
include
a) how significant the investments are to the investor's financial position and performance.
b) whether the investments are classified as current or long-term.
c) the nature and extent of the risks that the investor faces as a result of the investments.
d) how the risks that the investor faces as a result of the investments are managed.

Answer: b

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AACSB: Analytic

90. The disclosure requirements for private entities are usually less extensive as compared to those for
public entities because
a) investors in private entities are expected to have less information about the company.
b) investors in private entities are expected to have more information about the company.
c) investors in private entities tend to be more sophisticated.
d) investors in private entities tend to be less sophisticated.

Answer: b

91. The standards relating to consolidation differ under ASPE and IFRS. Which of the following
statements best describes the difference?
a) IFRS requires consolidation whereas ASPE offers a choice of methods.
b) ASPE requires consolidation whereas IFRS offers a choice of methods.
c) Consolidation is specifically excluded as one of the choices under ASPE.
d) Consolidation is specifically excluded as one of the choices under IFRS.

Answer: a

92. Which of the following is NOT required to report for associates accounted for using the equity
method?
a) the fair value of any of these investments that has a price quoted in an active market
b) separate disclosure of income related to equity-accounted associates
c) the investor’s strategy and motivation for holding equity ownership in the associate
d) information about associates’ year ends that are different from the investor’s year end

Answer: c

Difficulty: Easy

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Learning Objective: Explain how investments are presented and disclosed in the financial statements,
noting how this facilitates analysis.
Section Reference: Presentation, Disclosure, and Analysis
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

93. Financial disclosures required regarding acquisitions require that

a) readers are able to relate the investment category on the SFP to the investment income reported on
the income statement.
b) readers are able to understand the effects of the accounting methods that are used for different
categories of investments.
c) major acquisition dates are disclosed, as the SFP contains all assets, and the P&L only contains
income earned by the subsidiary after it was acquired.
d) all of these describe financial disclosures required regarding acquisitions.

Answer: d

94. Which of the following is a reason for the differences in the disclosure requirements for
investments in associates under IFRS and ASPE?
a) ASPE requires that the associate must be a private entity.
b) ASPE does not include an "associates" category.
c) ASPE allows the use of methods other than the equity method.
d) ASPE does not allow the equity method.

Answer: c

Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are
expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic

95. The standards relating to the treatment of transaction costs differ under ASPE and IFRS. Which of
the following statements best describe the difference?
a) ASPE requires that transaction costs are capitalized, except for those investments that are

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accounted for under the fair value through net income model.
b) ASPE requires that transaction costs are expensed whenever cost-based measures are used.
c) IFRS requires that transaction costs are capitalized except for those investments that are accounted
for under the fair value through net income model.
d) IFRS requires that all transaction costs are capitalized.
Answer: c

96. The standards relating to the treatment of interest and dividend income differ under ASPE and
IFRS. Which of the following statements is INCORRECT?
a) IFRS requires the use of the effective-interest method when interest income is to be reported
separately.
b) IFRS requires certain dividends to be recognized in other comprehensive income.
c) ASPE allows the use of either the straight-line or effective-interest method.
d) When using the equity method, IFRS allows a dividend from an investee to be recorded as income,
while ASPE does not.

Answer: d

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EXERCISES

Ex. 9-97 Shares acquired on margin

What does it mean when an investment in shares is acquired on margin and how is the asset
recorded?

Solution 9-97
Investments in shares acquired on margin means that the investor pays only part of the purchase
price to acquire the shares. The rest is financed by the broker. Since the shares legally belong to the
investor, the asset is recorded at the full share price and a liability to the broker for the amount that
was financed is also recognized.

Ex. 9-98 Fair value of bonds

What is the fair value of a $ 100,000 face value bond priced at
a) 102
b) 100
c) 98

Solution 9-98
d) $ 100,000 x 102% = $ 102,000
e) $ 100,000 x 100% = $ 100,000
f) $ 100,000 x 98% = $ 98,000

Difficulty: Medium
Learning Objective: Understand the nature of and basic accounting for investments, including which
types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 9-99 Cost/amortized cost model – ASPE versus IFRS 9

When is the cost/amortized cost model used under ASPE versus IFRS 9?

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Solution 9-99
ASPE uses the cost/amortized cost model for most investments, excluding equity investments where
an active market exists for trading the shares and derivatives. IFRS 9 uses this model for debt
instruments where the entity’s business model is to hold the investments to maturity.

Ex. 9-100 Investment in shares of other entities – cost model

Manson Corp. acquired 10,000 shares of Digicex Corp. on July 1, 2020 at $ 15 per share. There is no
quoted market price for Digicex shares as it is a private company. Manson reports under ASPE and has
elected to account for the investment using the cost method. On September 1, Digicex declared and
paid a $ 0.75 per share dividend and on December 31, Manson sells the shares at $ 12 per share.

Instructions
Prepare the journal entries to record the above transactions.

Solution 9-100

July 1 Other Investments 150,000

Cash 150,000
(10,000 shares × $ 15.00) = $ 150,000

Sept 1 Cash 7,500

Dividend Revenue 7,500
(10,000 shares × $ 0.75)

Dec 31 Cash 120,000

Loss on Disposal of Investments –
Cost/Amortized Cost 30,000
Other Investments 150,000
(10,000 shares × $ 12) - (10,000 × $ 15) = $ 30,000 loss

Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

Ex. 9-101 Motivation for investments

List three reasons why an organization would make investments.

Solution 9-101
1. for the returns provided (interest, dividends, capital appreciation)
2. to develop a special relationship with a supplier or customer
3. to establish a long-term operating relationship with the investee (usually by influencing or
controlling the investee)

Ex. 9-102 Types of companies that have investments

Consider the financial statements of a publishing house, a reinsurance provider, and a charitable
foundation. What types and proportions of investments would you expect to find on the financial
statements of these companies?

Solution 9-102
A publishing house is unlikely to have a significant portion of investments. Their main activity is selling
publications. If they do business in a foreign currency, they may hold some investments to hedge
foreign exchange risk.

A reinsurance provider will hold a significant proportion of investments as movement in the value of
these investment pools is meant to assist in possible payment of insurance policies. Investments
would be the main asset of these companies.

A charitable foundation is in place solely to finance the objectives of the charity with which it is
affiliated. If it holds investments they are likely in the form of endowments that have been gifted to it
by donors over its lifetime. Charitable foundations are not in the business of actively trading
investments.

Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which
types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
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Ex. 9-103 Types of companies that have investments

Two types of companies that carry significant amounts of investments are banks and pension plans.
Explain how these companies use their investment holdings to add value for their customers.

Solution 9-103
Banks add value by investing other people’s money and earning a return that is higher than their cost
of capital. Their expertise lies in understanding how and when to buy and sell shares and debt
instruments in order to maximize profits. They often buy and sell shares and debt instruments over
the short term for profit (referred to as trading).

Pension plans collect money from employees and pay out funds as pensions when employees retire.
In order to maximize the payout on retirement, pension plans generally invest the money in the
interim and try to maximize the value of investments.

Ex. 9-104 Application of cost/amortized cost method

Luke Corporation purchased $ 60,400 of 6-year, 7% bonds of Reed Inc. for $ 57,566 to yield an 8%
return, and classified the purchase as an amortized cost method investment. The bonds pay interest
semi-annually.
a) Assuming Luke Corporation applies IFRS, prepare its journal entries for the purchase of the
investment and receipt of semi-annual interest and discount amortization for the first two
interest payments that will be received.
b) Assuming Luke Corporation applies ASPE and has chosen the straight-line method of discount
amortization, prepare the same three entries requested in part a).

Solution 9-104
a) Bond Investment at Amortized Cost.................................... 57,566
Cash................................................................................ 57,566
To record the purchase of the investment

Cash........................................................................................ 2,114
Bond Investment at Amortized Cost.................................... 189
Interest Income.............................................................. 2,303
To record the receipt of the semi-annual interest payment
Cash: ($ 60,400 x 7% x 6/12) = $ 2,114
Interest Income ($ 57,566 x 8% x 6/12) = $ 2,303

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Cash........................................................................................ 2,114
Bond Investment at Amortized Cost.................................... 196
Interest Income.............................................................. 2,310
To record the receipt of the semi-annual interest payment
Interest Income ([$ 57,566 + $ 189] x 8% x 6/12) = $ 2,310

b) Bond Investment at Amortized Cost.................................... 57,566

Cash................................................................................ 57,566
To record the purchase of the investment

Cash........................................................................................ 2,114
Bond Investment at Amortized Cost.................................... 236
Interest Income.............................................................. 2,350
To record the receipt of the semi-annual interest payment
Cash: ($ 60,400 x 7% x 6/12) = $ 2,114
Interest periods to maturity: 6 x 2 = 12
Amortization each interest period: $ 2,834 ÷12 = $ 236

Ex. 9-105 Investment in debt securities at a premium

On April 1, 2020, Margarita Corp. purchased 6%, $ 120,000 (par value) bonds for $ 124,725 plus accrued
interest. Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2025. Margarita uses
the amortized cost model to account for this investment, and intends to hold the bonds to maturity.
Margarita Corp. follows ASPE.

Instructions
a) Prepare the journal entry to record the purchase.
b) The bonds are sold on November 1, 2021 at 103 plus accrued interest. Amortization was recorded
when interest was received by the straight-line method. Prepare all entries required to properly
record the sale. Round values to the nearest dollar, if necessary.
Solution 9-105
a) Bond Investment at Amortized Cost.................................... 124,725
Interest Income ($ 120,000 ×.06 × 3 ÷ 12)............................. 1,800
Cash................................................................................ 126,525
Premium on bond: $ 124,725 – $ 120,000 = $ 4,725
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b) Interest Income ($ 4,725 × 4 ÷ 63)......................................... 300

Bond Investment at Amortized Cost............................ 300

Cash ($ 120,000 ×.06 × 4 ÷ 12)................................................ 2,400

Interest Income.............................................................. 2,400

Cash........................................................................................ 123,600
Gain on Disposal of Investments – Cost/Amortized Cost 300
Bond Investment at Amortized Cost............................ 123,300
$ 124,725 – ($ 4,725 x 19 ÷ 63)

Ex. 9-106 Investment in debt securities at a premium

On January 1, 2020, Genevieve Ltd. purchased 8%, $ 100,000 (par value) bonds for $ 108,530. The
bonds were purchased to yield 6%. Interest is paid on July 1 and January 1 and the bonds mature on
January 1, 2025. Genevieve uses the amortized cost method and the effective-interest method to
amortize the premium. Genevieve has a year end of December 31 and follows ASPE.

Instructions
a) Prepare the journal entry to record the purchase.
b) Prepare the journal entries for the receipt of interest and amortization of the premium for the
remainder of 2020. Round all values to the nearest dollar.
c) To the nearest dollar, what is the carrying value of the investment at the end of 2021?

Solution 9-106
a) Bond Investment at Amortized Cost.................................... 108,530
Cash................................................................................ 108,530

b) July 1, 2020
Cash........................................................................................ 4,000
Interest Income.............................................................. 3,256
Bond Investment at Amortized Cost............................ 744
$ 108,530 ×.06 ×.5 = $ 3,256

December 31, 2020

Interest Receivable................................................................ 4,000
Interest Income.............................................................. 3,234
Bond Investment at Amortized Cost............................ 766

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($ 108,530 – $ 744) ×.06 ×.5 = $ 3,234

c) ($ 108,530 – $ 744 – $ 766) ×.06 ×.5 = $ 3,211; $ 4,000 – $ 3,211 = $ 789

($ 108,530 – $ 744 – $ 766 – $ 789) ×.06 ×.5 = $ 3,187; $ 4,000 – $ 3,187 = $ 813
Carrying value at the end of 2021:
($ 108,530 – $ 744 – $ 766 – $ 789 – $ 813) = $ 105,418

Ex. 9-107 Investments in debt securities

Presented below are unrelated cases involving investments in debt securities:
Case 1:
A company owns another firm's debt securities in the form of bonds. The bonds were acquired at a
discount and are accounted for under the amortized cost model.
Case 2:
An investment in notes receivable that had been held for several years is being sold. The investment
was accounted for under the amortized cost model.
Case 3:
A portfolio of debt investments has been determined to be impaired.

Instructions
Indicate the accounting required and/or available for each individual case.

Solution 9-107
Case 1: The bonds would have been recognized at their fair value plus transaction costs. The discount
would be amortized to net income over the life of the bond.

Case 2: The accrued interest and discount or premium would have to be updated to the date of
disposal. The resulting gain or loss (difference between carrying value and sales proceeds) would be
recognized in net income and the investment would be removed from the investor's books.

Case 3: Depending on whether ASPE or IFRS is followed, once the investment has been determined to
be impaired, three different models are available to recognize the loss: the incurred loss impairment
model, the expected loss impairment model, and the fair value loss impairment model.

Difficulty: Hard
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment
models.
Section Reference: Measurement - Impairment Models
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CPA: Communication
CPA: Financial Reporting
Bloomcode: Evaluate
AACSB: Communication

Ex. 9-108 Cost and equity methods

Compare the cost and equity methods of accounting for investments in shares subsequent to
acquisition (when permitted by ASPE).

Solution 9-108
Under the cost method, the investment is originally recorded at fair value plus any direct transaction
costs, i.e., cost. The investment remains at this value unless the investment becomes impaired.
Dividends are reported as income.
Similarly, under the equity method, the investment is originally recorded at cost. Subsequently,
however, the investment account is adjusted for the investor's share of the investee's net income or
loss and this amount is recognized in the net income of the investor. Dividends received from the
investee are recorded as reductions in the investment account.

Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement - Cost/Amortized Cost Model
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication

Ex. 9-109 Fair value through net income method

On October 1, Whiteside Ltd. purchased a 7% bond with a face value of $ 1,000 for trading purposes,
accounting for the investment at fair value through net income. The bond was priced at 1.023 to yield
Whiteside 5%, and pays interest annually each October 1. Whiteside has a December 31 year end, and
at this date, the bond’s fair value was $ 1,050. Assume Whiteside applies IFRS and follows a policy of
not reporting interest income separately from investment income.

Instructions
a) Prepare Whiteside’s entry for the purchase of the investment.
b) Prepare Whiteside’s entry for the December 31 interest accrual.
c) (i) Prepare Whiteside’s entry for the year-end fair value adjustment. (ii) Assume Whiteside applies
ASPE, uses the effective-interest method, and follows a policy of reporting interest income
separately.

Solution 9-109
a)
FV—NI Investments................................................................ 1,023
Cash................................................................................ 1,023
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To record purchase of the investment

Cash = ($ 1,000 x 1.023) = $ 1,023

b)
Interest Receivable................................................................ 17.50
Investment Income or Loss........................................... 17.50
To record the December 31 interest accrual
Investment Income or Loss = (7% x $ 1,000 x 3/12) = $ 17.50

c) (i)
FV—NI Investments................................................................ 27.00
Investment Income or Loss = ($ 1,050 – $ 1,023)......... 27.00
To record the year-end fair value adjustment

(ii) Under ASPE

Interest Receivable................................................................ 17.50
FV—NI Investments………………………… 4.71
Interest Income.............................................................. 12.79
To record the December 31 interest accrual
Interest Receivable = 7% x $ 1,000 x 3/12 = $ 17.50
Interest Income = 5% x $ 1,023 x 3/12 = $ 12.79

FV—NI Investments................................................................ 31.71

Unrealized Gain or Loss................................................. 31.71
To record the year-end fair value adjustment
Unrealized Gain or Loss = $ 1,050 – ($ 1,023 – $ 4.71) = $ 31.71

Ex. 9-110 Cost and equity methods

Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment
Income account by each of the following transactions, assuming Norah Corp. uses
a) the Fair Value through Net Income(FV–NI) method and
b) the equity method for accounting for its investments in Jessica Ltd.
a) FV–NI Method b) Equity Method
Investment Dividend Investment Investment
Transaction Account Revenue Account Income or
Loss
——————————————————————————————————————————
1. At the beginning of Year 1, Norah bought
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30% of Jessica's common shares at their

book value. At this time, the book value of
all Jessica's common shares was
$ 450,000.
——————————————————————————————————————————
2. During Year 1, Jessica reported $ 25,000
net income and paid a total of $ 12,500 in
dividends.
——————————————————————————————————————————
3. During Year 2, Jessica reported $ 10,000
net income and paid a total of $ 12,500
in dividends.
——————————————————————————————————————————
4. During Year 3, Jessica reported a net loss
of $ 6,000 and paid a total of $ 2,500 in
dividends.
——————————————————————————————————————————
5. Indicate the Year 3 ending balance in the
Investment account, and cumulative totals
for Years 1, 2, and 3 for dividend income
and investment income.
——————————————————————————————————————————

Solution 9-110
b) Equity Method a) FV–NI Method
Investment Investment
Investment Dividend
Transaction Account Account
Income or Revenue
Loss
——————————————————————————————————————————
1. 135,000 135,000
——————————————————————————————————————————
2. 7,500 7,500
3,750 (3,750)
——————————————————————————————————————————
3. 3,000 3,000
3,750 (3,750)
——————————————————————————————————————————
4. (1,800) (1,800)
750 (750)
——————————————————————————————————————————
5. 135,000 8,250 135,450 8,700
——————————————————————————————————————————

Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for
investments.

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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

Section Reference: Measurement - Fair Value through Net Income (FV–NI) Model
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 9-111 Fair value through other comprehensive income investments – entries
Lekan Corp provided you with the following information about its investment in Adoweye Inc. shares
purchased May 2020, and accounted for using the FV–OCI method
Cost $ 29,500
Fair value, December 31, 2020 $ 30,900
Fair value, December 31, 2021 $ 23,800
Fair value, December 31, 2022 $ 26,900

Instructions
a) Prepare the adjusting journal entries needed on December 31, 2020, 2021, and 2022.
b) Determine the balance in the accumulated other comprehensive income on the statement of
financial position on each of December 31, 2020, 2021, and 2022.
c) Assume Lekan sold its investment in Adoweye Inc. on February 13, 2023, for $ 28,100. Prepare the
journal entry(ies) needed on this date if (1) the FV–OCI method required recycling, and (2) the FV–
OCI method did not require recycling.

Solution 9-111
a)
December 31, 2020
Fair Value—OCI Investments................................................. 1,400
Unrealized Gain or Loss - OCI........................................ 1,400

December 31, 2021

Unrealized Gain or Loss - OCI................................................ 7,100
Fair Value—OCI Investments......................................... 7,100

December 31, 2022

Fair Value—OCI Investments................................................. 3,100
Unrealized Gain or Loss - OCI........................................ 3,100

Dec. Dec. 31/22

Dec. 31/21
31/20
Fair value of FV–OCI investments $ 30,900 $ 23,800 $ 26,900
Original cost of FV–OCI investments 29,500 29,500 29,500
Balance in accumulated other comprehensive income $ 1,400 $ (5,700) $ (2,600)
Proof of balance:
Entry, Dec. 31/20 $ 1,400 $ 1,400 $ 1,400
Entry, Dec. 31/21 0 (7,100) (7,100)
Entry, Dec. 31/22 0 0 3,100

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Balance at year end $ 1,400 $ (5,700) $ (2,600)

b) Balance at year-end:
December 31, 2020 $ 1,400
December 31, 2021 $ (5,700)
December 31, 2022 $ (2,600)

c) Entries to record sale in 2023

February 13, 2023
Fair Value–OCI Investments.................................................. 1,200
Unrealized Gain or Loss - OCI........................................ 1,200
Unrealized Gain or Loss ($ 28,100 – $ 26,900) = $ 1,200
To bring the investments to their fair value

February 13, 2023

Cash........................................................................................ 28,100
Fair Value—OCI Investments......................................... 28,100
To record the proceeds of disposal

February 13, 2023

Loss on Disposal of Investments – FV - OCI.......................... 1,400
Unrealized Gain or Loss - OCI........................................ 1,400

(1) With recycling

February 13, 2023

Retained Earnings.................................................................. 1,400
Accumulated Other Comprehensive Income .............. 1,400

(2) Without recycling

Unrealized Gain or Loss ($ 29,500 – $ 28,100) = $ 1,400

Ex. 9-112 Incurred loss, expected loss, and impairment

Tyne Corporation owns corporate bonds at December 31, 2020, accounted for using the amortized
cost model. These bonds have a par value of $ 864,000 and an amortized cost of $ 851,000. After an
impairment review was triggered, Tyne determined that the discounted impaired cash flows are $
796,500 using the current market rate of interest, but are $ 793,000 using the market rate when the

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bonds were first acquired. The company follows a policy of directly reducing the carrying amount of
any impaired assets.

Instructions
a) Assuming Tyne Corporation is a private enterprise that applies ASPE, prepare any necessary
journal entry(ies) related to the impairment at December 31, 2020.
b) Assuming Tyne Corporation is a private enterprise that applies ASPE, prepare any necessary
journal entry(ies) related to a December 31, 2021, fair value of $ 821,000 and an adjusted carrying
amount at that date of $ 801,000.
c) Assuming Tyne applies IFRS and has adopted IFRS 9, prepare any necessary journal entry related
to the impairment at December 31, 2020.
d) Assuming Tyne applies IFRS and has adopted IFRS 9, prepare any necessary journal entry(ies)
related to a December 31, 2021 fair value of $ 821,000 and an adjusted carrying amount at that
date of $ 801,000.

Solution 9-112
a) December 31, 2020
Loss on Impairment............................................................... 54,500
Bond Investment at Amortized Cost............................ 54,500
Bond Investment at Amortized Cost ($ 851,000 – $ 796,500) = $ 54,500
Under ASPE, the carrying amount is reduced to the higher of the discounted cash flow using a
current market rate or the bond’s net realizable value. This latter amount is not provided in this
situation.

b) December 31, 2021

Bond Investment at Amortized Cost.................................... 20,000
Recovery of Loss from Impairment.............................. 20,000
Recovery of Loss from Impairment ($ 821,000 – $ 801,000) = $ 20,000

c) December 31, 2020

Loss on Impairment............................................................... 58,000
Bond Investment at Amortized Cost............................ 58,000
Bond Investment at Amortized Cost ($ 851,000 – $ 793,000) = $ 58,000
Under IFRS 9, the carrying amount of a debt instrument is reduced to the discounted remaining
estimated cash flows using the historic discount rate.

d) December 31, 2021

Allowance for Investment Impairment................................ 20,000
Recovery of Loss from Impairment 20,000
Recovery of Loss from Impairment ($ 821,000 – $ 801,000) = $ 20,000

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Bloomcode: Application
Bloomcode: Knowledge
AACSB: Analytic

Ex. 9-113 Significant influence

Julep Corporation purchases a 25% interest in Orange Corporation on January 2, 2020, for $ 800. At
that time, the carrying amount of Orange’s net assets was $ 2,952. Any excess of the cost of the
investment over Julep’s share of Orange’s carrying amount can be attributed to unrecorded
intangibles with a useful life of 20 years. Orange declared and paid a dividend of $ 16 and reported net
income of $ 52 for its year ended December 31, 2020.

Instructions
Prepare Julep’s 2020 entries to record all transactions and events related to the investment in its
associate. Assume Julep is a publicly accountable enterprise that applies IFRS.

Solution 9-113
January 2, 2020
Investment in Associate........................................................ 800
Cash................................................................................ 800

December 31, 2020

Cash........................................................................................ 4
Investment in Associate................................................ 4
Dividend received from associate

December 31, 2020

Investment in Associate........................................................ 13
Investment Income or Loss........................................... 13
Julep’s share of associate’s net income

December 31, 2020

Investment Loss..................................................................... 3
Investment in Associate................................................ 3
Amortization of Orange’s unrecognized intangible assets

Calculations:

Cost of 25% investment in Orange Corp. shares $ 800

25% of Orange Corp.’s carrying amount (25% X $ 2,952) 738
Payment in excess of book value of Orange Corp. 62
Fair value allocation to unrecorded intangibles (62)
Goodwill (unexplained excess) $0

Annual amortization of excess payment for unrecorded intangibles

$ 62 ÷ 20-year remaining life = $ 3 per year

Cash = ($ 16 x 25%) = $ 4
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Investment Income or Loss = ($ 52 x 25%) = $ 13

Ex. 9-114
Charles Inc. purchased 30% of Nassar Corporation’s 29,000 outstanding common shares at a cost of $
15 per share on January 3, 2020. The purchase price of $ 15 per share was based solely on the book
value of Nassar’s net assets. On September 21, Nassar declared and paid a cash dividend of $ 37,800.
On December 31, Charles’s year end, Nassar reported net income of $ 82,000 for the year. Nassar
shares had a fair value of $ 14.75 per share at December 31. Charles Inc., a private Canadian
corporation, applies ASPE.

Instructions
Under the assumption that the 30% holding of Nassar does not give Charles significant influence over
Nassar, identify the possible accounting methods Charles could use under ASPE to account for its
investment. Prepare all required 2020 entries under each acceptable method.

Solution 9-114
FV–NI Method:
January 3, 2020
FV—NI Investments................................................................ 130,500
Cash................................................................................ 130,500
Cash (29,000 x 30%) = 8,700 shares x $ 15 = $ 130,500

September 21, 2020

Cash........................................................................................ 11,340
Dividend Revenue.......................................................... 11,340

December 31, 2020

Unrealized Gain or Loss......................................................... 2,175
FV—NI Investments........................................................ 2,175
Cash ($ 37,800 x 30%) = $ 11,340
FV (8,700 shares x $ 14.75) = 128,325
Carrying amount = 130,500
Adjustment required = $ (2,175)

Cost Method:
January 3, 2020
Other Investments................................................................. 130,500
Cash................................................................................ 130,500

September 21, 2020

Cash........................................................................................ 11,340
Dividend Revenue.......................................................... 11,340

December 31, 2020

No Entries

Ex. 9-115 Significant influence

Describe how to determine if an investment results in significant influence.

Solution 9-115
If the ownership is less than 20%, it is presumed that the investor does not have significant influence.
However, if there is evidence indicating that such influence exists, such as the investor having seats on
the board of directors, then the investment should be accounted for as one with significant influence.
If the ownership is 20% or greater, then it is presumed the investor has significant influence. If the
facts of the situation indicate that there is not significant influence, such as the existence of a larger
shareholder and the investor having no seats on the board of directors, then the investment should be
accounted for as one without significant influence.

Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication

Ex. 9-116 Investment in equity securities

On January 1, 2020, Sally Corp. acquired 30% of Wally Ltd.’s common shares for $ 500,000. At that
time, Wally had 1 million no par common shares issued and outstanding. During 2020, Wally paid total
cash dividends of $ 220,000, and later declared and issued a 5% common stock dividend when the
market value was $ 2 per share. Wally's net income for 2020 was $ 480,000. Sally is using the equity
method to account for this investment. What should be the balance in Sally’s investment account at
the end of 2020?

Solution 9-116
Cost......................................................................................... $ 500,000
Share of net income (.3 × $ 480,000)..................................... 144,000
Share of dividends (.3 × $ 220,000)....................................... (66,000)

$ 578,000

Ex. 9-117 True-false questions

Mark T or F in the left margin opposite the question number.

When one entity (investor) acquires the shares of another entity (investee) and the investment results
in significant influence:
___ 1. The investor may use the equity method to account for the investment if certain conditions
are met and ASPE is followed.
___ 2. Under IFRS, the investment would generally require more extensive disclosures.
___ 3. The investor may use the cost method to account for the investment if certain conditions are
met and IFRS is followed.

When an investor follows IFRS in accounting for its investments:

___ 4. Transaction costs must be capitalized except when the investment is accounted for under the
fair value through net income model.
___ 5. Gains and losses are always recognized in net income.
___ 6. Investments in subsidiaries must be accounted for under the equity method.
___ 7. Reclassifications between measurement models are allowed in rare circumstances.

Solution 9-117
1. T

2. T

3. F

4. T

5. F

6. F

7. T

Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates

Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments - Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Ex. 9-118
Hanuman Corp is a medium-sized corporation that has long dominated their market. With a strong
cash-flow position, they have decided to invest excess cash strategically. In particular, Hanuman
made periodic investments with their main supplier, Shiva. Although Hanuman currently owns 18% of
the common shares of Shiva, it does not yet have significant influence over the operations of this
investee company. Hanuman accounts for its investments in Shiva using IFRS 9 and the fair value
through other comprehensive income model without recycling.

The controller has gathered the following information about relevant transactions and requests your
assistance in preparing required adjusting entries:
1. In 2020, Hanuman acquires shares of Ahimsa Corp and Metta Ltd, for short-term trading
purposes. Hanuman purchased 100,000 shares of Ahimsa for $ 1.2 million and the shares
currently have a fair value of $ 1.4 million. Hanuman’s investment in Metta has not been
profitable: the company acquired 45,000 shares of Metta at $ 20 per share and they currently have
a fair value of $ 634,500.
2. Before 2020, Hanuman had invested $ 22.4 million in Shiva and, at December 31, 2019, the
investment had a fair value of $ 21.3 million. While Hanuman did not sell or purchase any Shiva
shares this year, Hanuman declared and paid a dividend totalling $ 2.2 million on all its common
shares, and reported 2020 net income of $ 13.6 million. Hanuman’s 18% ownership of Shiva has a
December 31, 2020, fair value of $ 21,405,000.

Instructions
a) Prepare the appropriate adjusting entries for Hanuman as at December 31, 2020.
b) Prepare the dividend and adjusting entries for the Shiva investment, assuming that Hanuman’s
18% interest results in significant influence over Shiva’s activities.

Solution 9-118
a) Adjusting entries for Hanuman as at December 31, 2020:
Investment Income or Loss................................................... 65,500
FV – NI Investments........................................................ 65,500
To adjust the investments to their fair value

Investment in trading (FV–NI) securities:

Unrealized
Securities Cost Fair Value
Gain (Loss)
Ahimsa $ 1,200,000 $ 1,400,000 $ 200,000
Metta 900,000 634,500 (265,500)
Total of portfolio $ 2,100,000 $ 2,034,500 $ (65,500)

FV – OCI Investments............................................................. 105,000

Investment Income or Loss........................................... 105,000

To bring the investment to its fair value

Investment in FV–OCI securities – Shiva:

$
Fair value of investment in Shiva
21,405,000
Carrying amount of investment 21,300,000
Unrealized holding gain $ 105,000

b) Dividend and adjusting entries for the Shiva investment, assuming that the 18% interest constitutes
significant influence

Investment in Associate........................................................ 2,448,000

Investment Income or Loss........................................... 2,448,000
To record Investment Income or Loss
($ 13,600,000 x 18%) = $ 2,448,000

Cash........................................................................................ 396,000
Investment in Associate................................................ 396,000
To record the dividend received from investments
($ 2.2M x 18%) = $ 396,000

Hanuman has significant influence and therefore should apply the equity method. No fair value
adjustments are recorded under the equity method.

Difficulty: Medium
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments - Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

Ex. 9-119
In early January 2020, Janus Inc., a private enterprise that applies ASPE, purchased 40% of the
common shares of Keqing Corp. for $ 484,000. Janus was now able to exercise considerable influence
in decisions made by Keqing’s management. Keqing Corp.’s statement of financial position reported
the following information at the date of acquisition:

Assets not subject to being amortized $ 242,000

Assets subject to amortization (10 years average life remaining) 732,000
Liabilities 136,000

Additional information:
1. Both the carrying amount and fair value are the same for assets that are not subject to
amortization and for the liabilities.
2. The fair value of the assets subject to amortization is $ 885,000.

3. The company amortizes its capital assets on a straight-line basis.

4. Keqing reported net income of $ 192,000 and declared and paid dividends of $ 132,000 in 2020.

Instructions
a) Prepare the journal entry to record Janus’s investment in Keqing Corp. Assume that any
unexplained payment is goodwill.
b) Assuming Janus applies the equity method to account for its investment in Keqing, prepare the
journal entries to record Janus’ equity in the net income and the receipt of dividends from Keqing
Corp. in 2020.
c) Assume the same factors as above and in part (b), except that Keqing’s net income included a loss
on discontinued operations of $ 45,000 (net of tax). Prepare the journal entries necessary to
record Janus’s equity in the net income of Keqing for 2020.

Solution 9-119
a)
Investment in Associate........................................................ 484,000
Cash................................................................................ 484,000

b)
Cash........................................................................................ 52,800
Investment in Associate................................................ 52,800
To record dividends ($ 132,000 x.40)

Investment in Associate........................................................ 76,800

Investment Income or Loss........................................... 76,800
To record net income ($ 192,000 x.40)

Investment Income or Loss................................................... 6,120

Investment in Associate................................................ 6,120
To record amortization ($ 61,200 ÷ 10)

c)
Loss on Discontinued Operations......................................... 18,000
Investment in Associate........................................................ 76,800
Investment Income or Loss........................................... 94,800
To record net income and loss on discontinued operations:
($ 45,000 x.40)
Investment Income or Loss $ 237,000 x 0.40

Investment Income or Loss................................................... 6,120

Investment in Associate................................................ 6,120
To record amortization ($ 61,200 ÷ 10)

In 2020, Janus Inc. will include investment income in continuing operations of $ 94,800 – $ 6,120 = $
88,680; and an investment loss of $ 18,000 in discontinued operations; for a total of $ 88,680 – $ 18,000
= $ 70,680 in net income. Note that this is the same total amount as reported in part b), but it is
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presented in two different places within net income.

Difficulty: Medium
Learning Objective: Explain how investments are presented and disclosed in the financial statements,
noting how this facilitates analysis.
Section Reference: Presentation, Disclosure, and Analysis
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic

PROBLEMS
Pr. 9-120 Transaction costs
Discuss whether transaction costs (fees, commissions, or transfer taxes), directly related to the
acquisition of financial assets initially measured at their fair value should be expensed immediately or
added to the cost of the asset acquired.

Solution
The answer is—it depends. It is logical to capitalize the transaction costs associated with any
investment that is accounted for using a cost-based model because transaction costs are a necessary
cost of acquiring the asset. Alternatively, for assets accounted for using a fair value model, it makes
more sense to expense the transaction costs because the fair value of an asset is its market price.
Regardless of how transaction costs are accounted for at acquisition, they are not included in the fair
value amount at later statement of financial position dates.

Pr. 9-121 Accounting for bonds – amortized cost model (IFRS)

On January 1, 2020, on their issue date, Diogenes Inc. purchased 9%, $ 200,000, 10-year bonds.
Interest is paid annually on December 31. Diogenes uses the amortized cost model and the effective-
interest method for amortizing premium or discount. The current market rate was 10% and as a result
Diogenes paid $ 187,711 for the bonds. On December 31, 2020, the bonds have a market value of $
185,000.

Instructions
a) Record the receipt of interest for 2020.
b) Record the amortization of the discount for 2020.

Solution 9-121
a) Interest income = $ 187,711 ×.10.......................................... $ 18,771
Actual interest........................................................................ 18,000
Discount amortization........................................................... $ 771

Cash........................................................................................ 18,000
Bond Investment at Amortized Cost.................................... 771
Interest Income.............................................................. 18,771

b) No entry is required. Using the amortized cost model, an entry would only be required if there
had been an impairment in value. Since this is not mentioned, we can assume there is no
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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

impairment. The investment is reported at amortized cost.

Pr. 9-122 Accounting for debt instruments purchased at a discount – FV–NI model
On January 1, 2020, Pluto Corp. acquired 6%, $ 100,000 (face value) bonds of Uranus Ltd., to yield 8%.
The bonds were dated January 1, 2020, and mature on December 31, 2025, with interest payable each
January 1. Pluto intends to hold the bonds to maturity, and will use the FV–NI model and the effective-
interest method of amortization of bond premium or discount.

Instructions
Prepare the following entries in Pluto’s books:
a) Acquisition of bonds on January 1, 2020,
b) Year-end adjusting entry at December 31, 2020,
c) Receipt of the first interest payment on January 1, 2021.
Round all values to the nearest dollar.

Solution 9-122
a) Acquisition of bonds on January 1, 2020
PV of principal: $ 100,000 (PVF*5, 8%) = $ 100,000 x 0.68058.......................... $ 68,058
PV of interest: (PVF*OA 5, 8%) = $ 6,000 x 3.99271........................................... 23,956
Present value of bond........................................................................................ $ 92,014

OR 5 N 8 I 6000 PMT 100000 FV CPT PV => 92,014

FV–NI Investments................................................................. 92,014

Cash................................................................................ 92,014

b) Year-end adjusting entry at December 31, 2020

Interest Receivable................................................................ 6,000
FV–NI Investments................................................................. 1,361
Interest Income.............................................................. 7,361

$ 100,000 x 6% = $ 6,000
$ 92,014 x 8% = $ 7,361
$ 6,000 – $ 7,361 = $ 1,361

c) Receipt of first interest payment on January 1, 2021

Cash........................................................................................ 6,000
Interest Receivable........................................................ 6,000
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Test Bank for Intermediate Accounting, Twelfth Canadian Edition

Pr. 9-123 Temporary investments – FV–NI model

During your examination of the financial statements of Venus Corporation for the year ended
December 31, 2020, you found a new account called "Investments." Your examination revealed that
during 2020, Venus began a program of investments, and all investment-related transactions were
entered in this account. Your analysis of this account for 2020 follows:

VENUS CORPORATION
Analysis of Investments
Year Ended December 31, 2020
Date—2020 Debit Credit
(i)
Jupiter Ltd. Common Shares
Feb. 14 Purchased 3,000 shares @ $ 55 per share............... $ 165,000
Jul. 26 Received 300 Jupiter common shares
as a stock dividend. (Memorandum entry)
Sep. 28 Sold the 300 Jupiter common shares
received July 26 @ $ 70 per share........................... $ 21,000

(ii)
Debit Credit
Mars Ltd. Common Shares
Apr. 30 Purchased 5,000 shares @ $ 40 per share............... $ 200,000
Oct. 28 Received dividend of $ 1.20 per share..................... $ 6,000

Additional information:
1. The market values for each security during 2020 follow:
Security Feb 14 Apr 30 Jul 26 Sep 28 Dec 31
Jupiter Ltd. $ 55 $ 62 $ 70 $ 72
Mars Ltd. $ 40 32
Venus Corp. 25 28 30 33 35
2. All of the investments of Venus are nominal in respect to percentage of ownership (five percent or
less).
3. Each investment is considered by Venus’s management to be temporary.
4. The company has adopted ASPE and intended to use the FV–NI method to account for these
investments.
5. Venus follows a policy of separately reporting dividend income.
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Instructions
a) Prepare any necessary correcting journal entries related to investments (i) and (ii).
b) Prepare the entry, if necessary, to record the proper valuation of these investments at December
31, 2020.

Solution 9-123
a) (i) Jupiter Ltd. original purchase 3,000 shares
stock dividend 300 shares
total holding 3,300 shares

Total cost of $ 165,000 ÷ Total shares of 3,300 = $ 50 average cost per share

Sold 300 shares

Correct entry:
Cash (300 × $ 70).................................................................... 21,000
FV–NI Investments—Jupiter (300 x $ 50)...................... 15,000
Investment Income or Loss........................................... 6,000

Entry made:
Cash........................................................................................ 21,000
Investments.................................................................... 21,000

Correction:
Investments............................................................................ 21,000
FV–NI Investments......................................................... 15,000
Investment Income or Loss........................................... 6,000

(ii) Mars Ltd. - should record cash dividend as dividend income.

Correct entry:
Cash........................................................................................ 6,000
Dividend Revenue.......................................................... 6,000

Entry made:
Cash........................................................................................ 6,000
Investments.................................................................... 6,000

Correction:
Investments............................................................................ 6,000
Dividend Revenue.......................................................... 6,000

b) Valuation at year end:

Increase
Quantity Cost Market Value (Decrease)
Jupiter 3,000 shares $ 150,000 $ 216,000 $ 66,000
Mars 5,000 shares 200,000 160,000 (40,000)
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$ 350,000 $ 376,000 $ 26,000

Year-end Adjustment:
FV–NI investments—Jupiter.................................................. 66,000
Investment Income or Loss........................................... 66,000

Investment Income or Loss................................................... 40,000

FV–NI Investments—Mars.............................................. 40,000

Pr. 9-124 Year-end adjustments for temporary investments

Mercury Corp. has the following portfolio of common shares (without significant influence) at
December 31, 2020:
Investment Cost Fair value
Albania Inc. $ 480,000 $ 570,000
Bulgaria Ltd. 90,000 620,000
Czech Corp. 120,000 220,000
Total $ 690,000 $ 1,410,000

Instructions
Provide the entry to record the year-end adjustment for these investments, assuming Mercury uses
one control account and has adopted the FV–NI model.

Solution 9-124
FV–NI Investments................................................................. 720,000
Investment Income or Loss........................................... 720,000

Pr. 9-125 Accounting for debt investments purchased at a premium – FV–NI model
On January 1, 2020, Pluto Corp. acquired 8%, $ 100,000 (face value) bonds of Uranus Ltd., to yield 6%.
The bonds were dated January 1, 2020, and mature on December 31, 2025, with interest payable each
January 1. Pluto intends to hold the bonds to maturity, and will use the FV–NI model and the effective-

interest method of amortization of bond premium or discount.

Solution 9-125
a) Acquisition of bonds on January 1, 2020
PV of principal: $ 100,000 (PVF*5, 6%) = $ 100,000 x 0.74726.......................... $ 74,726
PV of interest: (PVF*OA 5, 6%) = $ 8,000 x 4.21236........................................... $ 33,699
Present value of bond........................................................................................ $ 108,425

OR 5 N 6 I 8000 PMT 100000 FV CPT PV => 108,425

FV–NI Investments................................................................. 108,425

Cash................................................................................ 108,425

b) Year-end adjusting entry at December 31, 2020

Interest receivable................................................................. 8,000
FV–NI Investments......................................................... 1,494
Interest Income.............................................................. 6,506

$ 100,000 x 8% = $ 8,000
$ 108,425 x 6% = $ 6,506
$ 8,000 – $ 6,506 = $ 1,494

c) Receipt of first interest payment on January 1, 2021

Cash........................................................................................ 8,000
Interest Receivable........................................................ 8,000

Pr. 9-126 Accounting for investments – FV–NI

On December 31, 2020, Hubble Corp. has the following securities in its portfolio of temporary
investments:
Cost Market
5,000 common shares of Orion Corp. $ 80,000 $ 69,500
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10,000 common shares of Rigel Ltd. 91,000 92,500

$ 171,000 $ 162,000

All of the securities had been purchased in 2020. In 2021, Hubble completed the following securities
transaction:
Apr 1 Bought 300 common shares of Aries Corp. @ $ 50 each, plus fees of $ 550.

On December 31, 2021, Hubble’s portfolio of trading equity securities appeared as follows:
Cost Market
5,000 common shares of Orion Corp. $ 80,000 $ 78,000
10,000 common shares of Rigel Ltd. 91,000 99,250
300 common shares of Aries Corp. 15,000 12,750
$ 186,000 $ 190,000

Instructions
Assuming Hubble uses the FV–NI model, prepare the general journal entries for:
a) the 2020 year-end adjusting entry,
b) the purchase of the Aries Corp. shares,
c) the 2021 year-end adjusting entry.

Solution 9-126
a) December 31, 2020
Investment Income or Loss................................................... 9,000
FV–NI Investments......................................................... 9,000
($ 171,000 – $ 162,000)

b) April 1, 2021
FV–NI Investments................................................................. 15,000
Finance Expense.................................................................... 550

Cash [(300 x $ 50) + $ 550].............................................. 15,550

c) December 31, 2021

FV–NI Investments................................................................. 13,000
Investment Income or Loss........................................... 13,000
190,000 – (162,000 + 15,000) = 13,000

Pr. 9-127 Long-term investment – FV–NI method

Ceres Corporation is considering making a significant long-term investment in Pisces Ltd., a young
and very promising company. Ceres decides to make a smaller investment first, and if Pisces turns out
to be successful, Ceres intends to make an additional investment to reach significant influence. Pisces
has 200,000 shares authorized, and 110,000 shares outstanding.

On January 1, 2020, Pisces issues Ceres 10,000 shares for $ 400,000 in cash (so now there are 120,000
shares outstanding).

Additional information:
1. On November 1, 2020, Pisces declares a total cash dividend of $ 180,000.
2. Pisces reports $ 225,000 net income for 2020. Its stock price on December 31, 2020 is $ 38.
3. On November 1, 2021, Pisces announces a total dividend of $ 270,000 to be paid on January 2,
2022.
4. Pisces reports $ 360,000 net income for 2021. Its stock price on December 31, 2021 is $ 44.
5. On March 15, 2022, Ceres is approached by an investment fund which offers to buy all their Pisces
shares for $ 55 per share, a 25% premium over the current stock price of $ 44. Ceres accepts the
offer and sells the shares on that day.

Instructions
Assuming Ceres uses the fair value through net income model (FV–NI) to account for this investment:
a) Prepare the journal entries in Ceres’s books for the 2020 calendar year.
b) Prepare the journal entries in Ceres’s books for the 2021 calendar year.
c) Prepare the journal entries in Ceres’s books for the 2022 calendar year.

Solution 9-127
a) 2020 Entries
FV–NI Investment—Pisces..................................................... .400,000
Cash............................................................................... 400,000
To record the initial investment on January 1, 2020

Cash........................................................................................ 15,000
Dividend Revenue.......................................................... 15,000
To record Ceres’s share of the dividend on November 1, 2020
$ 180,000 x 10,000 ÷ 120,000 = $ 15,000

Investment Income or Loss................................................... 20,000

FV–NI Investment—Pisces................................................ 20,000
To record holding loss on December 31, 2020
($ 38 – $ 40) x 10,000 = $ 20,000

b) 2021 Entries
Dividend Receivable.............................................................. 22,500
Dividend Revenue.......................................................... 22,500
To record Ceres’s share of the dividend declared on November 1, 2021
$ 270,000 x 10,000 ÷ 120,000 = $ 22,500

FV–NI Investment—Pisces...................................................... 60,000

Investment Income or Loss........................................... 60,000
To record holding gain on December 31, 2021
($ 44 – $ 38) x 10,000 = $ 60,000

c) 2022 Entries
Cash........................................................................................ 22,500
Dividend Receivable................................................... . . 22,500
To record receipt of dividend on January 2, 2022

Cash........................................................................................ 550,000
FV–NI Investment—Pisces............................................. 440,000
Gain on Disposal of Investments- FV-NI....................... 110,000
To record gain on disposal of Pisces shares on March 15, 2022
$ 55 x 10,000 = $ 550,000
($ 55 – $ 44) x 10,000 = $ 110,000

Pr. 9-128 Equity method (ASPE)

On January 1, 2019, Titanic Corp. bought 30,000 shares of the available 100,000 common shares of
Iceberg Inc., a publicly traded firm. This acquisition provided Titanic with significant influence. Titanic
paid $ 700,000 cash for the investment. At the time of the acquisition, Iceberg reported assets of $
2,500,000 and liabilities of $ 1,200,000. Asset values reflected fair market value, except for capital
assets that had a net book value of $ 500,000 and a fair market value of $ 730,000. These assets had a
remaining useful life of five years. For 2019 Iceberg reported net income of $ 400,000 and paid total
cash dividends of $ 100,000.
On May 16, 2020, Titanic sold 15,000 of its shares in Iceberg for $ 425,000. Titanic has no immediate
plans to sell its remaining investment in Iceberg.

Iceberg is actively traded, and stock price information follows:

January 1, 2019 $ 23
December 31, 2019 $ 25
January 1, 2020 $ 26

Instructions
a) Assuming Titanic is using ASPE, did the initial investment include a payment for goodwill?
Provide support for your answer.
b) At the end of 2019, what would appear on the income statement and balance sheet of Titanic in
9-77
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Test Bank for Intermediate Accounting, Twelfth Canadian Edition

connection with its investment in Iceberg? Show supporting calculations.

c) Provide the entry to account for Titanic’s sale of the shares in May 2020. How should Titanic
account for its remaining investment in Iceberg?

Solution 9-128
a) Note that, even using ASPE, since Iceberg is quoted in an active market, Titanic must use the
equity method.

Purchase price............................................................................... $ 700,000

Market value of identifiable assets*............................................. $ 2,730,000
Less: liabilities................................................................................ (1,200,000)
Total market value of net assets acquired................................... 1,530,000
Portion purchased (30% x $ 1,530,000)........................................ (459,000)
Goodwill......................................................................................... $ 241,000
*$ 2,500,000 + ($ 730,000 – $ 500,000)

b)
Share of net income ($ 400,000 x 30%)........................................ $ 120,000
Less: amortization of fair value increment
($ 730,000 – $ 500,000) ÷ 5............................................................. $ 46,000
Investor portion 30%..................................................................... (13,800)
Investment income on income statement................................... $ 106,200

Cost................................................................................................. $ 700,000
Plus: investment income............................................................... 106,200
Less: dividends received ($ 100,000 x 30%)................................. (30,000)
Investment account on balance sheet......................................... $ 776,200

c)
Cash........................................................................................ 425,000
Investment in Associate................................................ 388,100
Gain on Disposal of Investments in Associate............. .36,900
........................................................................................To record the sale of the shares
$ 776,200 x 50% = $ 388,100

After this sale, Titanic will no longer have significant influence over Iceberg. As a result, the use of the
equity method will no longer be appropriate. Under ASPE, Titanic can choose the cost or fair value
through net income (FV–NI) model for its remaining investment in Iceberg.

Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for
investments.
Section Reference: Measurement - Fair Value through Net Income (FV–NI) Model
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments - Investments in Associates
CPA: Communication

CPA: Financial Reporting

Bloomcode: Application
AACSB: Communication

Pr. 9-129 Equity method – IFRS

Capricorn Corporation decided to purchase 35% of the outstanding shares of Aquarius Ltd.
Capricorn’s CFO conducted an extensive evaluation of the financial statements of Aquarius and
reported his findings to the board of directors in the following memo:

Dear Board of Directors,

Following your request, I conducted a detailed analysis of Aquarius Ltd. I found out that the liabilities
reported in its books at December 31, 2019 in the amount of $ 20M fairly represent their economic
values. As for the assets, their book value is $ 45M. The company owns an office building in downtown
Toronto where its headquarters are located. The net book value of this building, including the land, is
$ 10M. Aquarius purchased the land for $ 6M some 20 years ago and then constructed the building. I
consulted with real estate experts and currently the fair value of the land is $ 9M and the fair value of
the building is $ 8M. The remaining useful life of the building in Aquarius’s books is 20 years and I find
this estimate realistic.
The firm has developed a patent. According to my analysis, the fair value of the patent is $ 12M. Given
future advances in technology, I expect the value of the patent to decline and become worthless 6
years from now. The patent was developed by the company and all the related costs were recorded as
research and development expenses.
Sincerely,
Jake Connor, CPA

The board of directors of Capricorn Corporation adopted the report by Mr. Connor and on January 1,
2020, purchased 35% of the shares of Aquarius, based on its fair value according to Mr. Connor’s
analysis. After the acquisition of the shares, Capricorn was able to exercise significant influence over
Aquarius.
In 2020, Aquarius reported net income of $ 10M and distributed 40% of it as cash dividends.
In 2021, the earnings of Aquarius doubled compared with 2020. Aquarius distributed 60% of its
income as cash dividends.
On December 31, 2021, Capricorn sold its investment in Aquarius Ltd. for $ 20M.

Instructions
Assuming Capricorn accounts for this investment using the method required under IFRS,
a) Record the initial purchase by Capricorn Corp.
b) Record the entries related to the investment in Aquarius Ltd. for 2020.
c) Record the entries related to the investment in Aquarius Ltd. for 2021.

Solution 9-129
a) Calculation of amount paid
Net book value of Aquarius (45 – 20)............................................ 25M
Fair value of patent........................................................................ 12M
Excess value of land (9 – 6)............................................................ 3M
Excess value of building (8 – (10 – 6))........................................... 4M
9-79
Copyright © 2019 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited
Test Bank for Intermediate Accounting, Twelfth Canadian Edition

Fair value of Aquarius.................................................................... 44M

Shares held..................................................................................... 35%
Amount paid.................................................................................. 15.4M

b) Journal entries for 2020

Investment in Associate........................................................ 15.4M
Cash................................................................................ 15.4M
To record initial investment

Calculation of income to be recorded by Capricorn:

Aquarius’s net income................................................................... 10M
Capricorn’s ownership.................................................................. 35%
Capricorn’s share of net income................................................... 3.5M
Amortization of patent (12M ÷ 6) x 35%....................................... (0.7M)
Excess depreciation of the building (4M x 35%) ÷ 20.................. (0.07M)
Capricorn’s adjusted share in Aquarius’s net income................ 2.73M

Investment in Associate........................................................ 2.73M

Investment Income or Loss........................................... 2.73M

Cash........................................................................................ 1.4M
Investment in Associate................................................ 1.4M
To record dividend distribution (10M x 40% x 35%)

c) Journal entries for 2021

For recording its share in Aquarius’s net income, the only adjustment to the 2020 calculations is that
income now is 20M and Capricorn’s share is $ 7M, an increase of $ 3.5M compared with 2020. Thus,
investment income increases to 6.23M (2.73 + 3.5).

Investment in Associate........................................................ 6.23M

Investment Income or Loss........................................... 6.23M

Cash........................................................................................ 4.2M
Investment in Associate................................................ 4.2M
To record dividend distribution (10M x 2 x 60% x 35%)

By the end of 2021, the value of the investment in Capricorn’s books is as follows:
Initial investment........................................................................... 15.4
Investment income 2020............................................................... 2.73
Dividend 2020................................................................................ (1.4)
Investment income 2021............................................................... 6.23
Dividend 2021................................................................................ (4.2)
Investment in Aquarius Dec 31/21................................................ 18.76M
Selling price.................................................................................... 20.00M
Gain on disposal of investment.................................................... 1.24M

Cash........................................................................................ 20M
Investment in Associate................................................ 18.76M
Gain on Disposal of Investments in Associate............. 1.24M

LEGAL NOTICE

The data contained in these files are protected by copyright. This manual is furnished under licence
and may be used only in accordance with the terms of such licence.

The material provided herein may not be downloaded, reproduced, stored in a retrieval system,
modified, made available on a network, used to create derivative works, or transmitted in any form or
by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the
prior written permission of John Wiley & Sons Canada, Ltd.

MMXVIII xi F2

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