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SM 09

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SM 09

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Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

CHAPTER 9

INVESTMENTS
Learning Objectives
1. Understand the nature of and basic accounting for
investments, including which types of companies have
significant investments.
2. Explain and apply the cost/amortized cost model of
accounting for investments.
3. Explain and apply the fair value through net income model of
accounting for investments.
4. Explain and apply the fair value through other comprehensive
income model of accounting for investments.
5. Explain and apply the incurred loss, expected loss, and fair
value loss impairment models.
6. Explain the concept of significant influence and apply the
equity method.
7. Explain the concept of control and when consolidation is
appropriate.
8. Explain how investments are presented and disclosed in the
financial statements, noting how this facilitates analysis.
9. Identify differences in accounting between IFRS and ASPE,
and what changes are expected in the near future.

Solutions Manual 9-1 Chapter 9

Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy

Ite LO B Ite LO B Ite LO BT Ite LO BT Ite LO BT

m T m T m m m
Brief Exercises
1. 1 C 7. A 13. 4 AP 19. 5 C 25. 6 AP
2 P
2. 1 C 8. A 14. 4 AP 20. 5 AP 26. 6,7 AP
2 P
3. 2 A 9. A 15. 4 AP 21. 5 AP 27. 8 C
P 3 P
4. 2 A A 16. 4 AP 22. 5 AP 28. 1 C
P 10. 3 P
5 2 A .11. A 17. 2,3,4,9 AP 23. 6 AP 29. 1 C
P 3 P
6. 2 A 12. A 18. 5 C 24. 6 AP
P 4 P
Exercises
1. 1,2,3,4 A 7. A 13. 4 AP 19. 5 AP 25. 3,5,8 AP
P 3 P
2. 2 A 8. A 14. 4 AP 20. 2,3,5 AP 26. 4,6,8 AP
P 3 P
3. 2 A 9. A 15. 4,8 AP 21. 2,3,4,5 AP 27. 5,6,8 AP
P 3 P
4. 2 A A 16. 4 AP 22. 2,3,6 AP 28. 6,8,9 AP
P 10. 3,4 P
5 3 A .11. A 17. 4 AP 23. 6 AP
P 3,4,8 P
6. 3 A 12. A 18. 2,3,4,8, AP 24. 4,6,8 AP
P 2,8 P 9
Problems
1. 3 A 5. 2,4,8,9 A 9. 2,4 AP 13. 4,8
AP 17. 2,3,4, AP
P P 8
2. 3 A 6. 2,3 A 4,8 AP 14. 3,4,6 AP

Solutions Manual 9-2 Chapter 9

P P 10.
3. 2,3 A 7. 4 A 2,3,4,9 AP 15. 2,6,8 AP
P P 11.
4. 4,8 A 8. 4 A 2,3,6,9 AP 16. 3,4,8 AP
P P 12.
Cases and Integrated Case
1. 3,4,6 A 2. 3,4,6 A 3. 6,7,8,9 AN IC 2,6,7,8,
N N 1 9
Research and Analysis
1. 2,6,7,8, A 2. 5,6,7,8 A 3. 5 AN 4. 8 C 5. 8 AN
9 P P

Solutions Manual 9-3 Chapter 9

Legend: The following abbreviations will appear throughout the solutions

manual file.

LO Learning objective
BT Bloom's Taxonomy
K Knowledge
C Comprehension
AP Application
AN Analysis
S Synthesis
E Evaluation
Difficulty: Level of difficulty
S Simple
M Moderate
C Complex
Time: Estimated time to complete in minutes
AACSB Association to Advance Collegiate Schools of Business
Communication Communication
Ethics Ethics
Analytic Analytic
Tech. Technology
Diversity Diversity
Reflec. Thinking Reflective Thinking
CPA CM CPA Canada Competency Map
Ethics Professional and Ethical Behaviour
PS and DM Problem-Solving and Decision-Making
Comm. Communication
Self-Mgt. Self-Management
Team & Lead Teamwork and Leadership
Reporting Financial Reporting
Stat. & Gov. Strategy and Governance
Mgt. Accounting Management Accounting
Audit Audit and Assurance
Finance Finance
Tax Taxation
DAIS Data Analytics and Information Systems

Solutions Manual 9-4 Chapter 9

ASSIGNMENT CLASSIFICATION TABLE

Brief
Topics Exercises Exercises Problems

1. Understanding investments 1, 2, 28, 29 1, 26 1, 8, 9, 10, 11,

13, 16, 17

2. Debt/equity securities: 17
a. cost/amortized cost model
- equity securities 3 18, 20 5, 11

- debt securities 4, 5, 6, 7, 8 2, 3, 4 3, 6, 10, 11, 17

b. fair value through net income

(FV-NI) model
- equity securities 8, 9 7, 9, 10, 11, 18, 1, 2, 11, 12, 14,
20, 22 15, 17

- debt securities 10, 11 5, 6, 8, 20 2, 3, 6, 10, 11,

c. fair value through other 12, 13, 14, 15, 10, 11, 12, 13, 4, 5, 7, 8, 9, 10,
comprehensive income (FV- 16 14, 15, 16, 17, 11, 12, 13, 14,
OCI) model 18, 21, 23 15, 16, 17

3. Impairments 18, 19, 20, 21, 19, 20, 21, 23,

22 25, 27

4. Investments in associates
(a) equity method 23, 24, 26 22, 23, 24, 25, 12, 14, 15, 17
26, 27, 28

(b) other 25 22 4, 12

5. Investments in subsidiaries 26

6. Analysis, disclosures, reporting, 17, 27 12, 14, 16, 26, 1, 4, 5, 9, 10,

and statement presentation 28 11, 12, 13, 14,
15, 16, 17

7. IFRS and ASPE comparison

Solutions Manual 9-5 Chapter 9

ASSIGNMENT CHARACTERISTICS TABLE

Level of Time
Item Description Difficulty (minutes)

E9.1 Investment classifications Complex 30-40

E9.2 Entries for cost/amortized cost investments Simple 10-15
E9.3 Entries for cost/amortized cost investments Moderate 25-30
E9.4 Cost/amortized cost investments Moderate 20-25
E9.5 FV-NI investments in bonds Simple 20-25
E9.6 Amortized cost and FV-NI investments in Moderate 35-40
bonds purchased between interest payment
dates
E9.7 FV-NI equity investments Simple 10-15
E9.8 Investment in debt instruments held for trading Moderate 25-30
purposes, accounted for using FV-NI
E9.9 FV-NI equity investment entries Simple 15-20
E9.10 Entries for FV-NI and FV-OCI equity Simple 10-15
investments
E9.11 Equity investment entries – FV-NI and FV-OCI Moderate 45-50
E9.12 Debt investment entries – amort. cost and Moderate 25-30
Data Analytics and Information Systems
E9.13 Debt investment entries – FV-OCI Moderate 15-20
E9.14 Debt investment entries FV-OCI Moderate 25-30
E9.15 Debt investment entries – FV-OCI financial Moderate 25-30
statements
E9.16 FV-OCI investment entries and financial Complex 30-35
statement presentation
E9.17 FV-OCI investments – Entries Simple 15-20
E9.18 Entry and financial statement comparison of Moderate 30-35
cost, FV-NI, and FV-OCI
E9.19 Impairment of debt investment and Moderate 20-25
subsequent recovery in value
E9.20 Impairment of FV-NI investment and Moderate 30-35
subsequent recovery in value
E9.21 Investment in shares, impairment, and Complex 35-40
subsequent recovery
E9.22 Accounting methods with and without Simple 20-25
significant influence under ASPE
E9.23 Equity method Simple 10-15
E9.24 Fair value-OCI and equity method compared Simple 15-20
E9.25 Long-term equity investments, equity method, Moderate 35-45
and impairment

Solutions Manual 9-6 Chapter 9

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED)

Level of Time
Item Description Difficulty (minutes)

E9.26 Proper income reporting Moderate 25-30

E9.27 Equity method with cost in excess of carrying Moderate 25-30
amount, impairment
E9.28 ASPE, significant influence, equity method Moderate 25-30
with cost in excess of carrying amount,
alternative methods

P9.1 FV-NI entries and reporting for equity Moderate 20-25

investment
P9.2 FV-NI entries for equity and debt investments Moderate 40-45
P9.3 FV-NI and amortized cost bond investment Moderate 40-45
entries
P9.4 Purchase and sale of FV-OCI equity Moderate 35-40
investments, and presentation
P9.5 FV-OCI entries and reporting, comparison to Complex 60-70
cost method
P9.6 Amortized cost and FV-NI entries for bond Moderate 30-35
investment
P9.7 FV-OCI debt securities – bond amortization Simple 30-40
and fair value adjustments
P9.8 FV-OCI debt securities – fair value Simple 15-20
adjustments
P9.9 Entries for amortized cost and FV-OCI Simple 25-35
P9.10 Entries for FV-OCI debt investment; disposal Complex 45-50
and all financial statements for three years.
P9.11 Classify investments, entries for amortized Moderate 45-50
cost, FV-NI, and FV-OCI investments;
calculate interest between interest dates
P9.12 Fair value adjustments and presentation of Moderate 35-40
FV-NI, FV-OCI, and equity method
investments; choice under ASPE if significant
influence
P9.13 Financial statement presentation of FV-OCI Moderate 25-35
investments
P9.14 Entries for FV-NI and FV-OCI investments, as Complex 45-50
well as equity method investments
P9.15 FV-OCI and equity method entries under Moderate 35-45
IFRS, choices and entries under ASPE
P9.16 Deduce financial statements from limited Complex 50-60
information using FV-OCI; compare to FV-NI
P9.17 FV-NI, amortized cost, FV-OCI and equity Complex 75-80
method entries and preparation of partial
financial statements
Solutions Manual 9-7 Chapter 9
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 9.1

(a) The investment in Company A is an investment in a debt
security, and the investment in Company B is in an equity
security.
(b) Bali Corp. is a creditor of Company A because Company A
has a contractual obligation or liability to repay the $10,000
borrowed, as well as interest on the borrowed funds.
Therefore, Bali has invested in another company’s debt.

Company B, on the other hand, does not have an obligation

(and therefore does not have a liability) to either repay the
funds Bali invested or to provide a return to Bali on those
funds. Instead, Bali has taken on the risk of a residual
shareholder by profiting if Company B does well and losing if
Company B does not do well. This is an equity interest in
Company B.

LO 1 BT: C Difficulty: C Time: 15 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

BRIEF EXERCISE 9.2

(a) It would not be unusual for all of these entities to have some
level of investments on their statements of financial position,
but those most likely to report a significant proportion of their
assets as investments are the university, the insurance
company, and the pension plan. In each case, knowing the
business model of the type of organization is useful in making
this determination.

An old established university is very likely to have built up

considerable endowment funds over a period of many years.
These donations and bequests are invested, and the
university uses the investment income to pay for
scholarships, for example.

Solutions Manual 9-8 Chapter 9

BRIEF EXERCISE 9.2 (CONTINUED)

(a) (continued)

The insurance company collects insurance premiums in

advance from its policyholders, and it invests the monies
received to increase the funds it has available to pay out when
claims are paid as a result of insured losses.

The pension plan usually receives cash from employers and

employees as the employees provide services to an
organization—many years ahead of when the employees retire
and pensions have to be paid out. To increase the funds
available for payout in the future, pension plans invest the
contributions as they are received.

(b) All three of these organizations typically invest in a mix of

debt and equity securities with the proportion of each
depending on the level of risk the organization is required, or
willing, to assume. Some pension funds, for example, are so
large that they have been expanding into mortgages and other
asset-backed securities, real estate investments, shopping
centres, toll roads, etc. looking to diversify their holdings and
to increase the rate of return they earn.
LO 1 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-9 Chapter 9

BRIEF EXERCISE 9.3

(a)
Other Investments1...........................................................
13,332
Cash.......................................................................... 13,332
1
[$13,200 + ($13,200 X 0.01)]

(b)
Cash ...................................................................................
600
2
Dividend Revenue .................................................. 600
2
(400 shares X $1.50)

(c)
14,
Cash 3.................................................................................
949
Gain on Disposal of Investments
- Cost/Amortized Cost…………….. 1,617
Other Investments .................................................. 13,332
3
$15,100 – ($15,100 X 0.01) = $14,949

LO 2 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-10 Chapter 9

BRIEF EXERCISE 9.4

(a) Bond Discount Amortization Table

8% Bonds Sold to Yield a 10% Return
Date Cash Interest Bond Amortized
Receive Income Discount Cost of
d (8%) (10%) Amortization Bond
Day 1 $ 95.03
End Year 1 $8.00 $9.501 $1.50 96.53
End Year 2 8.00 9.65 1.65 98.18
End Year 3 8.00 9.82 1.82 100.00
$24.00 $28.97 $4.97
1
$95.03 X .10

(b) Bond Investment at Amortized Cost………... 95.03

Cash…………………………………………. 95.03
End of Year 1
Cash……………………………………………….. 8.00
Bond Investment at Amortized Cost………… 1.50
Interest Income……………………………. 9.50

End of Year 2
Cash……………………………………………….. 8.00
Bond Investment at Amortized Cost………… 1.65
Interest Income……………………………. 9.65

End of Year 3
Cash……………………………………………….. 8.00
Bond Investment at Amortized Cost………… 1.82
Interest Income……………………………. 9.82
To record interest collected

Cash………………………………………………. 100.00
Bond Investment at Amortized Cost…… 100.00
To record maturity of bond investment

Solutions Manual 9-11 Chapter 9

BRIEF EXERCISE 9.4 (CONTINUED)

(c) Discount on bond when purchased:

$100.00 – $95.03 = $4.97
Straight line discount amortization each year:
$4.97 ÷ 3 years = $1.66 each year

(d) Bond Investment at Amortized Cost……… 95.03

Cash…………………………………………. 95.03
End of Year 1
Cash………………………………………………... 8.00
Bond Investment at Amortized Cost………… 1.66
Interest Income……………………………. 9.66
End of Year 2
Cash………………………………………………... 8.00
Bond Investment at Amortized Cost………… 1.66
Interest Income……………………………. 9.66
End of Year 3
Cash………………………………………………... 8.00
Bond Investment at Amortized Cost………… 1.65
Interest Income……………………………. 9.65
To record interest collected

Cash………………………………………………. 100.00
Bond Investment at Amortized Cost…… 100.00
To record maturity of bond investment
(e) Total interest income:
Effective interest method $9.50 + $9.65 + $9.82 = $28.97
Straight-line method $9.66 + $9.66 + $9.65 = $28.97
That is, they are the same in total.

Solutions Manual 9-12 Chapter 9

BRIEF EXERCISE 9.4 (CONTINUED)

(f) Using Excel: =PV(rate,nper,pmt,fv,type)

Result: $95.02629602 rounded to $95.03. The result is negative

because it represents a cash outflow to acquire the investment.

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-13 Chapter 9

BRIEF EXERCISE 9.5

(a) Bond Premium Amortization Table
6% Bonds Sold to Yield a 4% Return
Date Cash Interest Bond Amortized
Received Income Premium Cost of
(6%) (4%) Amortization Bond
Day 1 $ 105.55
End Year 1 $6.00 $4.221 $1.78 103.77
End Year 2 6.00 4.15 1.85 101.92
End Year 3 6.00 4.08 1.92 100.00
$18.00 $12.45 $5.55
1
$105.55 X .04

(b) Bond Investment at Amortized Cost………... 105.55

Cash…………………………………………. 105.55
End of Year 1
Cash……………………………………………….. 6.00
Bond Investment at Amortized Cost………… 1.78
Interest Income……………………………. 4.22
End of Year 2
Cash……………………………………………….. 6.00
Bond Investment at Amortized Cost………… 1.85
Interest Income……………………………. 4.15
End of Year 3
Cash……………………………………………….. 6.00
Bond Investment at Amortized Cost………… 1.92
Interest Income……………………………. 4.08
To record interest collected
Cash………………………………………………. 100.00
Bond Investment at Amortized Cost…… 100.00
To record maturity of bond investment
Solutions Manual 9-14 Chapter 9
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

BRIEF EXERCISE 9.5 (CONTINUED)

(c) Premium on bond when purchased:

$105.55 – $100.00 = $5.55
Straight line premium amortization each year:
$5.55 ÷ 3 years = $1.85 each year

(d) Bond Investment at Amortized Cost………... 105.55

Cash…………………………………………. 105.55

End of Year 1
Cash………………………………………………... 6.00
Bond Investment at Amortized Cost…… 1.85
Interest Income……………………………. 4.15

End of Year 2
Cash………………………………………………... 6.00
Bond Investment at Amortized Cost…… 1.85
Interest Income……………………………. 4.15

End of Year 3
Cash………………………………………………... 6.00
Bond Investment at Amortized Cost…… 1.85
Interest Income……………………………. 4.15
To record interest collected
Cash………………………………………………. 100.00
Bond Investment at Amortized Cost…… 100.00
To record maturity of bond investment

Solutions Manual 9-15 Chapter 9

BRIEF EXERCISE 9.5 (CONTINUED)

(e) Total interest income:

Effective interest method $4.22 + $4.15 + $4.08 = $12.45
Straight-line method $4.15 + $4.15 + $4.15 = $12.45
That is, they are the same in total.
(f) Year Cash Flow

1 $6.00

2 $6.00

3 $106.00

=NPV(0.04,6,6,106)

Result: $105.5501821 rounded to $105.55

A step-by-step solution for this section of the problem can be
found in the student resources section of the online course.

LO 2 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-16 Chapter 9

BRIEF EXERCISE 9.6

(a) Bond Investment at Amortized Cost.............. 55,133

Cash.......................................................... 55,133
To record purchase of bond investment

Cash ($60,000 X 6% X 6/12)............................. 1,800

Bond Investment at Amortized Cost.............. 405
Interest Income1........................................ 2,205
1
($55,133 X 8% X 6/12 = $2,205)
To record collection of semi-annual interest

Cash ($60,000 X 6% X 6/12)............................. 1,800

Bond Investment at Amortized Cost.............. 422
Interest Income2........................................ 2,222
2
([$55,133 + $405] X 8% X 6/12 = $2,222)
To record collection of semi-annual interest

(b) Discount on bond when purchased:

$60,000 - $55,133 = $4,867
Interest periods to maturity: 5 years X 2 = 10
Amortization each interest period: $4,867 ÷ 10 = $487

Bond Investment at Amortized Cost.............. 55,133

Cash.......................................................... 55,133
To record purchase of bond investment

Cash ($60,000 X 6% X 6/12)............................. 1,800

Bond Investment at Amortized Cost.............. 487
Interest Income......................................... 2,287
To record collection of semi-annual interest

Solutions Manual 9-17 Chapter 9

BRIEF EXERCISE 9.6 (CONTINUED)

(b) (Continued)

Cash ($60,000 X 6% X 6/12)............................. 1,800

Bond Investment at Amortized Cost.............. 487
Interest Income......................................... 2,287
To record collection of semi-annual interest

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-18 Chapter 9

BRIEF EXERCISE 9.7

(a) September 1
Bond Investment at Amortized Cost............................... 73,970
Cash.......................................................................... 73,970

(b) December 31
Interest Receivable ($80,000 X 9% X 4/12)......................
2,400
Bond Investment at Amortized Cost……….. 312
1
Interest Income ……………………... 2,712
1
($73,970 X 11% X 4/12 = $2,712)

(c) March 1
Cash ($80,000 X 9% X 6/12)..............................................3,600
Bond Investment at Amortized Cost……….. 156
Interest Receivable……………………... 2,400
Interest Income2....................................................... 1,356
2
($73,970 X 11% X 2/12 = $1,356)

(d) March 1
Cash……………………………………………… 75,100
Gain on Disposal of Investments –
Cost/Amortized Cost………..……….. 662
Bond Investment at Amortized Cost3... 74,438
3
($73,970 + $312 + $156 = $74,438)

LO 2 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-19 Chapter 9

BRIEF EXERCISE 9.8

December 15, 2023

Note Investment at Amortized Cost.................................. 99,509
Cash.......................................................................... 99,509

December 31, 2023

Note Investment at Amortized Cost.................. 131
1
Interest Income ......................................... 131
($99,509 x .03 x 16/365) or ($100,000 - $99,509) / 60 x 16

February 13, 2024

Cash..................................................................... 100,000
Interest Income2......................................... 360
Note Investment at Amortized Cost......... 99,640
($99,509 x .03 x 44/365) or ($100,000 - $99,509 – $131)

LO 2 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-20 Chapter 9

BRIEF EXERCISE 9.9

(a) September 8
FV-NI Investments............................................................. 13,200
Cash.......................................................................... 13,200
(b)
Cash ...................................................................................
700
1
Dividend Revenue .................................................. 700
1
(400 shares X $1.75)

(c)
FV-NI Investments.............................................................
1,000
2
Unrealized Gain or Loss ........................................ 1,000
2
(400 X $35.50 - $13,200)

(d)
Cash ($34.95 X 400 shares).............................................
13,980
Loss on Disposal of Investments – FV-NI…. 220
FV-NI Investments ………………………. 14,200

LO 3 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-21 Chapter 9

BRIEF EXERCISE 9.10

(a) IFRS
FV-NI Investments………………………………. 1,044.00
Cash ($1,000 X 1.044)…………………..…. 1,044.00

(b)
Interest Receivable (7% X $1,000 X 3/12)…... 17.50
Investment Income or Loss …..…….… 17.50

(d) ASPE
Interest Receivable (7% X $1,000 X 3/12) …… 17.50
FV-NI Investments ………………………… 1.84
Interest Income (6% X $1,044 X 3/12) ….. 15.66
(e)
FV-NI Investments ……………………………… 12.84
Investment Income or Loss2 …………… 12.84
2
$1,055 – ($1,044 – $1.84)

LO 3 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-22 Chapter 9

BRIEF EXERCISE 9.11

(a)
FV-NI Investments ……………………………… 970
Interest Receivable……………………………... 10
Cash…………………………………………. 980

(b)
Interest Receivable……………………………... 45
Investment Income or Loss1...………....... 45
1
$1,000 X 6% X 9/12

Investment Income or Loss2…………………… 7

FV-NI Investments………………………… 7
2
($970 - $963)

(c)
Cash ($1,000 X 6% X 12/12)…………………… 60
Interest Receivable ($10 + $45) ………… 55
Investment Income or Loss3 ……………. 5
3
($1,000 X 6% X 1/12)

(d)
Cash ………………………………………………. 961
Loss on Disposal of Investments – FV-NI….. 2
FV-NI Investments ………………………... 963

LO 3 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-23 Chapter 9

BRIEF EXERCISE 9.12

(a) FV-OCI Investments......................................... 23,400

Cash........................................................... 23,400

(b) Cash ($3.25 per share X 300 shares).............. 975

Dividend Revenue..................................... 975

(c) Unrealized Gain or Loss – OCI1....................... 1,050

FV-OCI Investments............................... 1,050
1
($74.50 X 300 shares) - $23,400
= $22,350 – $23,400 = $1,050

LO 4 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-24 Chapter 9

BRIEF EXERCISE 9.13

FV-OCI Investments ………………………… 500

Unrealized Gain or Loss – OCI ……… 500
To adjust to fair value at date of disposal
($73,000 - $72,500)

Cash …………………………………………… 73,000

FV-OCI Investments …………………… 73,000
To record disposal

Accumulated Other Comprehensive

Income 1…………….…………….………… 3,000
Retained Earnings …………………… 3,000
1
($73,000 - $70,000) or $2,500 + $500
To reclassify holding gain

LO 4 BT: AP Difficulty: M Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-25 Chapter 9

BRIEF EXERCISE 9.14

Unrealized Gain or Loss – OCI ………… 500

FV-OCI Investments…….…………… 500
To adjust to fair value at date of disposal
($72,000 - $72,500)

Cash …………………………………………… 72,000

FV-OCI Investments …………………… 72,000
To record disposal

Loss on Disposal of Investments FV-OCI1… 2,000

Unrealized Gain or Loss – OCI……… 2,000
1
($1,500 unrealized loss + $500 unrealized loss)
To reclassify holding loss

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Solutions Manual 9-26 Chapter 9

BRIEF EXERCISE 9.15

(a)
FV-OCI Investments1.........................................................
263,600
Cash.......................................................................... 263,600
1
(10,000 X $26.18) + $1,800

(b)
Cash ($1.02 X 10,000)……………………….. 10,200
Dividend Revenue ……………………… 10,200

(d)
Gross selling price: 10,000 X $28.10 = $281,000
Less brokerage costs (1,925)
Proceeds from sale 279,075
Carrying amount of shares (271,500)
Additional holding gain on shares $ 7,575

FV-OCI Investments ………………………… 7,575

Unrealized Gain or Loss – OCI ……… 7,575
To adjust to fair value at date of disposal

Cash …………………………………………… 279,075

FV-OCI Investments …………………… 279,075
To record disposal

Solutions Manual 9-27 Chapter 9

BRIEF EXERCISE 9.15 (CONTINUED)

(d) (Continued)

Accumulated Other Comprehensive

Income 3…………….…………….………… 15,475
Retained Earnings …………………… 15,475
3
($7,900 + $7,575)
To reclassify holding gain

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BRIEF EXERCISE 9.16

(a) Other comprehensive income (loss) for 2023: $(20,830)

(b) Comprehensive income for 2023: $651,853 or ($672,683 –

$20,830)

(c) Accumulated other comprehensive income, December 31,

2023: $16,443 or ($37,273 – $20,830)

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BRIEF EXERCISE 9.17

(a) ASPE: 1, 2
(b) IFRS: 1, 2, 3, 4

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Solutions Manual 9-28 Chapter 9

BRIEF EXERCISE 9.18

(a) ASPE: Incurred loss model – for all investments

measured using the cost/amortized cost method.
Fair value model – for equity investments with
active market prices and derivatives.

(b) IFRS: Expected loss model – for all investments

measured using the cost/amortized cost method
and for debt securities accounted for using FV-
OCI.
Fair value model – likely for all investments
measured at fair value. Note that for equity
investments measured using FV-OCI, impairment
losses would be booked through OCI.
LO 5 BT: C Difficulty: M Time: 10 min. AACSB: None CPA: CPA: cpa-t001 Reporting

BRIEF EXERCISE 9.19

Under the expected loss model, if an entity determines that there

has been a significant increase in credit risk, the entity must
consider the risk of default over the life of the investment. This
requires the entity to estimate lifetime credit losses considering
the probability of default over the life of the investment along with
the expected cash shortfall.

Conversely, if the entity determines that there has not been a

significant increase in credit risk, the entity must consider the risk
of default in the next 12-month period. The entity would estimate
the lifetime credit losses, considering the probability of default
over the next 12-month period and the expected cash shortfall.
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Solutions Manual 9-29 Chapter 9

BRIEF EXERCISE 9.20

If the company determines there is no significant increase in risk,

the risk of default is considered for the next 12 months.

Therefore, the loss allowance is calculated based on the 12-month

expected credit losses as follows:

0.01 X .20 X $55,000 = $110

The journal entry is as follows:

Loss on Impairment…………………………… 110

Bond Investment at Amortized Cost… 110
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BRIEF EXERCISE 9.21

If the company determines there has been a significant increase in

credit risk, the risk of default must be considered over the life of
the investment.

Therefore, the loss allowance is calculated based on the

probability of default over the life of the investment and the
expected cash shortfall as follows:

0.05 X .50 X $55,000 = $1,375

The journal entry is as follows:

Loss on Impairment…………………………… 1,375

Bond Investment at Amortized Cost… 1,375

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Solutions Manual 9-30 Chapter 9

BRIEF EXERCISE 9.22

2023 Loss on Impairment..........................................................

9
Bond Investment at Amortized Cost...................... 9
$100 minus higher of the discounted cash
flow using current market rate and its
NRV: $100 - $91 = $9

2024 Bond Investment at Amortized Cost….. 9

Recovery of Loss from Impairment 9
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BRIEF EXERCISE 9.23

Investment in Associate......................................... 100

Cash.................................................................. 100
To record investment purchase

Investment in Associate......................................... 6
Investment Income or Loss1........................... 6
1
(40% X $15)
To record investment income

Cash2......................................................................... 2
Investment in Associate.................................. 2
2
(40% X $5)
To record receipt of dividend
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Solutions Manual 9-31 Chapter 9

BRIEF EXERCISE 9.24

January 2
Investment in Associate......................................... 1,000
Cash.................................................................. 1,000
To record investment purchase

Cost of 25% investment in Krov Corp. shares...... $1,000

25% of Krov Corp.’s carrying amount (25% X $3,600) 900
Payment in excess of book value of Krov Corp.... 100
Fair value allocation to unrecorded intangibles.... (100)
Goodwill (unexplained excess)............................... $ 0

Annual amortization of excess payment for unrecorded

intangibles:
$100 ÷ 20-year remaining life = $5 per year

Dividend received from associate:

Cash ($12 X 25%)..................................................... 3
Investment in Associate.................................. 3
To record receipt of dividend

Julip’s share of associate’s net income:

Investment in Associate…………………………….. 15
Investment Income or Loss ($60 X 25%) …… 15
To record investment income

Amortization of Krov’s unrecognized intangible assets:

Investment Income or Loss ………………………… 5
Investment in Associate ……………………… 5
To record amortization of fair value difference
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Solutions Manual 9-32 Chapter 9

BRIEF EXERCISE 9.25

(a) FV-NI Investments ........................................... 1,000

Cash.......................................................... 1,000
To record investment purchase

Cash ($12 X 25%)............................................. 3

Dividend Revenue.................................... 3
To record receipt of dividend

FV-NI Investments ........................................... 20

Investment Income or Loss1.................... 20
1
($1,020 - $1,000)
To record fair value adjustment

(b) Other Investments .......................................... 1,000

Cash ……………………………………….... 1,000
To record investment purchase

Cash ($12 X 25%)............................................. 3

Dividend Revenue.................................... 3
To record receipt of dividend
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Solutions Manual 9-33 Chapter 9

BRIEF EXERCISE 9.26

(a)
If Beckett acquires 40% of Kyla Corp.’s shares for $1.6 million
cash, and can exercise significant influence over Kyla’s policies,
Beckett’s statement of financial position will be affected as
follows:

A L SE
+1.6M Invest. in
Associate
-1.6M Cash
-0- No net -0- No effect -0- No effect
effect

(b)
If Beckett acquires 60% of Kyla Corp.’s shares for $2.4 million
cash, and now controls Kyla’s operations (Kyla is a subsidiary
company), Beckett’s consolidated statement of financial position
will be affected as follows:

A L SE
+10.0 Due to +6.0M Due to +1.6M 40% non-
M Kyla’s Kyla’s controllin
assets liabilities g interest
in Kyla’s
net assets
- 2.4M Cash _____ _____
+ +6.0M +1.6M1
7.6M
1
Non-controlling interest is computed as follows: 40% of $4.0M
(net assets) = $1.6M

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Solutions Manual 9-34 Chapter 9

BRIEF EXERCISE 9.27

The requirement to disclose both the carrying amount of each

type of investment on the statement of financial position and the
income statement amounts allows the reader to assess how
significant the financial asset investments are to an entity’s
financial position (total assets, net assets) and to its performance
(net income, comprehensive income). In some enterprises
(pension plans, insurance companies, etc.) these investments are
very significant, whereas in others (most manufacturers, retail
outlets, etc.) they do not contribute very much to the economic
resource base of the entity or to its profitability.

Once the significance is known, a better risk assessment of the

entity can be performed because financial asset investments tend
to expose entities to specific types of financial risks.
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BRIEF EXERCISE 9.28

Level 1 assets have fair values that are objectively determined,

meaning that they are measured at market values for identical
assets traded in a liquid market. All trading assets are measured
at fair value. Significant amounts of public data is available in
order to value the assets.

Level 2 assets are those that involve more judgement in

determining the value. Data on their valuation is not readily
available. Level 2 assets are valued based on other market data
and measures.

A very small percentage of assets are categorized as level 3

assets. IFRS requires additional notes disclosures for level 3
assets. Data, such as market prices, is not readily available for
level 3 assets, thus leading to measurement uncertainty.

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Solutions Manual 9-35 Chapter 9

BRIEF EXERCISE 9.29

Environmental, Social and Governance (ESG) Bonds generate

capital for companies to aid them in ESG initiatives. This capital is
linked to ESG activities and is not, in general, linked to one
specific initiative.

Measurement uncertainty arises due to the unpredictable nature of

the cashflows depending on what sustainable development goals
are linked to the bonds and whether they are met, thereby causing
income statement volatility. Further, the measurement basis of the
instrument on the statement of financial position may be affected
when a company fails to meet the ESG targets. These fluctuations
in cashflows and measurement may mean that ESG bonds may
not qualify for the amortized cost method.

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Solutions Manual 9-36 Chapter 9

SOLUTIONS TO EXERCISES

EXERCISE 9.1
Parts a. and b.

(i) ASPE (ii) IFRS

1 Amortized cost, unless the company FV-NI or FV-OCI.
chooses the fair value option (FV-NI).
It looks as though the company’s
For cost / amortized cost, no income business model is to either hold
statement impact other than for the (and collect principal and interest)
sale of the bond and for interest or sell these types of securities.
income. Therefore, FV-OCI might make the
most sense.
Classify as a FV-NI security since the
company’s intent is to manage the The FV-OCI method will not
changing fair values and sell the bond increase volatility since
as soon as the value increases. Gains remeasurement gains and losses
and losses on remeasurement will are booked through OCI.
affect net income and therefore may
introduce volatility.
2 If no active market prices are available FV-NI or FV-OCI (if the company
for Farm Corp., then at cost; if active elects to use this method).
market prices are available, then at FV-
NI. This will be reassessed if and when When the company acquires 20%
a more significant holding is achieved. or more, the investment will be
reclassified to an equity
If accounted for at cost – no impact on investment if significant influence
net income except for dividends. If over Farm Corp. exists.
accounted for using FV-NI – this will
introduce volatility since gains and If FV-NI is used, it will introduce
losses are booked through net income. volatility into net income.
3 Amortized cost, unless the company Amortized cost, FV-NI, or FV-OCI
chooses the fair value option (FV-NI). depending on the company’s
With such a short maturity, its cost business model (which is not
plus accrued interest will be noted in the question).
representative of FV under the
amortized cost method. The only method that will
introduce volatility is the FV-NI
For cost / amortized cost, no income method. With such a short
statement impact other than for the maturity, its cost plus accrued
sale of the bond ahead of maturity date interest will be representative of
and for interest income. FV under the amortized cost
method.
Gains and losses on remeasurement
will affect net income and therefore
may introduce volatility if FV-NI used.

Solutions Manual 9-37 Chapter 9

EXERCISE 9.1 (CONTINUED)

a. & b. (continued)

(i) ASPE (ii) IFRS

4 Amortized cost should be used Amortized cost or FV-OCI. The
unless the FV option is elected (FV- business model appears to be to
NI). hold the bond and collect
For cost / amortized cost, no income principal and interest (amortized
statement impact other than for the cost method). Having said that –
sale of the bond and for interest it looks as though the company
income. now intends to perhaps sell the
securities. Therefore, the FV-OCI
Gains and losses on remeasurement might make the most sense.
will affect net income and therefore
may introduce volatility if FV-NI used. Neither method will introduce
volatility.
5 Amortized cost should be used Amortized cost method as the
unless the FV option is elected (FV- company’s intent is to collect
NI). principal and interest and hold
the bonds until maturity.
Amortized cost appears to be the
best choice here based on the This will not introduce any
purpose of the investment. volatility.

For cost / amortized cost, no income

statement impact other than for the
sale of the bond (although not
intended) and for interest income.

6 Cost should be used unless the FV FV-NI unless the company

option is elected (FV-NI). If the shares chooses to use FV-OCI (which is
are traded in an active market – FV-NI an accounting policy choice). The
is required. FV-OCI method might make sense
given the fact that the company
Use of FV-NI will introduce volatility. intends to hold for a longer
Given the intent (to hold for the long- period (and therefore short-term
term) it makes sense to use the cost gains and losses are not as
method as long as the shares do not relevant)
trade in an active market.
The FV-OCI method will not
introduce any volatility.

Solutions Manual 9-38 Chapter 9

EXERCISE 9.1 (CONTINUED)

a. & b. (continued)

(i) ASPE (ii) IFRS

7 Cost should be used unless the FV FV-NI or FV-OCI (which is an
option is elected (FV-NI). If the shares accounting policy choice). Since
are traded in an active market – FV-NI they are held for longer term
is required. strategic purposes, the entity
would probably choose the FV-
Use of FV-NI will introduce volatility. OCI approach.
Given the nature of the investment This would not introduce any
(long-term) – the cost method may be volatility.
the best as long as the shares do not
trade in an active market. Short-term
fluctuations in market price are not as
relevant since the investment is a
long-term one.

Part c.

Financial statement preparers are allowed to select among

accounting options provided that the selection does not
violate any of the accounting standards. In addition, the
policy that is the most transparent as to the company’s
business model would be the optimal choice. The company
should not select accounting options based on a desired
outcome.
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Solutions Manual 9-39 Chapter 9

EXERCISE 9.2
a. January 1, 2023
Bond Investment at Amortized Cost........... 300,000
Cash....................................................... 300,000

b. December 31, 2023

Cash............................................................... 30,000
Interest Income1.................................... 30,000
1
($300,000 x 10%)

c. December 31, 2024

Cash............................................................... 30,000
Interest Income...................................... 30,000

d. January 1, 2028
Cash............................................................... 300,000
Bond Investment at Amortized Cost. . . 300,000
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Solutions Manual 9-40 Chapter 9

EXERCISE 9.3

a. January 1, 2023
Bond Investment at Amortized Cost...... 537,907.40
Cash.................................................. 537,907.40

b.
Schedule of Interest Income
and Bond Premium Amortization
Effective Interest Method
12% Bonds Sold to Yield 10%

Premium Carrying
Cash Interest Amorti- Amount
Date Received Income zation of Bonds
01/01/23 — — — $537,907.40
12/31/23 $60,000 $53,790.74 $6,209.26 531,698.14
12/31/24 60,000 53,169.81 6,830.19 524,867.95
12/31/25 60,000 52,486.80 7,513.20 517,354.75
12/31/26 60,000 51,735.48 8,264.52 509,090.23
12/31/27 60,000 50,909.771 9,090.231 500,000.00
$300,000 $262,092.60 $37,907.40
1
Adjusted due to rounding.

c. December 31, 2023

Cash...............................................................60,000.00
Bond Investment at Amortized Cost. . . 6,209.26
Interest Income...................................... 53,790.74

d. December 31, 2024

Cash...............................................................60,000.00
Bond Investment at Amortized Cost. . . 6,830.19
Interest Income...................................... 53,169.81

Solutions Manual 9-41 Chapter 9

EXERCISE 9.3 (CONTINUED)

e. January 1, 2028
Cash.......................................................... 500,000.00
Bond Investment at Amortized Cost 500,000.00

f. Cost of bond when acquired $537,907.40

Face value of bond (maturity value) 500,000.00
Premium to be amortized $ 37,907.40
Number of interest periods = 5
Premium to be amortized each year:
$37,907.40 ÷ 5 = $7,581.48

Cash...............................................................60,000.00
Bond Investment at Amortized Cost. . . 7,581.48
Interest Income...................................... 52,418.52

g. Total interest income,

Part b. above: $262,092.60
Part f. above:
$52,418.52 X 5 = $262,092.60
Conclusion: the two methods result in the same amount of
total interest income because the cash flows and the
premium amount are the same in both cases. The two
methods differ only in the timing of interest income
recognition.
h. Under the effective interest method, the interest income
reported, when compared with the investment’s carrying
amount, always corresponds to the rate the bond was
purchased to yield, and it is the same rate and relationship
each year. This is what an investor would expect to see – as
the investment carrying amount is reduced, so is the amount
of interest income.

Solutions Manual 9-42 Chapter 9

EXERCISE 9.3 (CONTINUED)

h. (continued)

Under the straight-line method, the interest income reported

each year stays the same, even though the investment’s
carrying amount changes (in this case, the carrying amount
is reduced each period). This makes it appear that the
interest income is at a higher yield each period. This is not
the economic reality.

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Solutions Manual 9-43 Chapter 9

EXERCISE 9.4

a. Schedule of Interest Income

and Bond Discount Amortization
Effective Interest Method
9% Bond Purchased to Yield 12%

Bond Carrying
Cash Interest Discount Amount
Date Received Income Amortization of Bonds
01/01/23 — — — $278,384
1
12/31/23 $27,000 $33,406 $6,406 284,790
12/31/24 27,000 34,175 7,175 291,965
2
12/31/25 27,000 35,035 8,035 300,000
11
11 $278,384 X .12 = $33,406
2
Adjusted due to rounding
A step-by-step solution for this section of the problem can be
found in the student resources section of the online course.

b. December 31, 2024

Cash......................................................... 27,000
Bond Investment at Amortized Cost..... 7,175
Interest Income............................... 34,175

c. December 31, 2025

Cash......................................................... 27,000
Bond Investment at Amortized Cost..... 8,035
Interest Income............................... 35,035
To record collection of interest

Cash......................................................... 300,000
Bond Investment at Amortized Cost 300,000
To record maturity of bond investment

Alternatively, the entries could be combined in one

compound entry:

Cash......................................................... 327,000
Interest Income.................................. 35,035

Solutions Manual 9-44 Chapter 9

Bond Investment at Amortized Cost 291,965

Solutions Manual 9-45 Chapter 9

EXERCISE 9.4 (CONTINUED)

d. Cash ……………………………………… 285,270

Loss on Disposal of Investments –
Cost/Amortized Cost………............... 6,695
Bond Investment at Amortized Cost 291,965

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Solutions Manual 9-46 Chapter 9

EXERCISE 9.5

FV-NI Investments …………………….. 537,907.40

Cash ……………………………….. 537,907.40

b.
December 31, 2023
Cash …………………………………….. 60,000.00
FV-NI Investments ………………. 6,209.26
Interest Income ………………….. 53,790.74
To record interest collected

FV-NI Investments ……………………. 2,501.86

Unrealized Gain or Loss 1 ….. 2,501.86
1
$534,200 – ($537,907.40 - $6,209.26)
= $534,200 - $531,698.14 = $2,501.86
To record fair value adjustment

December 31, 2024

Cash ……………………………………… 60,000.00
FV-NI Investments ……………….. 6,830.19
Interest Income …………………… 53,169.81
To record interest collected

Unrealized Gain or Loss 2………….. 12,369.81

FV-NI Investments ………………. 12,369.81
2
($534,200 – $6,830.19) - $515,000
= $527,369.81 - $515,000 = $12,369.81
To record fair value adjustment

Solutions Manual 9-47 Chapter 9

EXERCISE 9.5 (CONTINUED)

b. (continued)

December 31, 2025

Cash …………………………………….. 60,000.00
FV-NI Investments ……………… 7,513.20
Interest Income …………………. 52,486.80
To record interest collected

FV-NI Investments ……………………. 5,513.20

Unrealized Gain or Loss3…….. 5,513.20
3
$513,000 – ($515,000 - $7,513.20)
= $513,000 - $507,486.80 = $5,513.20

Assuming no change in the credit rating of the company that

issued the bond, it appears that market rates increased rather than
decreased. Market prices of bonds fall when interest rates rise,
and prices of bonds rise when interest rates fall. However, part of
the decrease in the fair value of this bond is due to the reduction
in time to maturity.
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Solutions Manual 9-48 Chapter 9

EXERCISE 9.6

February 1
FV-NI Investments.............................................................
300,000
1
Interest Receivable ……………………. 10,000
Cash ……………………………….. 310,000
1
$300,000 X 10% X 4/12 = $10,000

April 1
Cash 2.................................................................................
15,000
Interest Receivable ………………. 10,000
Investment Income or Loss ……. 5,000
2
$300,000 X 10% X 6/12 = $15,000

June 15
FV-NI Investments ……………………... 200,000
Interest Receivable3 ……………………. 750
Cash ……………………………….. 200,750
3
$200,000 X 9% X ½ /12 = $750

August 31
Cash 6……………………………………… 61,900
Loss on Disposal of Investments –
FV-NI4………..………………………… 600
Investment Income or Loss5….... 2,500
FV-NI Investments ………………. 60,000
4
$60,000 – ($60,000 X .99)
5
($60,000 X 10% X 5/12)
6
Cash = ($60,000 X .99) + $2,500
October 1
Cash ……………………………………… 12,000
Investment Income or Loss7……. 12,000
7
($300,000 - $60,000) X 10% X 6/12

Solutions Manual 9-49 Chapter 9

EXERCISE 9.6 (CONTINUED)

December 1
8
Cash …………………………………….. 9,000
Interest Receivable ……………… 750
Investment Income or Loss …… 8,250
8
$200,000 X 9% X 6/12 = $9,000
To record interest collected

December 31
Interest Receivable …………………… 7,500
Investment Income or Loss ……. 7,500
To accrue interest
Accrued interest to Dec. 31:
Gibbons: $240,000 X 10% X 3/12 = $6,000
Sampson: $200,000 X 9% X 1/12 = 1,500
$7,500

Carrying Fair
December 31 Amount Value
Gibbons bonds $240,000 $236,400
Sampson bonds 200,000 202,000
$440,000 $438,400

Investment Income or Loss9 …………. 1,600

FV-NI Investments ………………. 1,600
9
($440,000 - $438,400)
To record fair value adjustment

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Finance

Solutions Manual 9-50 Chapter 9

EXERCISE 9.7
a.
Investment Income or Loss1............................................
1,400
FV-NI Investments................................................... 1,400
1
($50,000 – $48,600)

b.
Cash ...................................................................................
9,500
Investment Income or Loss...................................... 500
FV-NI Investments................................................... 9,000

c.
Carrying
Securities Amount2 Fair Value
Moonstar Corp. shares $19,000 $19,300
Radius Ltd. shares 20,600 20,500
Total of portfolio $39,600 $39,800
Adjustment needed to bring portfolio
to fair value $200 Dr
2
Carrying amount for 2023 reflects the FV adjustments as at
December 31, 2022

FV-NI Investments.............................................................
200
Investment Income or Loss.................................... 200
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Solutions Manual 9-51 Chapter 9

EXERCISE 9.8
a.
August 31, 2022
FV-NI Investments.............................................................
104,490
Interest Receivable ($100,000 X 9% X 10/12).................. 7,500
Cash.......................................................................... 111,990

November 1, 2022
Cash ($100,000 X 9%)........................................................
9,000
Interest Receivable.................................................. 7,500
Investment Income or Loss.................................... 1,500

December 31, 2022

Interest Receivable ($100,000 X 9% X 2/12)....................
1,500
Investment Income or Loss.................................... 1,500
To accrue interest

Investment Income or Loss1............................................

1,290
FV-NI Investments................................................... 1,290
1
($104,490 – $103,200)
To record fair value adjustment

January 15, 2023

2
Cash .................................................................................
104,775
3
Loss on Disposal of Investment FV-NI .......................... 300
4
Investment Income or Loss ................................... 375
Interest Receivable.................................................. 1,500
FV-NI Investments................................................... 103,200

Solutions Manual 9-52 Chapter 9

EXERCISE 9.8 (CONTINUED)

a. (continued)
2
Selling price of bonds $102,900
Interest since last interest payment
($100,000 X 9% X 2.5/12) 1,875
Cash received from purchaser $104,775
3
Selling price of bonds $102,900
Carrying amount of bonds Dec. 31, 2022 103,200
Loss on disposal of investments – FV-NI $ 300
4
Interest since last interest payment $1,875
Interest accrued at December 31 1,500
Additional interest accrued to date of sale $ 375
b.
For 2022, the number of months the bond was held is: August
31 to December 31 = 4 months. The amount of interest earned
and reported on the income statement for 2022 should be
$100,000 X 9% X 4/12 = $3,000.
The income statement would also report Investment Loss of
$1,290 from the fair value adjustment.

The investment income related to interest from the investment

for the time the investment was held until disposal was $3,375
calculated as follows:

Interest purchased Aug. 31, 2022 $(7,500)

Interest received Nov. 1, 2022 9,000
Interest accrued Dec. 31, 2022 1,500
Interest to Jan. 15, 2023 375
Total interest income 3,375

Solutions Manual 9-53 Chapter 9

EXERCISE 9.8 (CONTINUED)

c. The overall investment income earned from the investment

was $1,785 calculated as follows:
3
Total interest earned (part b) ,375
Unrealized loss at Dec. 31, 2022 1,290
Realized loss recorded Jan. 2023 300
1,590
Net income overall $1,785

Alternatively:

Cash out:
August 31, 2022 $111,990
Cash in:
November 1, 2022 $ 9,000
January 15, 2023 104,775 113,775
Net positive return $ 1,785

This return represents a 4.56% annual return on the

investment [($1,785/4.5 months X 12) / $104,490]. The
company earns a return on excess funds if the return on the
bond investment exceeds the interest rate on its savings
account. The actual return of 4.56% is lower than the bond’s
stated rate of 9% since the company purchased the bond at a
premium and incurred a loss on the market value of the bond
at resale. This offset some of the interest earned while the
bond was held.

LO 8 BT: AP Difficulty: M Time: 30 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 9-54 Chapter 9

EXERCISE 9.9

a.
Investment Income or Loss1............................................
5,900
FV-NI Investments......................................................... 5,900
1
($311,500 – $305,600)

b.
Cash 2.................................................................................
67,000
Investment Income or Loss............................................. 2,000
FV-NI Investments ………………. 69,000
2
(1,500 X $45) – $500

c.
FV-NI Investments (700 X $75).........................................
52,500
Investment Income or Loss.............................................
1,300
Cash.......................................................................... 53,800

Carrying Fair
(d. Securities Amount3 Value

Hearn Corp., common $175,000 $175,000

Oberto Ltd., common 52,500 50,400
Alessandro Inc., preferred 61,600 58,000
Total portfolio $289,100 $283,400
Adjustment needed - credit $5,700 Cr
3
Reflects the fair value of the investments at December 31, 2022

Investment Income or Loss.............................................

5,700
FV-NI Investments........................................................ 5,700
LO 3 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-55 Chapter 9

EXERCISE 9.10

a. FV-NI Investments....................................... 3,000

Investment Income or Loss................ 3,000

b. FV-OCI Investments.................................... 3,000

Unrealized Gain or Loss- OCI............. 3,000
Note: Each investment could also be adjusted separately.

c. The amounts are the same; however, the reporting is

different under both models. Specifically, the holding gain
on the investments accounted for using the fair value
through net income (FV-NI) model is reported as part of
investment income/loss in the income statement under Other
Revenues and Gains, and this account is subsequently
closed out to Retained Earnings at the end of the period. The
holding gain or loss for investments accounted for using the
fair value through other comprehensive income (FV-OCI)
model is reported as a part of other comprehensive income
and is closed out to Accumulated Other Comprehensive
Income (AOCI) at the end of the period. The holding gain or
loss is never recycled to income under FV-OCI for equity
investments. Both the FV-OCI and FV-NI securities are
reported at fair value on the SFP.

LO 3,4 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-56 Chapter 9

EXERCISE 9.11

a. January 15, 2023

FV-NI Investments (9,000 X $33.50).............. 301,500
Commission Expense................................... 1,980
Cash........................................................ 303,480

April 1, 2023
FV-NI Investments (5,000 X $52.00).............. 260,000
Commission Expense................................... 3,370
Cash........................................................ 263,370

September 10, 2023

FV-NI Investments (7,000 X $26.50).............. 185,500
Commission Expense................................... 2,910
Cash........................................................ 188,410

b. May 20, 2023

Cash [(3,000 X $35) – $2,850]........................ 102,150
FV-NI Investments1................................ 100,500
Gain on Disposal of Investments –
FV-NI 2................................................ 1,650
1
(3,000/9,000 X $301,500)
2
Gain on disposal: (3,000 X $35) - $100,500 = $4,500
Transaction costs expensed (2,850)
Net investment income $1,650

Solutions Manual 9-57 Chapter 9

EXERCISE 9.11 (CONTINUED)

Fair
c. Shares Cost Value
Nirmala Corp. (6,0003 shares) $201,000 $180,000
Oxana Corp. (5,000 shares) 260,000 275,000
WTA Corp. (7,000 shares) 185,500 196,000
Total portfolio $646,500 $651,000
3
Of the 9,000 shares purchased on January 15, 2023, 3,000
were sold May 20, 2023.

December 31, 2023

FV-NI Investments......................................... 4,500
Investment Income or Loss.................. 4,500

d. The total purchase price of these investments is:

Nirmala: (9,000 X $33.50) + $1,980 = $303,480
Oxana: (5,000 X $52.00) + $3,370 = $263,370
WTA: (7,000 X $26.50) + $2,910 = $188,410

The purchase entries will be:

January 15, 2023

FV-OCI Investments...................................... 303,480
Cash........................................................ 303,480

April 1, 2023
FV-OCI Investments...................................... 263,370
Cash........................................................ 263,370

September 10, 2023

FV-OCI Investments...................................... 188,410
Cash........................................................ 188,410

Solutions Manual 9-58 Chapter 9

EXERCISE 9.11 (CONTINUED)

d. (continued)

May 20, 2023

4
FV-OCI Investments ..................................... 990
Unrealized Gain or Loss - OCI.............. 990
To adjust to fair value at date of disposal

Cash [(3,000 X $35) – $2,850]........................ 102,150

FV-OCI Investments............................... 102,150
To record disposal

Accumulated Other Comprehensive Income 990

Retained Earnings................................. 990
To reclassify holding gain
4
Gross selling price of 3,000 shares at $35 $105,000
Less: Brokerage commissions (2,850)
Net proceeds from sale 102,150
Carrying amount of 3,000 shares
($303,480 X 3,000/9,000) (101,160)
Gain on disposal of shares $ 990

Solutions Manual 9-59 Chapter 9

EXERCISE 9.11 (CONTINUED)

d. (continued)

December 31, 2023

Unrealized Gain or Loss - OCI...................... 3,100
FV-OCI Investments............................... 3,100

Note: It would also be appropriate to make separate entries

for each investment

Unrealized
Carrying Fair Gain
Shares Amount Value (Loss)
Nirmala Corp., 6,000 shs *$202,3205 $180,000 $(22,320)
Oxana Corp., 5,000 shs 263,370 275,000 (11,630)
WTA Corp., 7,000 shs 188,410 196,000 7,590)
Total portfolio $654,100 $651,000 (3,100)
5
$303,480 + $990 – $102,150 = $202,320

e. Other comprehensive income

Items that may not be reclassified subsequently
to net income:
Holding losses arising during the year..................... $ 2,110

Fair value adjustment May 20

On Nirmala Corp. shares sold................................... $ 990
Year-end fair value adjustment for portfolio............ (3,100)
Total .......................................................................... $(2,110)

f. Balance of Accumulated Other Comprehensive Income:

Beginning balance...................................................... $0
Other comprehensive income for 2023 (part e.)....... (2,110)
Less Reclassification adjustment............................. (990)
Ending balance December 31, 2023.......................... $(3,100)
LO 3,4,8 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-60 Chapter 9

EXERCISE 9.12

a. January 1, 2022

Bond Investment at Amortized Cost....... 322,744.72

Cash.................................................... 322,744.72

b. Schedule of Interest Revenue and

Bond Premium Amortization
Effective-Interest Method
12% Bonds Sold to Yield 10%

Cash Interest Premium Carrying Amount

Date Received Income Amortized of Bonds
1/1/22 — — — $322,744.72
12/31/22 $36,000 $32,274.47 $3,725.53 319,019.19
12/31/23 36,000 31,901.92 4,098.08 314,921.11
12/31/24 36,000 31,492.11 4,507.89 310,413.22
12/31/25 36,000 31,041.32 4,958.68 305,454.54
12/31/26 36,000 30,545.46 *5,454.54 300,000.00

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

c. December 31, 2022

Cash............................................................... 36,000.00
Bond Investment at Amortized Cost. . . 3,725.53
Interest Income...................................... 32,274.47

d. December 31, 2023

Cash............................................................... 36,000.00
Bond Investment at Amortized Cost. . . 4,098.08
Interest Income...................................... 31,901.92

Solutions Manual 9-61 Chapter 9

EXERCISE 9.12 (CONTINUED)

Part e:

TOTAL CASH RECEIVED

37,000

36,000

35,000

34,000 3,726 4,098 4,508 4,959

5,455
33,000

32,000

31,000

30,000
32,274 31,902 31,492 31,041
29,000 30,545
28,000

27,000
2022 2023 2024 2025 2026

Interest Income Premium Amortization

A step-by-step solution for this section of the problem can be

found in the student resources section of the online course.

LO 2,8 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 cpa-t007 Reporting and DAIS

Solutions Manual 9-62 Chapter 9

EXERCISE 9.13

a. December 31, 2022

Cash............................................................... 36,000.00
FV-OCI Investments.............................. 3,725.53
Interest Income ($322,744.72 X .10)..... 32,274.47
To record collection of interest

FV-OCI Investments...................................... 1,480.81

Unrealized Gain or Loss—OCI1............
1,480.81
1
($320,500.00 – $319,019.19 CV)
To record fair value adjustment

b. December 31, 2023

Unrealized Gain or Loss—OCI2.................... 7,401.92

FV-OCI Investments.............................. 7,401.92
2
($320,500.00 – $4,098.08 amortization - $309,000.00)
To adjust to fair value at date of disposal

Amortized Unrealized
Cost Fair Value Gain (Loss)
FV-OCI Investment $314,921.11 $309,000.00 $(5,921.11)
Previous fair value adjustment
in 2022—Dr. (1,480.81)
Fair value adjustment—Cr. $(7,401.92)

Cash............................................................... 309,000.00
FV-OCI Investments.......................... 309,000.00
To record disposal

Loss on Disposal of Investments – FV-OCI3. 5,921.11

Unrealized Gain or Loss – OCI............. 5,921.11
3
($309,000.00 - $314,921.11)
To reclassify holding loss

Solutions Manual 9-63 Chapter 9

LO 4 BT: AP Difficulty: M Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-64 Chapter 9

EXERCISE 9.14

a. July 1, 2023

FV-OCI Investments.................................. 103,585

Cash.................................................... 103,585

b. Schedule of Interest Revenue and

Bond Premium Amortization
Effective-Interest Method
6% Bonds Sold to Yield 5%
Amortized
Cash Interest Premium
Cost of
Received Revenue Amortized
Date Bonds
July 1, 2023 — — — $103,585
Dec. 31, 2023 $3,000 $2,590 $410 103,175
June30, 2024 3,000 2,579 421 102,754
Dec. 31, 2024 3,000 2,569 431 102,323

c. December 31, 2023

Cash............................................................... 3,000
FV-OCI Investments.............................. 410
Interest Income...................................... 2,590
To record collection of interest

December 31, 2023

FV-OCI Investments...................................... 225
Unrealized Gain or Loss – OCI............. 225
To record fair value adjustment
($103,400 - $103,175)

Solutions Manual 9-65 Chapter 9

EXERCISE 9.14 (CONTINUED)

c. (Continued)

June 30, 2024

Cash............................................................... 3,000
FV-OCI Investments.............................. 421
Interest Income...................................... 2,579
To record collection of interest

December 31, 2024

Cash............................................................... 3,000
FV-OCI Investments.............................. 431
Interest Income...................................... 2,569
To record collection of interest

d. December 31, 2024

Unrealized Gain or Loss – OCI.................... 348
FV-OCI Investments.............................. 348
To record fair value adjustment to date of disposal
[$102,200 - ($103,400 - $421 - $431)]

December 31, 2024

Cash............................................................... 102,200
FV-OCI Investments.............................. 102,200
To record disposal of the bond

December 31, 2024

Loss on Disposal of Investments – FV-OCI 123
Unrealized Gain or Loss – OCI ................... 123
To reclassify accumulated unrealized gains
and losses from OCI to net income
($225 - $348) = $(123)
LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-66 Chapter 9

EXERCISE 9.15

a.
Miron Aggregates Ltd.
Statement of Financial Position
December 31
2024 2023
Long-Term Investments:
Investments in equity securities, FV-OCI ....... $ 0 $103,400

Shareholders’ Equity:
Accumulated Other Comprehensive Income
Unrealized gains on FV-OCI investments..... $ 0 $225

b.
Statement of Income
years ended December 31,
2024 2023
Other revenues and gains
Interest income1............................................. $5,148 $2,590
Loss on disposal of bonds........................ 123 _____
Net income............................................................. $5,025 $2,590
1
amortization table and entries E9-14:
$2,579 + $2,569 = $5,148 for 2024

c.
Statement of Comprehensive Income
years ended December 31,
2024 2023

Net income .............................................................. $5,025 $2,590

Other Comprehensive Income

Item that will be reclassified to net income:
Unrealized loss on FV-OCI investments2 (348) 225
Less: reclassified to net income 123 (225)
Comprehensive Income $4,800 $2,815
2
(Unrealized gain $225 in 2023 – unrealized loss $348 in 2024)

Solutions Manual 9-67 Chapter 9

EXERCISE 9.15 (CONTINUED)

d.
Miron Aggregates Ltd.
Statement of Changes in Shareholders’ Equity (Partial)
For the Years Ended December 31, 2023 and 2024
Accumulated
Other
Retained Comprehensive
Earnings Income
Balance January 1, 2023 $200,000 $ 0
Comprehensive income
Net income 2,590
Other comprehensive Income ________ 225
Balance December 31, 2023 $202,590 $225
Comprehensive income
Net income 5,025
Other comprehensive Income _______ (225)
Balance December 31, 2024 $207,615 $ 0

e.
Interest revenue – Taken from E9.14 amortization table part b.
Six months period to Dec. 31, 2023 $2,590
Six months period to July 1, 2024 2,579
Six months period to Dec. 31, 2024 2,569
Total interest revenue $7,738

Loss on sale of bond

Carrying amount of bond at date of sale $102,323
Proceeds from sale (102,200) (123)
Net increase in retained earnings ($207,615 - $200,000) $7,615

LO 4,8 BT: AP Difficulty: C Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-68 Chapter 9

EXERCISE 9.16

a. December 31, 2023

Unrealized Gain or Loss - OCI............ 3,600
FV-OCI Investments..................... 3,600
Note: It is also acceptable to prepare a separate entry for
each investment

b.
Wang Inc.
Statement of Financial Position
December 31, 2023

Long-Term Investments:
Investments in equity securities, FV-OCI ......... $366,100

Shareholders’ Equity:
Accumulated Other Comprehensive Income
Unrealized losses on FV-OCI investments.............. (3,600)

c.
Statement of Comprehensive Income

Net income
(including dividend income on equity investments) $ xxx
Other Comprehensive Income
Item that will not be reclassified to net income:
Unrealized net loss on FV-OCI investments (3,600)
Comprehensive Income $xxx – 3,600

Solutions Manual 9-69 Chapter 9

EXERCISE 9.16 (CONTINUED)

d.
January 20, 2024
FV-OCI Investments....................................... 3,300
Unrealized Gain or Loss – OCI1.......... 3,300
1
($150,000 - $153,300)
To adjust to fair value at date of disposal

Cash................................................................. 153,300
FV-OCI Investments ............................... 153,300
To record disposal

Retained Earnings.......................................... 21,900

Accumulated Other Comprehensive
Income2................................................. 21,900
2
($25,200 from 2023 - $3,300)
To reclassify holding loss

June 2024
Cash................................................................. 1,300
Dividend Revenue................................... 1,300

e. December 31, 2024

Carrying Holding
Investments Amount Fair Value Gain (Loss)
Burnham Corp. shares $140,600 $153,750 $13,150
Chi Ltd. shares 75,500 72,600 (2,900))
Total of portfolio $216,100 $226,350 $10,250

FV-OCI Investments.................................... 10,250

Unrealized Gain or Loss - OCI............ 10,250
Note: it would be equally correct to make a separate entry for
each investment

LO 4 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-70 Chapter 9

EXERCISE 9.17

a.
December 31, 2023
FV-OCI Investments....................................... 1,850
Unrealized Gain or Loss – OCI1.......... 1,850
December 31, 2024
Unrealized Gain or Loss – OCI2..................... 9,550
FV-OCI Investments ............................... 9,550

December 31, 2025

FV-OCI Investments....................................... 4,200
Unrealized Gain or Loss – OCI3............. 4,200

Dec. 31/23 Dec. 31/24 Dec. 31/25

Fair value of FV-OCI
investments $41,750 $32,200 $36,400
Original cost of FV-OCI
investments 39,900 39,900 39,900
Balance in accumulated
other comprehensive
income $ 1,850 $(7,700) $(3,500)

Proof of balance:
Entry, Dec. 31/231 $ 1,850 $ 1,850 $ 1,850
Entry, Dec. 31/242 -0- (9,550) (9,550)
Entry, Dec. 31/253 -0- -0- 4,200

Balance at year end $ 1,850 $(7,700) $(3,500)

Solutions Manual 9-71 Chapter 9

EXERCISE 9.17 (CONTINUED)

c.
February 13, 2026
FV-OCI Investments........................................... 1,600
Unrealized Gain or Loss – OCI4................. 1,600
4
($38,000 - $36,400)
To adjust to fair value at date of disposal

Cash.................................................................... 38,000
FV-OCI Investments................................... 38,000
To record disposal

Retained Earnings.............................................. 1,900

Accumulated Other Comprehensive
Income 5.................................................... 1,900
5
($39,900 - $38,000) or ($3,500 loss + $1,600 gain)
To reclassify holding loss

d. Balance AOCI December 31, 2025 (from b.) $(3,500)

Fair value adjustment to date of disposal 1,600
Reclassification entry to Retained Earnings 1,900
Balance AOCI December 31, 2026 $ 0

LO 4 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-72 Chapter 9

EXERCISE 9.18
a.
Cost FV-NI FV-OCI
Debit Credit Debit Credit Debit Credit
(1) Cash 4,500 4,500 4,500
Dividend Revenue 4,500 4,500 4,500
(5,000 X $0.90)

(2) $15.50 X 5,000 - $68,750

FV-NI Investments 8,750
Investment Income or Loss 8,750
FV-OCI Investments 8,750
Unrealized Gain or Loss - OCI 8,750

(3) Cash 4,500 4,500 4,500

Dividend Revenue 4,500 4,500 4,500

(4) $17 X 5,000 - $77,500

FV-NI Investments 7,500
Investment Income or Loss 7,500
FV-OCI Investments 7,500
Unrealized Gain or Loss - OCI 7,500

Solutions Manual 9-73 Chapter 9

EXERCISE 9.18 (CONTINUED)

b.
Cost FV-NI FV-OCI
(1) Effect on total assets, Dec. 31, 2023
Investments + $ 68,750 $ 77,500 + $ 77,500
Cash +4,500 +4,500 +4,500

(2) Effect on 2023 net income + $4,500 + $ 4,500

$4,500 + $8,750 + $ 13,250

(3) Effect on total assets, Dec. 31, 2024

Investments + $ 68,750 + $ 85,000 + $ 85,000
Cash ($9,000 on an accumulated basis) +4,500 +4,500 +4,500

(4) Effect on 2024 net income + $ 4,500 + $ 4,500

$4,500 + $7,500 + $ 12,000

c.
Cost FV-NI FV-OCI
$17 X 5,000 shares = $85,000
Gain reported in net income:
$85,000 - $68,750 +$16,250
$85,000 - $85,000 $ -0-
No effect – realized gain is
transferred directly to R/E

Solutions Manual 9-74 Chapter 9

EXERCISE 9.18 (CONTINUED)

c. (continued)

Note that the difference between the cost and FV-NI methods is
one of timing. Under FV-NI measurement, the $16,250 increase in
value since acquisition was reported in net income in 2023 and
2024. Under the cost method, recognition of the increase in value
is deferred until it is realized in 2025. Under the FV-OCI approach
without recycling, the gain is recognized only in comprehensive
income, never in net income.

Under ASPE, the company would have to choose between the cost
method and the FV-NI method.

The FV-NI method must be used for equity instruments that trade
in an active market and therefore have an active market price (as
is the case here), and for derivatives. The cost/amortized cost
method is used for all other investments and would not be used
here.

The method that would show higher income earlier on would

be the FV-NI measurement. More specifically, the increase in value
of $16,250 was reported in income in 2023 and 2024 unlike the
cost method which reports it in 2025 (See part b. above).
Management is allowed to select a policy choice that best meets
its objectives provided that it is in accordance with the accounting
standards. Management should choose a policy that best reflects
the substance of the investment and the company’s business
model. It would be unethical to base the decision on wanting to
report a higher income.
LO 2,3,4,8,9 BT: AP Difficulty: M Time: 35 min. AACSB: Ethics CPA: CPA: cpa-t001 cpa-e001 Reporting and
Ethics

Solutions Manual 9-75 Chapter 9

EXERCISE 9.19

a.
(1) December 31, 2023 entry:
Loss on Impairment1........................................ 50,500
Bond Investment at Amortized Cost.......... 50,500
1
($788,000 – $737,500)
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. Rather than reducing the investment
account directly, an allowance account may be used.

(2) December 31, 2024 entry:

Bond Investment at Amortized Cost ……….. 18,500
Recovery of Loss from Impairment2.......... 18,500
2
($760,000 – $741,500)
b.
(1) December 31, 2023 entry:
Loss on Impairment3........................................ 54,000
Bond Investment at Amortized Cost.......... 54,000
3
($788,000 – $734,000)
Under IFRS, the carrying amount is reduced to the discounted
remaining estimated cash flows using the historic discount
rate.

(2) December 31, 2024 entry:

Bond Investment at Amortized Cost ……….. 18,500
Recovery of Loss from Impairment4.......... 18,500
4
($760,000 – $741,500)

Solutions Manual 9-76 Chapter 9

EXERCISE 9.19 (CONTINUED)

c.
(1) December 31, 2023 entry:
Loss on Impairment5........................................ 50,500
Allowance for Investment Impairment....... 50,500
5
($788,000 – $737,500)
The investment account remains at its current carrying
amount and is offset by the credit balance in the Allowance
account.

(2) December 31, 2024 entry:

Allowance for Investment Impairment ……… 18,500
Recovery of Loss from Impairment6.......... 18,500
6
($760,000 – $741,500)

d. The expected loss model would recognize losses earlier than

the incurred loss model. The expected loss model reflects
both incurred losses to date and future expected credit loss.
Therefore, it results in earlier recognition of these losses in
net income. The incurred loss model only recognizes losses
when there are significant adverse changes in the expected
future amount and timing of cash flows. Therefore, an
impairment loss under the incurred loss model would be
computed only if there are trigger or loss events.

LO 5 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-77 Chapter 9

EXERCISE 9.20

a.
Bond Amortization Table
(12%) (10%) Premium Carrying
Cash Interest Amorti- Amount
Date Received Income zation of Bonds
01/01/21 — — – $322,744.44
12/31/21 $36,000 $32,274.44 $3,725.56 319,018.88
12/31/22 36,000 31,901.89 4,098.11 314,920.77
12/31/23 36,000 31,492.08 4,507.92 310,412.85
12/31/24 36,000 31,041.29 4,958.71 305,454.14

b.
January 1, 2021

FV-NI Investments ............................................................

322,744.44
Cash............................................................................ 322,744.44

December 31, 2021

Cash (12% X $300,000) ....................................................
36,000.00
Investment Income or loss ........................................ 36,000.00
To record collection of interest

FV-NI Investments ............................................................

2,044.44
Investment Income or Loss....................................... 2,044.44
To record fair value adjustment

Carrying amount – refer to Table in a.:

Purchase price $322,744.44
FV at December 31 = 320,700.00
FV adjustment, Dec. 31 = $ 2,044.44

Solutions Manual 9-78 Chapter 9

EXERCISE 9.20 (CONTINUED)

c.
December 31, 2022
Cash ..................................................................................
36,000.00
Investment Income or Loss...................................... 36,000.00
To record collection of interest

Investment Income or Loss.............................................

64,200.00
FV-NI Investments....................................................... 64,200.00
To record fair value adjustment

Carrying amount Jan. 1 $320,700.00

FV at December 31:
$300,000 X .855 = 256,500.00
Loss on impairment $ 64,200.00

December 31, 2023

Cash ..................................................................................
36,000.00
Investment Income or Loss...................................... 36,000.00

FV-NI Investments ............................................................

4,500.00
Investment Income or Loss......................................... 4,500.00
To record fair value adjustment
Carrying amount Jan. 1 $256,500.00
FV at December 31:
$300,000 X .87 = 261,000.00
FV adjustment, Dec. 31 = $ 4,500.00

Solutions Manual 9-79 Chapter 9

EXERCISE 9.20 (CONTINUED)

d.
December 31, 2024
Cash ..................................................................................
36,000.00
Investment Income or Loss....................................... 36,000.00
To record collection of interest

FV-NI Investments ............................................................

37,500.00
Investment Income or Loss....................................... 37,500.00
To record fair value adjustment

Carrying amount Jan. 1 $261,000.00

FV at December 31:
$300,000 X .995 = 298,500.00
FV adjustment, Dec. 31 = $ 37,500.00

Solutions Manual 9-80 Chapter 9

EXERCISE 9.20 (CONTINUED)

Parts a. to d. use a fair value impairment model. That is, the

investments are re-measured to their FV at each year end, and
there is no need to calculate a separate impairment loss or
recovery.

If Mamood had accounted for this investment at amortized cost,

the impairment model would change to an incurred loss model
under ASPE. When there is objective evidence that the expected
future cash flows have been significantly reduced (triggering
event), an impairment loss is measured and recognized.

Under IFRS, the company reports an impairment loss by the first

reporting date and assesses whether the credit risk on the
investment has increased significantly since the investment was
first recognized.

If the company determines that the default risk has not

significantly increased then it considers the 12 month expected
credit losses.

If, however, the company determines that the default risk on the
investment has significantly increased, then the company must
look at lifetime expected credited losses. Therefore, the company
would consider all possible default events over the life of the
instrument.

The loss is then computed as the difference between the carrying

amount and the present value of the revised expected cash flows,
discounted at the historic discount rate.

Should the investment value subsequently increase, the

impairment losses may be reversed and a recovery recorded.

LO 2,3,5 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-81 Chapter 9

EXERCISE 9.21

a.
Situation 1 would use the fair value impairment model.
Situation 2 would use the fair value model. However, since
there is no recycling under IFRS for equity investments, the
investment would simply be revalued to fair value with the loss
booked to OCI and never recycled to income. Therefore, there is
no need to perform any impairment testing.

b.
Situation 1 December 31, 2022
Investment Income or Loss 1............................. 2,500
FV-NI Investments....................................... 2,500
1
($29.00 - $26.50) X 1,000 shares
December 31, 2023
Investment Income or Loss 2............................. 15,400
FV-NI Investments....................................... 15,400
2
($26.50 – $11.10) X 1,000 shares = $15,400

Situation 2 December 31, 2022

Unrealized Gain or Loss – OCI3......................... 1,000
FV-OCI Investments.................................... 1,000
3
($27,000 - $26,000)

December 31, 2023

Unrealized Gain or Loss – OCI4......................... 13,600
FV-OCI Investments.................................... 13,600
4
($26,000 - $12,400)

Solutions Manual 9-82 Chapter 9

EXERCISE 9.21 (CONTINUED)

ASPE: Situation 1 – fair value impairment model

December 31, 2022
Investment Income or Loss 5............................. 2,500
FV-NI Investments....................................... 2,500
5
($29.00 - $26.50) X 1,000 shares

December 31, 2023

Investment Income or Loss 6............................. 15,400
FV-NI Investments....................................... 15,400
6
($26.50 – $11.10) X 1,000 shares = $15,400

LO 2,3,4,5 BT: AP Difficulty: C Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-83 Chapter 9

EXERCISE 9.22

a.
If Nadal Corporation’s shares are quoted in an active market,
Holmes is required to apply the FV-NI method to account for its
investment. If Nadal’s shares are not quoted in an active market,
the cost method may be used. However, in this case, Holmes
could elect to use the FV-NI method.

FV-NI method:
January 3, 2023
1
FV-NI Investments .............................................. 135,000
Cash............................................................. 135,000
1
(30,000 X 30%) = 9,000 shares X $15
To record investment purchase

September 21, 2023

Cash ($39,000 X 30%) ........................................ 11,700
Dividend Revenue....................................... 11,700
To record receipt of dividend

December 31, 2023

Investment Income or Loss2.............................. 2,250
FV-NI Investments....................................... 2,250
2
FV = (9,000 shares X $14.75) = $132,750
Carrying amount = 135,000
Adjustment required = $( 2,250)
To record fair value adjustment

Cost method:
January 3, 2023
3
Other Investments ............................................. 135,000
Cash............................................................. 135,000
3
(30,000 X 30%) = 9,000 shares X $15
To record investment purchase
September 21, 2023
Cash ($39,000 X 30%) ........................................ 11,700
Dividend Revenue ...................................... 11,700
To record receipt of dividend

Solutions Manual 9-84 Chapter 9

EXERCISE 9.22 (CONTINUED)

a. (continued)

December 31, 2023

No entry required.

b.
Equity method:
January 3, 2023
4
Investment in Associate .................................... 135,000
Cash............................................................. 135,000
4
(30,000 X 30%) = 9,000 shares X $15
To record investment purchase

September 21, 2023

Cash ($39,000 X 30%) ........................................ 11,700
Investment in Associate............................. 11,700
To record collection of dividend

December 31, 2023

Investment in Associate .................................... 25,500
Investment Income or Loss5....................... 25,500
5
($85,000 X 30%)
To record investment income

c.
Even though Holmes has significant influence over the operations
of Nadal Corporation, ASPE allows Holmes to choose the cost
method instead of the equity method. However, if Nadal’s shares
are actively traded in the market, the cost method cannot be used
and Holmes will need to choose between the FV-NI method and
the equity method.

d.
A financial analyst is interested in assessing the current
performance of the investor company management and what the
company’s prospects are for the future. The analyst is interested
in the ability of the investor company to generate cash flows that
will be replicated in future periods.
Solutions Manual 9-85 Chapter 9
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

EXERCISE 9.22 (CONTINUED)

d. (continued)

Under the equity method, the investor reports all increases

(decreases) in the net assets of the associate as an increase
(decrease) in the carrying amount of the investment account on its
SFP. In addition, the investor recognizes its share of the income
(loss) earned by the associate. Therefore, the investor’s financial
statements reflect the performance of its management, including
its performance as it influences the associate’s operations. This is
relevant information for the financial analyst because the financial
statements portray the economic substance of management’s
results for the period (as well as the investor’s legal entitlement to
its share of the changing net assets of the associate) and this
provides a basis for predicting future performance and cash flows.

Under the FV-NI method, the shares in the investee are adjusted to
their current market value, but the investor has made the decision
to hold the shares. They are not “for trading.” In addition, the
investor’s share of the dividends paid by the investee increase the
investor’s income even though the investee may have incurred
losses. Alternatively, the investee could be profitable, but not pay
any dividends to the investor, so what is reported on the
investor’s income statement does not correspond to the influence
the investor has had on investee company operations. The FV-NI
method, however, does recognize in the income statement and the
SFP, through the FV adjustment, the market’s assessment of how
the investee’s current operations affect its value to the investor.

The cost method is the least informative, as it has the downsides

of the FV-NI method without the benefit of the FV adjustment each
year.

LO 2,3,6 BT: AP Difficulty: S Time: 25 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 9-86 Chapter 9

EXERCISE 9.23

a. $110,000, the increase to the Investment account.

b. If the payout ratio is 35%, then 35% of their portion of the net
income is their share of dividends: $110,000 X 35% =
$38,500, the credit to the investment account.
c. Annual depreciation of excess payment for capital assets =
$14,000, the remaining credit to the investment account.
d. Fox’s share is 25%, so, Total Net Income x 25% = $110,000.
Total Net Income of Gloven = $110,000 ÷ 25% = $440,000.
e. $38,500 ÷ 25% = $154,000 or Total Net Income of $440,000
(from d.) x 35% = $154,000
f. Cost of 25% of investment in Gloven Corp. $1,000,000
25% of carrying amount of Gloven Corp.
25% X $3,200,000 (800,000)
Payment in excess of share of carrying amount 200,000
Fair value allocated to depreciable assets
$14,000 X 10 (140,000)
Unexplained excess assigned to goodwill $ 60,000

LO 6 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-87 Chapter 9

EXERCISE 9.24

a. December 31, 2022

FV-OCI Investments.................................. 1,250,000

Cash..................................................... 1,250,000

June 15, 2023

Cash ($0.75 X 62,500 shares)................... 46,875

Dividend Revenue.............................. 46,875

December 15, 2023

Cash........................................................... 46,875
Dividend Revenue.............................. 46,875

December 31, 2023

FV-OCI Investments................................... 62,500

Unrealized Gain or Loss – OCI1......... 62,500
1
$21 X 62,500 shares = $1,312,500
$1,312,500 – $1,250,000 = $62,500

Solutions Manual 9-88 Chapter 9

EXERCISE 9.24 (CONTINUED)

b. December 31, 2022

Investment in Associate....................... 1,250,000

Cash................................................ 1,250,000

June 15, 2023

Cash (62,500 X $.75).............................. 46,875

Investment in Associate................ 46,875

December 15, 2023

Cash........................................................ 46,875
Investment in Associate................ 46,875

December 31,2023

Investment in Associate....................... 130,000

Investment Income or Loss2......... 130,000
2
(25% X $520,000)
To record investment income

c. Fair Value Equity

Method Method
Statement of Financial
Position:
Investment amount $1,312,500 $1,286,2503
3
$1,250,000 + $130,000 – $46,875 – $46,875

The Investment accounts under both a. and b. are likely to

be included in non-current assets. That is, the investment
was not acquired for short-term trading profits, it would be
accounted for at FV-NI and reported in current assets.

Solutions Manual 9-89 Chapter 9

EXERCISE 9.24 (CONTINUED)

d.
Statement of Comprehensive Income:
Fair Value Equity
Method Method
Dividend revenue $93,750
Investment income ______ $130,000
Included in net income 93,750 130,000
Other comprehensive income:
Unrealized gain on FV-OCI
investment during the year 62,500 _______
Effect on comprehensive
income for 2023 $156,250 $130,000

LO 4,6,8 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-90 Chapter 9

EXERCISE 9.25

a. 2023:
FV-NI Investments............................................196,000
Cash.......................................................... 196,000
To record investment purchase

Cash ($15,000 X .30)........................................ 4,500

Dividend Revenue.................................... 4,500
To record receipt of dividend

FV-NI Investments............................................ 5,000

Investment Income or Loss1…….……… 5,000
1
$201,000 – $196,000 = $5,000
To record fair value adjustment

Statement of Comprehensive Income, 2023

Net income (includes the dividend revenue of $4,500

and the unrealized gain of $5,000)............... $ xxx
Other comprehensive income......................... -0-
Comprehensive income................................ $ xxx

2024:
Investment Income or Loss2........................... 61,000
FV-NI Investments.................................... 61,000
2
Carrying amount of $201,000 - $140,000 FV

Statement of Comprehensive Income, 2024

Net income (includes a deduction for the unrealized

holding loss of $61,000)................................ $ xxx
Other comprehensive income......................... -0-
Comprehensive income................................ $ xxx

Solutions Manual 9-91 Chapter 9

EXERCISE 9.25 (CONTINUED)

b. 2023:
Investment in Associate..................................196,000
Cash.......................................................... 196,000
To record investment purchase

Cash ($15,000 X .30)........................................ 4,500

Investment in Associate.......................... 4,500
To record collection of dividend

Investment in Associate.................................. 22,500

Investment Income or Loss3.................... 22,500
3
($75,000 X .30)
To record investment income

Investment Income or Loss4........................... 2,000

Investment in Associate.......................... 2,000
To record amortization of fair value difference
4
Purchase price...................................... $196,000
Carrying amount (30% X $520,000)...... (156,000 )
Excess - unrecorded intangible........... 40,000
Amortization (over 20 years)................ $2,000

Statement of Comprehensive Income, 2023

Net income (includes investment income from
the associate of $22,500 - $2,000 = $20,500) $ xxx
Other comprehensive income......................... -0-
Comprehensive income................................ $ xxx

There is no entry to adjust the investment to its fair value

under the equity method.

Solutions Manual 9-92 Chapter 9

EXERCISE 9.25 (CONTINUED)

b. (continued)

2024:
Investment Income or Loss5........................... 24,000
Investment in Associate.......................... 24,000
5
($80,000 X .30)
To record investment income

Investment Income or Loss............................ 2,000

Investment in Associate.......................... 2,000
To record amortization of fair value difference
Carrying amount of the investment in Martz Limited:
Cost $196,000
Dividend received in 2023 (4,500 )
Income earned in 2023 ($22,500 – $2,000) 20,500
Loss incurred in 2024 ($24,000 + $2,000) (26,000 )
Carrying amount at December 31, 2024 $186,000

Fair value of investment at December 31, 2024 $140,000

Just because the fair value has dropped does not automatically
mean that the investment is impaired. There may have been a
general market decline and the decrease in value is considered
temporary. If this is the case, no entries are needed to recognize
the decline.

However, on the stated assumption that the drop in value of the

investment does represent an impairment, recognition is required.
The loss is equal to the difference between the investment’s
carrying amount and its recoverable amount – the higher of its
value in use and fair value less costs to sell. Therefore, the
impairment loss is $186,000 - $149,000 = $37,000.

Loss on Impairment................................................ 37,000

Investment in Associate.......................... 37,000
To record loss on impairment

Solutions Manual 9-93 Chapter 9

EXERCISE 9.25 (CONTINUED)

b. (continued)

Statement of Comprehensive Income, 2024

Net income (includes investment loss on the

associate of $26,000 and the impairment
loss of $37,000)............................................. $ xxx
Other comprehensive income......................... -0-
Comprehensive income................................ $ xxx

c. All entries would stay the same except for the entry recording
the 2023 share of income. This entry would change to reflect
the investor’s share of the loss from discontinued operations
separately from its share of the loss from continuing
operations, as follows:

2023:

Investment in Associate.................................. 20,500

Loss on Discontinued Operations6................ 6,000
Investment Income or Loss..................... 26,500
6
($20,000 X .30)
To record investment income

Martz Limited Income Statement reports:

Income from Continuing Operations $95,000
Loss from Discontinued Operations (20,000)
Net Income $75,000

30% X $95,000 = $28,500

Amortization of excess = (2,000)
$26,500 - ordinary
30% X $20,000 loss = $(6,000)- discontinued operations

The 2023 net income of Rae Corporation will be the same as

in part b.
LO 3,5,6 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-94 Chapter 9

EXERCISE 9.26

a. (1) Peel Corp - $12,250, dividend income.

(2) Vonna Corp - None reported—reduction of investment
account (equity method).
(3) Express Inc - None reported—the dividend is eliminated
as an intercompany transaction on consolidation.

Total dividend income reported is therefore $12,250.

b. Sale price ($94 X 6,000 shares) $564,000

Previous carrying amount ($81 X 6,000 shares) 486,000
Holding gain in 2024 $ 78,000
The $78,000 increase in value while held in 2024 is reported in
OCI on the 2024 Statement of Comprehensive Income.
Since there is no recycling by Chad Corp., the total
accumulated change in value since the investment was first
acquired is transferred out of OCI directly to retained
earnings.
Proceeds on sale ($94 X 6,000 shares) $564,000
Purchase cost ($76 X 6,000 shares) 456,000
Realized gain on sale of investment $108,000

Net income is not affected in 2023 or 2024 relative to the

investment transactions. The Other Comprehensive Income
portion of the Statement of Comprehensive Income in 2024
appears as follows:

Solutions Manual 9-95 Chapter 9

EXERCISE 9.26 (CONTINUED)

b. (continued)

Other Comprehensive Income:

Item that will not be reclassified to net income-
Holding gain on investment $ 78,000

Because the Roddy Ltd. shares was the only investment

accounted for at FV-OCI, no balance remains in AOCI.

c.
FV-OCI Investments........................................... 78,000
Unrealized Gain or Loss – OCI1................. 78,000
1
($564,000 - $486,000)
To adjust to fair value at date of disposal

Cash....................................................................564,000
FV-OCI Investments................................... 564,000
To record disposal

Accumulated Other Comprehensive

Income............................................................108,000
Retained Earnings 2................................ 108,000
2
Refer to b.
To reclassify holding gain

LO 4,6,8 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-96 Chapter 9

EXERCISE 9.27

a. Investment in Associate ................................. 438,000

Cash.......................................................... 438,000

b. Cost of investment $438,000

Carrying amount
Assets $1,310,000
Liabilities 110,000
1,200,000
X 30% 360,000
Cost in excess of
share of carrying amount $ 78,000

Allocated
Assets subject to depreciation
[($880,000 – $760,000) X 30%] $36,000
Goodwill 42,000
$78,000

Cash ($110,000 X .30)...................................... 33,000

Investment in Associate.......................... 33,000
To record dividends received

Investment in Associate.................................. 45,000

Loss on Discontinued Operations 1............... 15,000
Investment Income or Loss2.................... 60,000*
1 2 22
$50,000 X .30 2 $200,000 X .30
To record investment income or loss

Investment Income or Loss3........................... 3,600

Investment in Associate.......................... 3,600
To record amortization of fair value difference
Amortization of undervalued depreciable assets:
3
($36,000 ÷ 10) = $3,600
Goodwill is not amortized, but rather is tested on an annual
basis for impairment.

Solutions Manual 9-97 Chapter 9

EXERCISE 9.27 (CONTINUED)

c.
Because the associate’s long-term prospects have deteriorated,
this situation is likely one of impairment rather than a temporary
decline.
In this case, the impairment loss should be measured and
recognized at December 31, 2023 as follows:
Investment recoverable amount = $115 X 3,000 shs. = $345,000
Carrying amount of investment:
$438,000 - $33,000 + $45,000 - $3,600 = 446,400
Impairment loss = $101,400

Entry:
Loss on Impairment.................................. 101,400
Investment in Associate …………. 101,400

In the future, if the associate’s fair value recovers, the impairment

loss can be reversed.

d.
Given that senior management obtains a bonus based on net
income, it would appear that management’s motivation is to inflate
the share value such that no impairment would be warranted.
Management’s argument is that the initial assessment was overly
pessimistic; however, this argument is likely due to management’s
desire to obtain a bonus.
Unless management is able to substantiate the higher share price,
an impairment loss must be recorded for $101,400 as in c.
Although we may feel pressure to appease our boss, we cannot
act unethically by not recording an impairment where one exists.

LO 5,6,8 BT: AP Difficulty: M Time: 30 min. AACSB: Ethics CPA: CPA: cpa-t001 cpa-e001 Reporting and
Ethics

Solutions Manual 9-98 Chapter 9

EXERCISE 9.28

a. Investment in Associate............................. 410,000

Cash...................................................... 410,000
b. Cost of 40% investment $410,000
Washi Corp. carrying amounts:
Assets $825,000
Liabilities 115,000
710,000
X 40% 284,000
Excess paid over share of book value $126,000

Excess allocated to:

Assets subject to depreciation
[($750,000 – $620,000) X 40%]3 $52,000
Residual to goodwill 74,000
$126,000
Cash................................................................ 44,800
Investment in Associate1....................... 44,800
1
($112,000 X .40)
To record collection of dividend

Investment in Associate............................... 65,200

Investment Income or Loss2................. 65,200
2
($163,000 X .40)
To record investment income

Investment Income or Loss4......................... 5,200

Investment in Associate........................ 5,200
4
($52,0003 ÷ 10)
To record depreciation of fair value difference
c. In 2023, Washi reports:
Income from continuing operations $201,000
Loss from discontinued operations (38,000)
Net income $163,000

Solutions Manual 9-99 Chapter 9

EXERCISE 9.28 (CONTINUED)

c. (continued)

Loss on Discontinued Operations5.............. 15,200

Investment in Associate 6............................. 65,200
Investment Income or Loss7................. 80,400
5
$38,000 X 40% = $15,200
6
$163,000 X 40% = $65,200
7
$201,000 X 40% = $80,400
To record investment income and loss

Investment Income or Loss8......................... 5,200

Investment in Associate........................ 5,200
8
($52,000 ÷ 10)
To record depreciation of fair value difference

In 2023, Chi Inc. will include investment income in continuing

operations of $80,400 - $5,200 = $75,200 and an investment loss of
$15,200 in discontinued operations for a total of $75,200 - $15,200
= $60,000 in net income. Note that this is the same total amount as
reported in part b., but it is presented in two different places within
net income.

Solutions Manual 9-100 Chapter 9

EXERCISE 9.28 (CONTINUED)

Chi’s share of the unrealized gain on investments reported in OCI

by Washi will be recorded by Chi as follows:

Investment in Associate............................... 18,000

Investment Income or Loss – OCI9........ 18,000
9
($45,000 X .40)

Chi Inc.
Statement of Comprehensive Income
Year ended December 31, 2023

Net income ($172,400 + $65,200 - $5,200) $232,400

Other comprehensive income:
Items that will not be reclassified subsequently
to net income -
Unrealized gain on investment $10,000
Unrealized gain on associate’s investment 18,000 28,000
Comprehensive income $260,400

LO 6,8,9 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-101 Chapter 9

TIME AND PURPOSE OF PROBLEMS

Problem 9.1
Purpose— the student is required to prepare during-the-year and year-end entries
for equity trading securities and to provide the presentation on the statement of
financial position at the end of the fiscal year.

Problem 9.2
Purpose— the student is required to prepare during-the-year and year-end entries
for debt and equity trading securities, accounted for using the FV-NI model.

Problem 9.3
Purpose—the student is required to prepare transactional and adjusting entries for
debt securities accounted for using the amortized cost model and then accounted
for using the FV-NI model. Bond premium amortization is also involved.

Problem 9.4
Purpose—the student is required to prepare journal entries for the sale and
purchase of equity securities accounted for under the FV-OCI model along with the
year-end adjusting entry for unrealized gains and losses. They are also asked to
indicate how all balances are to be reported on the financial statements.

Problem 9.5
Purpose—to provide the student with an understanding of the reporting problems
associated with equity securities accounted for under the FV-OCI model. The
problem includes purchases, dividends, sales, and year-end adjustments to fair
values. Statement presentation is required, including the reclassification adjustment
out of other comprehensive income. Students are asked to determine how the net
income in two years would differ if the entity applied ASPE and used the cost
method.

Problem 9.6
Purpose—from successive SFP carrying amounts, the student is required to
prepare entries for a bond investment accounted for using the amortized cost
method and then the FV-NI model.

Solutions Manual 9-102 Chapter 9

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 9.7
Purpose—the student is required to prepare transactional and adjusting entries for
FV-OCI debt investments, along with an amortization schedule. Students also
journalize the sale of the investment.

Problem 9.8
Purpose—the student is required to distinguish between the existence of a bond
premium or discount. The student is also required to prepare the adjusting entries
at two year-ends for FV-OCI debt investments.

Problem 9.9
Purpose—the student is required to prepare during-the-year and year-end entries
for FV-OCI debt investments and to explain how the entries would differ if the
securities were classified at cost / amortized cost.

Problem 9.10
Purpose—to provide the student with an opportunity to record interest and
amortization on a debt investment over three fiscal years as well as record fair
value adjustments using the FV-OCI method. The problem also includes the
disposal of the debt investment. Comprehensive financial statement preparation for
the three-year period is included as a requirement to the problem. Finally, the
student must summarize the overall results of the investment.

Problem 9.11
Purpose—to provide the student with an opportunity to record interest and
amortization of a bond premium for a bond purchased between interest dates as
well as a non-interest-bearing note. The cost of the bond must first be adjusted for
the portion of interest accrued between interest dates. The student must determine
the proper accounting and reporting for each investment. The student must also
record the year-end adjustment for fair value and the disposal of the bond and note.

Solutions Manual 9-103 Chapter 9

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 9.12
Purpose—to provide the student with an opportunity to prepare journal entries for
equity investments accounted for under the FV-NI and FV-OCI methods as well as
the equity method, and choices available under ASPE. The student is required to
record fair value adjustments and describe how they would be reflected in the body
and notes to the financial statements.

Problem 9.13
Purpose—to provide the student with an understanding of the proper accounting
treatment for equity securities accounted for using the FV-OCI model and the
resulting effect of a sale of an investment and the reclassification of realized gains
and losses to retained earnings. The student is required to discuss the descriptions
and amounts that would be reported on the statement of financial position and
statement of comprehensive income with regard to these investments, plus prepare
any necessary note disclosures.

Problem 9.14
Purpose—the student is required to review entries made by an employee to
determine if they are in accordance with GAAP. If incorrect, correct entries are
required to be made. The student is also required to explain when the equity
method may or may not be appropriate.

Problem 9.15
Purpose—the student is asked to prepare entries for a company’s equity
investment in a 30% held company both on the basis that there is significant
influence and that there isn’t significant influence. The alternative method to be
applied is the FV-OCI under IFRS. They must also discuss and make entries for the
accounting method(s) that could be used under ASPE. The student must also
consider how the entries would be affected by a partial year ownership period for
the investment.

Problem 9.16
Purpose—students are required to work through their understanding of how the FV-
OCI method works and affects the statement of financial position and the statement
of comprehensive income. Critical thinking is needed here as students must
understand what each account represents in order to go back and prepare the
entries that must have been made. The student is then asked to explain how the
financial statements would differ if the investment had been accounted for at FV-NI.

Solutions Manual 9-104 Chapter 9

Solutions Manual 9-105 Chapter 9

TIME AND PURPOSE OF PROBLEMS (CONTINUED)

Problem 9.17
Purpose—students are provided with an opportunity to work their way through a
situation that requires them to apply their knowledge of all methods of accounting
for investments introduced in the chapter. They begin with the presentation of
investments on the statement of financial position at the end of the preceding year
and work through the transaction and valuation entries through the year and are
required to determine what is reported on the year-end financial statements. Finally,
they are asked to explain to non-accountants what the balance in AOCI represents.

Solutions Manual 9-106 Chapter 9

SOLUTIONS TO PROBLEMS

PROBLEM 9.1

a.
October 8, 2023
Cash ........................................................................
212,850
Gain on Disposal of Investment – FV-NI............ 12,850
FV-NI Investments............................................. 200,000
(50,000 shares X $4.30 X 99%= $212,850)

November 16, 2023

FV-NI Investments..................................................... 133,500
Commission Expense................................................1,335
Cash................................................................... 134,835
(3,000 shares X $44.50 = $133,500)

At December 31, 2023, MacAskill Corp. had the following fair value
adjustment:
Trading Investment Portfolio — December 31, 2023
Carrying Fair
Amount Value
Monty Ltd. preferred $140,000 $106,000
Oakwood Inc. common 179,000 203,000
Patriot Corp. common 133,500 122,000
Total of portfolio $452,500 $431,000

Adjustment needed to the portfolio = ($452,500 – $431,000) =

$21,500.

Solutions Manual 9-107 Chapter 9

PROBLEM 9.1 (CONTINUED)

a. (continued)

The entry on December 31, 2023 is therefore as follows:

Investment Income or Loss.................................................

21,500
FV-NI Investments......................................................... 21,500

b. Current Assets:
Trading Equity Investments, FV-NI $431,000
Note: Trading investments are generally current assets

To be classified as a current asset under IFRS, a FV-NI investment

only has to meet one of the following three criteria: 1. It is expected to
be realized within 12 months from the reporting date; 2. It is held
primarily for trading purposes; or 3. It is a cash equivalent. As long as
one criteria is met, the investment is included in current assets.

Examples of situations where FV-NI investments would be excluded

from current assets:
 The entity does not classify its assets and liabilities according to
current and non-current categories.
 The investments are held in a portfolio of investments (such as a
sinking fund) held for long-term purposes, such as to retire a
bond issue when it matures, or to be held specifically for a plant
expansion planned for the future.
 The investment does not meet any one of the required criteria
for classification as current, such as an equity investment that is
acquired for the longer term. Management may want to use the
accounting method whereby changes in its fair value are
recognized and flow through net income.

LO 3 BT: AP Difficulty: M Time: 25 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-108 Chapter 9

PROBLEM 9.2

a.
Williams Corp. bonds
February 1, 2023
FV-NI Investments..............................................................
500,000
1
Interest Receivable ............................................................
20,000
Cash.......................................................................... 520,000
1
($500,000 X 12% X 4/12)
April 1, 2023
2
Cash .................................................................................
30,000
Interest Receivable.................................................... 20,000
Investment Income or Loss....................................... 10,000
2
($500,000 X 12% X 6/12)

September 1, 2023
Cash ($100,000 X 104%) + $5,000.....................................
109,000
Investment Income or Loss 3...................................... 5,000
Gain on Disposal of Investments - FV-NI 4,000
FV-NI Investments ($500,000 X 1/5)......................... 100,000
3
($100,000 X 12% X 5/12 = $5,000)

October 1, 2023
Cash ...................................................................................
24,000
4
Investment Income or Loss ..................................... 24,000
4
($400,000 X 12% X 6/12)

December 31, 2023

Interest Receivable.............................................................
12,000
5
Investment Income or Loss ..................................... 12,000
5
($400,000 X 12% X 3/12 = $12,000)
To accrue interest

Solutions Manual 9-109 Chapter 9

PROBLEM 9.2 (CONTINUED)

a. (continued)

FV-NI Investments..............................................................
7,000
6
Investment Income or Loss .................................... 7,000
6
($500,000 - $100,000) – ($400,000 x 101.75%)
= $400,000 - $407,000 FV = $7,000
To record fair value adjustment

b.
Saint Inc. bonds
July 1, 2023
FV-NI Investments..............................................................
200,000
7
Interest Receivable ............................................................
1,500
Cash.......................................................................... 201,500
7
($200,000 X 9% X 1/12)

December 1, 2023
8
Cash .................................................................................
9,000
Interest Receivable.................................................... 1,500
Investment Income or Loss 9..................................... 7,500
8
($200,000 X 9% X 6/12)
9
($200,000 X 9% X 5/12)
December 31, 2023
Interest Receivable.............................................................
1,500
10
Investment Income or Loss .................................... 1,500
10
($200,000 X 9% X 1/12 = $1,500)
To accrue interest

6,000
Investment Income or Loss11 .............................................
FV-NI Investments....................................................... 6,000
11
$200,000 – ($200,000 x .97)
($200,000 - $194,000) = $6,000
To record fair value adjustment

Solutions Manual 9-110 Chapter 9

PROBLEM 9.2 (CONTINUED)

c.
Scotia Corp. shares
August 12, 2023
FV-NI Investments (3,000 shares X $59)............................ 177,000
Commission Expense.........................................................
1,770
Cash.......................................................................... 178,770

September 28, 2023

Cash ...................................................................................
1,500
12
Dividend Revenue ................................................... 1,500
12
(3,000 X $.50)

December 28, 2023

Cash ...................................................................................
1,560
13
Dividend Revenue ................................................... 1,560
13
(3,000 X $.52)

December 31, 2023

FV-NI Investments..............................................................
4,500
14
Investment Income or Loss ...................................... 4,500
14
(3,000 x $60.50) FV - $177,000
($181,500 – $177,000) = $4,500

(Note to instructor: Some students may debit Interest Income at the

date of purchase of the bonds instead of Interest Receivable. This
procedure is correct, assuming that, when the cash is received for the
interest, an appropriate credit to Interest Income is recorded.)

Solutions Manual 9-111 Chapter 9

PROBLEM 9.2 (CONTINUED)

At December 31, 2022, the trading investment (FV-NI) would have

been adjusted to its fair value of $390,000. The sale in 2023 for
$400,000 would trigger a Gain on Disposal of Investments – FV-NI of
$10,000 ($400,000 – $390,000).

LO 3 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-112 Chapter 9

PROBLEM 9.3

a. December 31, 2022

Bond Investment at Amortized Cost............... 108,660
Cash........................................................ 108,660

b. December 31, 2023

Cash............................................................... 7,000
Bond Investment at Amortized Cost........ 1,567
Interest Income........................................ 5,433

c. December 31, 2025

Cash............................................................... 7,000
Bond Investment at Amortized Cost........ 1,728
Interest Income........................................ 5,272

d. December 31, 2022

FV-NI Investments.......................................... 108,660
Cash........................................................ 108,660

e. December 31, 2024

Cash............................................................... 7,000
Investment Income or Loss …………..... 7,000
To record collection of interest

FV-NI Investments.......................................... 1,000

Investment Income or Loss1.................... 1,000
1
[$107,500 – $106,5002 ]
2
Carrying amount Dec. 31,2023
To record fair value adjustment

Solutions Manual 9-113 Chapter 9

PROBLEM 9.3 (CONTINUED)

f. December 31, 2026

Cash............................................................... 7,000
.....................Investment Income or Loss
7,000
To record collection of interest

Investment Income or Loss3........................... 2,650

FV-NI Investments ……………………….. 2,650
3
[$103,000 – $105,6504 ]
4
Carrying amount Dec. 31,2025
To record fair value adjustment

As a member of management, I would want the accounting information

and reporting system to be consistent with how various parts of the
organization are managed.

If we invest in short-term trading securities with the objective of quickly

recovering more from our investments than we paid for them, the
important information to be reported is how much more (or less!) we
received from these investments than the amount of cash we expended
on them. This is exactly what the investment income/loss account
measures and reports when interest and dividends are not reported
separately from the other components of investment income.

However, if we acquire longer term investments with the objective of

earning a specific yield to maturity, the yield (or interest income) should
be reported separately from other types of investment income. Gains
and losses on disposal provide additional information to management
over and above the yield they committed to earn when the investments
were acquired. Short-term variations in fair value are of little interest.

Solutions Manual 9-114 Chapter 9

PROBLEM 9.3 (CONTINUED)

g. (continued)

If information for tax purposes is important for management, the

accounting information and reporting system should differentiate
between the various types of income according to how each is taxed;
e.g., dividend income is taxed differently than capital gains and losses
(realized gains and losses on disposal). Note that the accounting
system would not be able to fully reflect the taxation issues involved.
For example, gains on disposal are usually taxed at half the rate
applicable to other income, whereas capital losses can only be applied
to capital gains and are otherwise not deductible (although can be
carried forward and back to other years).

LO 2,3 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-115 Chapter 9

PROBLEM 9.4

a. Investments (FV-OCI)—December 31, 2023

Fair
Securities Cost Value
Anderson Corp. 2,500 sh. $48,750 $49,580
Munter Ltd. 10,000 sh. 580,000 569,500
King Corp. 6,000 sh. 255,000 254,400
Total of portfolio $883,750 $873,480

Note: Balance in AOCI, December 31, 2023 = $10,270 debit

($873,480 – $883,750) since all securities were purchased in
2023. The Anderson shares make up $49,580 - $48,750 = $830
credit of this.

Sale of Anderson shares, January 15, 2024:

Gross selling price of 2,500 shares at $21 $52,500
Less fees (2,150)
Net proceeds from sale 50,350
Cost of 2,500 shares (48,750)
Total gain on disposal of shares $ 1,600

The investment had a carrying amount of $49,580 at December

31, 2023. The holding gain since December 31, 2023 = $50,350 –
$49,580 = $770.

January 15, 2024

FV-OCI Investments........................................ 770
Unrealized Gain or Loss - OCI................. 770
To adjust to fair value at date of disposal

Cash................................................................ 50,350
FV-OCI Investments................................ 50,350
To record disposal

Accumulated Other Comprehensive Income... 1,600

Retained Earnings................................... 1,600
To reclassify holding gain
(Proof of reclassification amount: $830 + $770 = $1,600)
Solutions Manual 9-116 Chapter 9
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 9.4 (CONTINUED)

b.
April 17, 2024
1
FV-OCI Investments ....................................... 35,480
Cash......................................................... 35,480
1
(1,000 X $33.50) + $1,980 = $35,480

c. Investments (FV-OCI)—December 31, 2024

Carrying Fair Gain

Securities Cost Amount Value (Loss)
Munter Ltd. (10,000 shs) $580,000 $569,500 $610,0002 $40,500
King Corp. (6,000 shs) 255,000 254,400 240,0003 (14,400)
Castle Ltd. (1,000 shs) 35,480 35,480 29,0004 (6,480)
Total of portfolio $870,480 $859,380 $879,000 $19,620
2
(10,000 x $61)
3
(6,000 x $40)
4
(1,000 x $29)
December 31, 2024
FV-OCI Investments..................................... 19,620
Unrealized Gain or Loss - OCI.............. 19,620

Note: It would be equally correct to prepare a separate entry to adjust

each different security, instead of one combined entry.

Solutions Manual 9-117 Chapter 9

PROBLEM 9.4 (CONTINUED)

d. Reporting of FV-OCI Investments

Statement of Financial Position, December 31, 2024

Long-term Investments (assumed)

Investments, at fair value with gains and losses in OCI $ 879,000

Shareholders’ Equity
Accumulated other comprehensive income (credit)5 $8,520
5
($10,270 dr. from 2023 - $770 cr. + $1,600 dr. reclass - $19,620 cr.)

Statement of Comprehensive Income, Year Ended Dec. 31, 2024

Net income (including any dividend income on shares) $ x

Other comprehensive income- items that will

not be reclassified to net income:
Holding gains on FV-OCI
investments during year ($770 + $19,620) $20,390

Comprehensive income $ x + 20,390

Statement of Changes in Shareholders’ Equity (Excerpt)

Accumulated Other
Comprehensive Income, Year Ended Dec. 31, 2024

Accumulated other comprehensive income (loss),

January 1, 2024 $(10,270)
Reclassification to retained earnings (1,600)
Other comprehensive income, 2024 20,390
Accumulated other comprehensive income (loss),
December 31, 20246 $8,520
6
Proof: Dec. 31/24 FV of $879,000 – original cost of $870,480 = $8,520

LO 4,8 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-118 Chapter 9

PROBLEM 9.5

a. 2023
1. Mar. 1 Cash .................................................. 1,800
Dividend Revenue1.................... 1,800
1
(900 X $2)

2. Apr. 30 FV-OCI Investments........................... 840

Unrealized Gain or Loss – OCI2 840
2
[300 X ($10 – $7.20)]
To adjust to fair value at date of disposal

Cash 3................................................. 3,000

FV-OCI Investments.................. 3,000
3
[300 X $10]
To record disposal

Accumulated Other Comprehensive

Income4........................................... 300
Retained Earnings .................... 300
4
[300 X ($10 – $9)]
To reclassify holding gain

3. May 15 FV-OCI Investments5.......................... 3,200

Cash ......................................... 3,200
5
(200 X $16)

Solutions Manual 9-119 Chapter 9

PROBLEM 9.5 (CONTINUED)

a. (continued)

4. Dec. 31 FV-OCI Investments....................... 8,110

Unrealized Gain or Loss – OCI.. 8,110

Carrying Gain
Security Quantity Amount Fair Value (Loss)
Earl Corp. 1,200 $14,7006 $ 20,4009 $ 5,700
Josie Corp. 900 14,8507 17,10010 2,250
Asher Corp. 200 1,4408 1,60011 160
Total of Portfolio $30,990 $39,100 $ 8,110

Carrying amounts at Dec. 31, 2023:

6
Earl Corp. = (1,000 shares X $11.50) + (200 shares X $16)
7
Josie Corp. = 900 shares X $16.50
8
Asher Corp. = (500 shares X $7.20) – 3,000 + 840 or (200 sh.X $7.20)

Fair values at Dec. 31,2023:

9
(1,200 x $17)
10
(900 x $19)
11
(200 x $8)

Note: It is equally correct to individually adjust each investment to fair

value.

Solutions Manual 9-120 Chapter 9

PROBLEM 9.5 (Continued)

a. (continued)

2024
5. Feb. 1 Unrealized Gain or Loss – OCI12........ 200
FV-OCI Investments.................. 200
12
[200 X ($7 – $8)]
To adjust to fair value at date of disposal

Cash13................................................. 1,400
FV-OCI Investments.................. 1,400
13
(200 X $7)
To record disposal

Retained Earnings.............................. 400

Accumulated Other Comprehensive
Income 14................................... 400
14
[200 X ($7 – $9)]
To reclassify holding loss

6. Mar. 1 Cash .................................................. 1,800

Dividend Revenue15................... 1,800
15
(900 x $2)

7. Dec. 21 Dividend Receivable........................... 3,600

or Dividend Revenue16................... 3,600
16
Dec. 31 (1,200 X $3)

Solutions Manual 9-121 Chapter 9

PROBLEM 9.5 (Continued)

a. (continued)

8. Dec. 31 FV-OCI Investments........................... 4,200

Unrealized Gain or Loss – OCI.. 4,200

Carrying Gain
Security Quantity Amount Fair Value (Loss)
Earl Corp. 1,200 $20,400 $ 22,80017 $ 2,400
Josie Corp. 900 17,100 18,90018 1,800
Total of Portfolio $37,500 $ 41,700 $ 4,200

Fair values at Dec. 31,2024:

17
(1,200 x $19)
18
(900 x $21)

Note: It is equally correct to individually adjust each investment to fair

value.

Solutions Manual 9-122 Chapter 9

PROBLEM 9.5 (CONTINUED)

b. Reporting of FV-OCI Investments

Statement of Financial Position, December 31
2023 2024
Long-term Investments (assumed)
Investments, at fair value with gains and
losses in OCI (ref. 4. and 8.) $ 39,100 $41,700

Shareholders’ Equity
Retained earnings (ref. 2. and 5) entries not balances x + 300 x + (400)
Accumulated other comprehensive income bal. (below) $1,100 $5,500

Statement of Comprehensive Income

Net income (includes dividend revenue) $ x $ x

Other comprehensive income – items that may not be

reclassified subsequently to net income:
Holding gains on FV-OCI
investments during year $8,95019 $4,00020

Comprehensive income $x + 8,950 $x + 4,000

19
(Item 2 $840 + Item 4 $8,110)
20
(Item 5 - $200 + Item 8 $4,200)

Solutions Manual 9-123 Chapter 9

PROBLEM 9.5 (Continued)

b. (continued)
Statement of Changes in Shareholders’ Equity
Changes in Accumulated Other Comprehensive Income

2023 2024
Accumulated other comprehensive income (loss),
January 1 $(7,550)21 $1,10022
Reclassification to retained earnings of (gain) and losses (300) 400
Other comprehensive income for the year 8,950 4,000
Accumulated other comprehensive income December 31 $1,100 $5,500

21
The opening balance can be calculated as the difference between the portfolio at
cost and at fair value at Dec. 31, 2022 ($29,950 - $37,500) = $(7,550) below:
22
from end of 2023

Units Cost Market

Earl Corp. 1,000 15.00 $15,000 11.50 $11,500
Josie Corp. 900 20.00 18,000 16.50 14,850
Asher Corp. 500 9.00 4,500 7.20 3,600
Total $37,500 $29,950

Income Statement
2023 2024

Other revenues and gains

Dividend revenue $1,80023 $5,40024
23
(Item 1)
24
(Item 6 $1,800 + Item 7 $3,600)

Solutions Manual 9-124 Chapter 9

PROBLEM 9.5 (CONTINUED)

c.
If Castlegar Ltd. applied the cost method in accounting for these
investments instead of the FV-OCI method, the net income would be as
follows:
Entry
item No. 2023 2024
Dividend Revenue 1 $1,800
Gain on sale of 300 Asher shares 2 300
(cost $9 sold for $10)
Loss on sale of 200 Asher shares 5
(cost $9 sold for $7) $(400)
Dividend Revenue 6 1,800
Dividend Revenue 7 3,600
$2,100 $5,000

Why is this?
1.Dividends are recognized in income under both approaches, and

2.Under the cost method, the full amount of any realized gains or
losses are recognized in net income when the investments are
sold. Under the FV-OCI approach, the full amount of the realized
gains or losses may be transferred to retained earnings when the
investments are sold (no recycling).
d.
An investor is interested in assessing the prospects for future cash
flows. Under the FV-OCI approach, the investments are reported at fair
value which provides more relevant information than the amount paid
for the investments when they were acquired, as under the cost
method.
In addition, the unrealized gains and losses reported in OCI tell the
investor how well the enterprise managed its portfolio of investments
during the period i.e., whether management increased or reduced the
potential for future cash flows. The FV-OCI approach reports in OCI the
unrealized gains and losses on the investments as they occur rather
than waiting until they are sold and reporting the total and final change
in value only at that point.

Solutions Manual 9-125 Chapter 9

LO 2,4,8,9 BT: AP Difficulty: C Time: 70 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting
and Finance

Solutions Manual 9-126 Chapter 9

PROBLEM 9.6

a. Bond Amortization Schedule

Effective Interest Method
10% Bonds Sold to Yield 15%

Discount Carrying
Cash Interest Amorti- Amount
Date Received Income zation of Bonds
12/31/22 — — – $487,214
12/31/23 $55,000 $73,082 $18,082 505,296
12/31/24 55,000 75,794 20,794 526,090
12/31/25 55,000 78,9101 23,9101 550,000
1
Adjusted due to rounding

Dec. 31, 2022

Bond Investment at Amortized Cost ......................... 487,214
Cash ............................................................... 487,214

Dec. 31, 2023

Cash ......................................................................... 55,000
Bond Investment at Amortized Cost.......................... 18,082
Interest Income ………………………………... 73,082

Dec. 31, 2024

Cash ......................................................................... 55,000
Bond Investment at Amortized Cost.......................... 20,794
Interest Income............................................... 75,794

Dec. 31, 2025

Cash …………………………………………………... 55,000
Bond Investment at Amortized Cost ......................... 23,910
Interest Income............................................... 78,910
To record collection of interest

Cash ......................................................................... 550,000

Bond Investment at Amortized Cost............... 550,000
To record maturity of bond investment
(these two entries could be combined into one)
Solutions Manual 9-127 Chapter 9
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 9.6 (CONTINUED)

b.
Dec. 31, 2022
FV-NI Investments..................................................... 487,214
Cash ............................................................... 487,214

Dec. 31, 2023

Cash ......................................................................... 55,000
Interest Income .............................................. 55,000
To record collection of interest

Investment Income or Loss2 ..................................... 11,786

FV-NI Investments ......................................... 11,786
2
[$499,000 – $487,214]
To record fair value adjustment

Dec. 31, 2024

Cash ......................................................................... 55,000
Investment Income or Loss............................. 55,000
To record collection of interest

FV-NI Investments..................................................... 24,000

Investment Income or Loss3........................... 24,000
3
[$523,000 – $499,000]
To record fair value adjustment

Solutions Manual 9-128 Chapter 9

PROBLEM 9.6 (Continued)

b. (continued)

Dec. 31, 2025

Cash ......................................................................... 55,000
Investment Income or Loss............................. 55,000
To record collection of interest

FV-NI Investments..................................................... 27,000

Investment Income or Loss4........................... 27,000
4
[$550,000 - $523,000]
To record fair value adjustment

Cash.......................................................................... 550,000
FV-NI Investments.......................................... 550,000
To record maturity of bond investment

LO 2,3 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-129 Chapter 9

PROBLEM 9.7

a. January 1, 2023 purchase entry:

FV-OCI Investments......................................... 369,114
Cash.......................................................... 369,114

b. The amortization schedule is as follows:

Schedule of Interest Revenue and Bond Discount

Amortization—Effective-Interest Method
8% Bonds Purchased to Yield 10%
Interest
Receivable Bond Carrying
Or Interest Discount Amount of
Date Cash Received Revenue Amortization Bonds
1/1/23 $369,114
7/1/23 16,000 $ 18,456 $ 2,456 371,570
12/31/23 16,000 18,579 2,579 374,149
7/1/24 16,000 18,707 2,707 376,856
12/31/24 16,000 18,843 2,843 379,699
7/1/25 16,000 18,985 2,985 382,684
12/31/25 16,000 19,134 3,134 385,818
7/1/26 16,000 19,291 3,291 389,109
12/31/26 16,000 19,455 3,455 392,564
7/1/27 16,000 19,628 3,628 396,192
12/31/27 16,000 19,8081 3,808 400,000
Total $160,000 $190,886 $30,886
1
$2 difference due to rounding.

c. Interest entries:
July 1, 2023
Cash............................................................ 16,000
FV-OCI Investments.................................... 2,456
Interest Income.................................... 18,456

Solutions Manual 9-130 Chapter 9

PROBLEM 9.7 (CONTINUED)

c. (continued)
December 31, 2023
Interest Receivable........................................... 16,000
FV-OCI Investments......................................... 2,579
Interest Income......................................... 18,579

d. December 31, 2024 adjusting entry:

Amortized Unrealized
Securities Cost Fair Value Gain (Loss)
Aguirre (total portfolio *
value) $379,6992 $372,726 $ (6,973)
Previous fair value
adjustment—loss (3,375
)
Fair value adjustment—Cr. $(10,348)
2
This is the amortized cost of the bonds on December 31, 2024.
See b. schedule.

December 31, 2024

Unrealized Gain or Loss—OCI........................... 10,348

FV-OCI Investments................................

Solutions Manual 9-131 Chapter 9

PROBLEM 9.7 (CONTINUED)

e.
January 1, 2025

Unrealized Gain or Loss—OCI3.......................... 2,000

FV-OCI Investments................................. 2,000
3
($370,726 - $372,726)
To adjust to fair value at date of disposal

Cash................................................................... 370,726
FV-OCI Investments.................................
To record disposal

Loss on Disposal of Investments – FV-OCI........ 8,973

Unrealized Gain or Loss - OCI................. 8,973
4
($370,726 – $379,699)
To reclassify holding loss

LO 4 BT: AP Difficulty: S Time: 40 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-132 Chapter 9

PROBLEM 9.8

a. The bonds were purchased at a discount. That is, they were

purchased at less than their face value because the bonds’
amortized cost increased from $491,150 to $550,000.

b. December 31, 2023

FV-OCI Investments............................................. 4,850

Unrealized Gain or Loss—OCI..................... 4,850

FV-OCI Investment Portfolio

Amortized Fair Unrealized

Cost Value Gain (Loss)
Debt Investment $491,150 $497,000 $5,850
Previous fair value adjustment—loss (1,000)
Fair value adjustment—Dr. $4,850

c. December 31, 2024

Unrealized Gain or Loss—OCI........................... 16,292

FV-OCI Investments................................... 16,292

FV-OCI Investment Portfolio

Amortized Fair Unrealized

Cost Value Gain (Loss)
Debt Investment $519,442 $509,000 $(10,442)
Previous fair value adjustment—loss (5,850)
Fair value adjustment—Cr. needed
to bring balance to $10,442 Cr. $(16,292)

LO 4 BT: AP Difficulty: S Time: 20 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-133 Chapter 9

PROBLEM 9.9

a. February 1

FV-OCI Investments....................................... 300,000

Interest Income (4/12 X .10 X $300,000)........ 10,000
Cash........................................................ 310,000

April 1

Cash............................................................... 15,000
Interest Income ($300,000 X .10 X 6/12) 15,000

July 1

FV-OCI Investments....................................... 200,000

Interest Income (1/12 X .09 X $200,000)........ 1,500
Cash........................................................ 201,500

October 1

Cash [$300,000 X .10 X 6/12]......................... 15,000

Interest Income....................................... 15,000

December 1

Cash ($200,000 X 9% X 6/12)........................ 9,000

Interest Income....................................... 9,000

December 31

Interest Receivable......................................... 9,000

Interest Income....................................... 9,000
(3/12 X $300,000 X .10 = $7,500)
(1/12 X $200,000 X .09 = $1,500)
($7,500 + $1,500 = $9,000)
To accrue interest

Solutions Manual 9-134 Chapter 9

PROBLEM 9.9 (CONTINUED)

a. (continued)

December 31

Unrealized Gain or Loss—OCI....................... 29,000

FV-OCI Investments................................ 29,000
To record fair value adjustment

FV-OCI Portfolio

Fair Unrealized
Security Cost Value Gain (Loss)
Gibbons Co. $300,000 $285,0001 $(15,000)
Sampson Inc. 200,000 186,0002 (14,000)
Total $500,000 $471,000 $(29,000)
1
$300,000 X 95%
2
$200,000 X 93%

(Note to instructor: Some students may debit Interest Receivable at

date of purchase instead of Interest Income. This procedure is
correct, assuming that when the cash is received for the interest, an
appropriate credit to Interest Receivable is recorded.)

b. All the entries would be the same except the account title Bond
Investment at Amortized Cost would be used instead of FV-OCI
Investments. In addition, cost / amortized cost securities would be
carried at amortized cost and not valued at fair value at year-end,
so the last entry would not be made.

LO 2,4 BT: AP Difficulty: S Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-135 Chapter 9

PROBLEM 9.10

a. July 1, 2023

FV-OCI Investments.................................... 48,645.70

Cash.................................................... 48,645.70

b. Schedule of Interest Revenue and

Bond Discount Amortization
Effective-Interest Method
5% Bonds Sold to Yield 6%

Cash Interest Discount Amortized

Received Revenue Amortized Cost of Bonds
Date
July 1, 2023 — — — $48,645.70
Dec. 31, 2023 $1,250.00 $1,459.37 $209.37 48,855.07
July 1, 2024 1,250.00 1,465.65 215.65 49,070.72
Dec. 31, 2024 1,250.00 1,472.12 222.12 49,292.84
July 1, 2025 1,250.00 1,478.79 228.79 49,521.63
Dec. 31, 2025 1,250.00 1,485.65 235.65 49,757.28
July 1, 2026 1,250.00 1,492.72 242.72 50,000.00

c. December 31, 2023

Cash............................................................... 1,250.00
FV-OCI Investments....................................... 209.37
Interest Income....................................... 1,459.37
To record collection of interest

FV-OCI Investments....................................... 244.93

Unrealized Gain or Loss – OCI............... 244.93
To record fair value adjustment
($49,100.00 - $48,855.07)

Solutions Manual 9-136 Chapter 9

PROBLEM 9.10 (Continued)

c. (Continued)

July 1, 2024

Cash............................................................... 1,250.00
FV-OCI Investments....................................... 215.65
Interest Income....................................... 1,465.65
To record collection of interest

December 31, 2024

Cash............................................................... 1,250.00
FV-OCI Investments....................................... 222.12
Interest Income....................................... 1,472.12
To record collection of interest

Unrealized Gain or Loss – OCI....................... 37.77

FV-OCI Investments................................ 37.77
To record fair value adjustment
[$49,500.00 - ($49,100.00 + $215.65 + $222.12)]

July 1, 2025

Cash............................................................... 1,250.00
FV-OCI Investments....................................... 228.79
Interest Income....................................... 1,478.79
To record collection of interest

d. July 1, 2025

FV-OCI Investments....................................... 121.21

Unrealized Gain or Loss – OCI............... 121.21
To record fair value adjustment to date of disposal
[$49,850.00 - ($49,500.00 + $228.79)]

Solutions Manual 9-137 Chapter 9

PROBLEM 9.10 (Continued)

d. (Continued)

July 1, 2025

Cash............................................................... 49,850.00
FV-OCI Investments................................
49,850.00
To record disposal of the bond

Unrealized Gain or Loss – OCI....................... 328.37

Gain on Disposal of Investment – FV-OCI 328.37
To reclassify accumulated unrealized gains
and losses from OCI to net income
($244.93 - $37.77 + $121.21) = $328.37

Solutions Manual 9-138 Chapter 9

PROBLEM 9.10 (Continued)

e.
Menard Concrete Ltd.
Statement of Financial Position
December 31
2025 2024 2023
Non-current Assets:
Investments in equity securities, FV-OCI $0 $49,500 $49,100

Shareholders’ Equity:
Accumulated Other Comprehensive Income
Unrealized gains on FV-OCI investments $0 $ 207 $ 245

f.
Menard Concrete Ltd.
Statement of Income
Year ended December 31,
2025 ........2024 2023
Other revenues and gains
Interest income1 $1,479 ...$2,938 $1,459
Gain on disposal of bonds 328 ____ __ _
Net income .$1,807 $2,938 $1,459
1
$1,465.65 + $1,472.12 = $2,937.77 for 2024

Solutions Manual 9-139 Chapter 9

PROBLEM 9.10 (Continued)

g.
Menard Concrete Ltd.
Statement of Comprehensive Income
Year ended December 31,
2025 2024 2023

Net income $1,807 $2,938 $1,459

Other Comprehensive Income

Item that will be reclassified to net income:
Unrealized gain (loss) on FV-OCI investments 121 (38) 245
Less: reclassified to net income (328) (207) ______ __ __
Comprehensive Income $1,600 $2,900 $1,704

Solutions Manual 9-140 Chapter 9

PROBLEM 9.10 (Continued)

h. Menard Concrete Ltd.

Statement of Changes in Shareholders’ Equity (Partial)
For the Year Ended December 31, 2025
Accumulated
Other
Retained Comprehensive
Earnings Income
Balance January 1, 2023 $800,000 $ 0
Comprehensive income
Net income 1,459
Other comprehensive Income ________ 245
Balance December 31, 2023 $801,459 $245
Comprehensive income
Net income 2,938
Other comprehensive (Loss) _______ (38)
Balance December 31, 2024 $804,397 $ 207
Net income 1,807
Other comprehensive Income _______ (207)
Balance December 31, 2025 $806,204 $ 0

i. Retained earnings increased from $800,000 to $806,204 as

demonstrated in part h. above. This increase is made up of
interest income for the two years the bond was held of $5,875.93
(refer to amortization table) and the gain on sale of the bond of
$328.37.
The market value of the bond increased beyond the amortized
cost of the bond because the market rate of interest fell below the
yield rate of the bond, making it more attractive to other investors.
Rather than wait to the maturity date and effectively only earn
interest at the yield rate of the bond, Menard sold the bond before
the maturity date and realized a gain on resale of $328.37.

Solutions Manual 9-141 Chapter 9

LO ,4,8 BT: AP Difficulty: C Time: 50 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and
Finance

Solutions Manual 9-142 Chapter 9

PROBLEM 9.11

a. Looking at the decision tree, the Chiang Corp. common shares is

not an investment that pays interest and has a fixed principal
amount. The shares may pay dividends (not interest) and do not
have a maturity date. Therefore, the decision tree is not used.
Investments in shares are accounted for using the fair value
model. Since, the shares are an investment in an equity
instrument that is not held for trading purposes, the FV-OCI
model would likely be used.

The Government of Canada bonds represent an investment

whose contractual cash flows are represented only by principal
and interest (6%). The company has decided to collect the
interest annually and collect the principal amount at maturity. The
bonds would be accounted for at cost, since there is no difference
between the stated interest rate and the market rate. The
purchase price of the bonds was the same as their face value so
there is no need to amortize any premium or discount.

Similar to the Government of Canada bonds, the contractual cash

flows of the Monet bonds are represented only by principal and
interest (11% in this case). However, Octavio company expects to
gain from the falling interest rates by selling the bonds at some
point in the future. This takes us to the right-hand side of the
decision tree. The Monet bonds should be accounted for using
the FV-NI model (with interest not reported separately according
to company policy) as they are being managed based on their fair
value in the hopes of trading them when their market value
increases as interest rates fall.

Solutions Manual 9-143 Chapter 9

PROBLEM 9.11 (CONTINUED)

The non-interest bearing note investment should be accounted

for at amortized cost since it is being managed for its yield to
maturity. Although the note says that it is non-interest-bearing, it
was purchased to yield 10% interest, and the resulting discount
from its face value must be amortized over the life of the note
using the effective interest method. The contractual cash flow is
solely the face amount of $60,000 (which includes interest) and
the note is held to collect on that contractual cash flow. There is
no quoted fair value for the note.

b. Interest Receivable
($50,000 X 1.08) – ($56,000)............... 2,000
FV-OCI Investments...................................... 37,400
Bond Investment at Amortized Cost.............. 100,000
FV-NI Investments......................................... 54,000
Note Investment at Amortized Cost............... 57,143
Investments........................................... 250,543

The investment in Monet Corp. bonds is corrected to separate the

interest purchased from the price of the bond. The Interest Income
account could have been debited instead of the Interest
Receivable as long as it is also credited later when the full interest
is received.

c. December 31, 2023

1
Interest Receivable ...................................... 4,500
Note Investment at Amortized Cost2............. 952
Interest Income ($952 + $1,500)........... 2,452
Investment Income or Loss................... 3,000
To record accrued interest
1
Accrued interest (Monet)
$50,000 X .12 X 6/12 = $3,000
Accrued interest – Gov’t bonds
$100,000 X .06 X 3/12 = 1,500
Interest Receivable $4,500
2
Interest on Note
Solutions Manual 9-144 Chapter 9
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

($57,143 X 10% X 2/12) 952

Solutions Manual 9-145 Chapter 9

PROBLEM 9.11 (CONTINUED)

c. (continued)

Carrying
Investment Amount Fair Value Gain (Loss)
Chiang Corp. common
(FV-OCI) $37,400 $33,800 $ (3,600)
Monet Corp. bonds
(FV-NI) 54,000 55,600 1,600

December 31, 2023

Unrealized Gain or Loss - OCI...................... 3,600
FV-NI Investments......................................... 1,600
Investment Income or Loss..........…… 1,600
FV-OCI Investments…………………... 3,600
To record fair value adjustment

d. 1. February 1, 2024
Note Investment at Amortized Cost............... 476
3
Interest Income ..................................... 476
3
($57,143 X .10 X 1/12) = $476 for January 2024
To amortize discount on note receivable

Cash.............................................................. 59,600
Note Investment at Amortized Cost4...... 58,571
Gain on Disposal of Investments –
Cost/Amortized Cost....................... 1,029
4
($57,143 + $952 + $476)
To record sale of note receivable

Solutions Manual 9-146 Chapter 9

PROBLEM 9.11 (CONTINUED)

d. (continued)
2. July 1, 2024
Cash ($109,200 + $1,500)............................ 110,700
Bond Investment at Amortized Cost...... 100,000
5
Interest Income ..................................... 1,500
Gain on Disposal of Investments –
Cost/Amortized Cost....................... 9,200
5
($100,000 X .06 X 3/12)

e. May 1, 2024
Note Investment at Amortized Cost............... 1,905
6
Interest Income ..................................... 1,905
6
Interest since December 31, 2023: ($57,143 X .10 X 4/12)
To record accrued interest earned

Cash.............................................................. 60,000
Note Investment at Amortized Cost7...... 60,000
7
($57,143 + $952 + $1,905)
To record maturity of note

f. If Octavio Corp. was a private entity following ASPE, then the

Chiang Corp. common shares would have to be accounted for
using FV-NI (since ASPE does not have an FV-OCI option), or at
cost, if the Chiang shares do not trade in an active market.

Under ASPE, the straight-line method of determining interest

could be used instead of the effective interest method, and the
interest income on the Monet bonds would have to be accounted
for and reported separately from other types of investment
income.

g. A public company must follow IFRS. However, a private company

can choose to follow either IFRS or ASPE.

LO 2,3,4,9 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-147 Chapter 9

PROBLEM 9.12

a. Investment in trading (FV-NI) securities:

Investment Income or Loss ....................... 80,000

FV-NI Investments.............................. 80,000
To record fair value adjustment
Calculations:

Unrealized
Securities Cost Fair Value Gain (Loss)
Delaney Motors $1,400,000 $1,600,000 ($200,000)
Isha Electric 1,000,000 720,000 ((280,000)
Total of portfolio $2,400,000 $2,320,000 $(80,000)

Investment in FV-OCI securities - Norton:

FV-OCI Investments................................... 725,000

Unrealized Gain or Loss - OCI............... 725,000
To record fair value adjustment

Fair value of investment in Norton $22,225,000

Carrying amount of investment 21,500,000
Unrealized holding gain $ 725,000

Solutions Manual 9-148 Chapter 9

PROBLEM 9.12 (CONTINUED)

b. Statement of Financial Position:

Current Assets
Trading securities, at fair value $2,320,000
Long-term Investments
Investment in shares of Norton Industries,
at fair value with holding gains in OCI $22,225,000

Shareholders’ Equity
Accumulated other comprehensive
income (loss) ($22,500,000 - $22,225,000) $(275,000)

Statement of Comprehensive Income:

Other Expenses and Losses (in net income)

Investment loss on securities at FV-NI $(80,000)
Other Comprehensive Income:
Item that will not be reclassified to net income-
Holding gain on FV-OCI securities 725,000
Included in comprehensive income $ 645,000

Statement of Changes in Shareholders’ Equity (Excerpt) –

Accumulated Other Comprehensive Income:

Accumulated other comprehensive income (loss),

January 1, 20231 $(1,000,000)
Other comprehensive income, 2023 725,000
Accumulated other comprehensive income (loss),
December 31, 2023 $(275,000)
1
Norton: $21,500,000 opening FV – $22,500,000 invested

Solutions Manual 9-149 Chapter 9

PROBLEM 9.12 (CONTINUED)

c.
Investment in Associate......................................................
2,484,000
2
Investment Income or Loss ...................................... 2,484,000
2
($13,800,000 X 18%)
To record investment income

432,000
Cash ($2,400,000 X 18%)...................................................
Investment in Associate............................................. 432,000
To record dividends received

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

d.
Under parts a. and b., if Brooks Corp. was a private entity following
ASPE, then the Norton Industries shares would have to be accounted
for using FV-NI (since ASPE does not have an FV-OCI option).
However, if the Norton Industries shares were not actively traded and
there was no active market price available for the shares, then Brooks
could also account for the shares at cost.

Under part c., ASPE permits the investor to account for shares in a
significantly influenced company to be accounted for using the equity
method or at cost. However, if the shares of Norton Industries were
actively traded, then the cost method is not permitted and the FV-NI
method is.

e.
The 20%-50% holding is a guide only. It is up to the entity to determine
if significant influence exists; specifically, does the entity have the
power to participate in the financial and operating policy decisions of
the entity whose shares it owns. If the other shares are widely held, for
example, an 18% interest could result in significant influence. On the
other hand, if one other party owned the other 55% of the shares, a
45% interest might not enable the investor to have any influence at all.

LO 3,4,6,9 BT: AP Difficulty: M Time: 40 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-150 Chapter 9

PROBLEM 9.13

a. Equity investments accounted for using the FV-OCI model:

Holding
Security Cost Fair Value Gain (Loss)
Frank Inc. $ 22,000 $ 32,000 $ 10,000
Ellis Corp. 115,000 95,000 (20,000)
Mendota Ltd. 124,000 96,000 (28,000)
Total of portfolio $261,000 $223,000 $(38,000)

Statement of Financial Position (Excerpt)—December 31, 2023

Long-term investments:
Investments at fair value, with gains and
losses in OCI $223,000

Shareholders’ equity:
Accumulated other comprehensive loss $(38,000)
($261,000 – $223,000)

b. Equity investments accounted for using the FV-OCI model:

2024
Carrying Fair Holding
Security Cost Amount Value Gain (Loss)
Ellis Corp. $115,000 $ 95,000 $140,000 $45,000
Mendota Ltd. 124,000 96,000 92,000 (4,000)
Kaptein Inc. 50,000 50,000 44,000 (6,000)
Total of portfolio $289,000 $241,000 $276,000 $35,000

Statement of Financial Position (Excerpt)—December 31, 2024

Long-term investments:
Investments at fair value, with gains and
losses in OCI $276,000
Shareholders’ equity:
Accumulated other comprehensive loss1 $(13,000)
1
(cost of $289,000 – FV of $276,000)
(or beg. Bal. ($38,000) + OCI current year $36,660 less
reclassification $11,660)
Solutions Manual 9-151 Chapter 9
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

PROBLEM 9.13 (CONTINUED)

c.
Statement of Comprehensive Income – 2024

Net income (includes only dividends from FV-OCI

investments) $158,300
Other Comprehensive Income:
Items that will not be reclassified to
net income -
Holding gains in year2 36,660

Comprehensive Income $194,960

2
Calculations:
Proceeds on Frank Inc. shares (2,000 X $17) X .99 $33,660
Carrying amount, Dec. 31, 2023 32,000
Holding gain, 2024 Frank Inc. shares 1,660
Holding gain on other shares in 2024 (part b.) 35,000
Increase in OCI due to unrealized holding gains $36,660

Transfer of realized gain from OCI to retained earnings:

Net proceeds from sale of Frank Inc. shares $33,660

Cost of shares (2,000 X $11) (22,000)
Gain on securities while held $11,660

Accumulated Other Comprehensive Income.... 11,660

Retained Earnings.................................... 11,660
To reclassify realized gains – Frank Inc. shares

Note: Under IFRS, transaction costs are capitalized for all investments
except those accounted for under the FV-NI model.

Solutions Manual 9-152 Chapter 9

PROBLEM 9.13 (CONTINUED)

d. Note X—Investments Accounted for Using the FV-OCI Model

Investments are accounted for using the FV-OCI model with

realized gains and losses transferred to retained earnings and are
reported at fair values based on third-party quotes. The fair values
and unrealized holding gains and losses of equity securities were
as follows:

December 31, 2024

Gross Unrealized
Fair
FV-OCI model Cost Gains Losses Value
Equity securities $289,000 $25,000 $(38,000) $276,000

December 31, 2023

Gross Unrealized
Fair
FV-OCI model Cost Gains Losses Value
Equity securities $261,000 $10,000 $(48,000) $223,000

The information about other comprehensive income indicates whether

the company’s management of its investment portfolio during the year
has added to (or reduced) the potential for cash flows, the extent to
which such gains and losses have been realized or converted to cash,
and whether future net income will be affected as gains and losses (in
OCI) are realized. The AOCI, on the other hand, indicates the extent to
which investments accounted for at FV-OCI are reported at amounts
above (or below) their original cost at the company’s year end.

LO 4,8 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-153 Chapter 9

PROBLEM 9.14

a. Some of the journal entries proposed by Ted Yan are not in

accordance with the applicable reporting standards. For those
entries that are not correct, revised entries are presented below.

Entry 1
The proposed entry is in accordance with applicable reporting
standards (IFRS in this case since the company is a public
company). The difference between the net proceeds from the sale
of a trading equity security and its carrying amount represents the
realized gain or loss. Any transaction costs on this disposition
have been expensed in the period because the net proceeds have
been used to determine the investment gain on disposal.

Entry 2
The November 26, 2023 entry to record the purchase of Mer
Limited common shares is not in accordance with IFRS. Brokerage
fees for trading investments accounted for using the FV-NI model
must be expensed and cannot be included in the cost of the
investment. The following entry should have been made:

FV-NI Investments......................................... 102,200

Investment Income or Loss........................... 2,800
Cash...................................................... 105,000

Solutions Manual 9-154 Chapter 9

PROBLEM 9.14 (CONTINUED)

a. (continued)
Entry 3
The proposed entry is not in accordance with IFRS. The amount of
$3,000 represents the excess of the cost of equity investments of
$819,000($615,000 + $204,000) over the fair values totalling
$816,000 ($611,000 + $205,000). IFRS requires that the carrying
amount of a portfolio of trading investments be reported at fair
value at the reporting date. Adjustments to fair value are recorded
at each reporting date and should be the difference between the
investments’ carrying amount and its current fair value, not its cost
and fair value. These adjustments are included in the
determination of net income for the period and need to be
separated from the amount that is reported in OCI, such as the
adjustment on the Admin Importers shares. In addition, an
allowance account might be used in situations where there is an
impairment of an amortized cost investment, but it is not
appropriate for the fair value adjustments of FV-NI and FV-OCI
investments.

The correct entry as at November 30, 2023 is as follows, assuming

the correct entry was made for Entry 2:
Carrying Fair Holding
Security Amount Value Gain (Loss)
Craxi Electric $314,000 $323,000 ($ 9,000
Renoir Inc. 181,000 180,000 ( (1,000)
Mer Limited 102,200 108,000 ( 5,800)
Total of portfolio $597,200 $611,000 $13,800)

Thus, the correct entries would have been:

FV-NI Investments......................................... 13,800

Investment Income or Loss................... 13,800
To record fair value adjustment

FV-OCI Investments .................................... 7,000

Unrealized Gain or Loss - OCI............... 7,000
($205,000 – $198,000)

Solutions Manual 9-155 Chapter 9

To record fair value adjustment

Solutions Manual 9-156 Chapter 9

PROBLEM 9.14 (CONTINUED)

a. (continued)
Entry 4
As Fellows Inc. has indicated, it exercises significant influence
over Yukasato Inc. (25% ownership), and its investment requires
using the equity method of accounting. Accordingly, the dividends
received from Yukasato are treated as a reduction of Fellows’
investment in Yukasato. The remaining dividends are correctly
recognized as dividend revenue. The correct entries as at
November 30, 2023, are as follows:

Cash.............................................................. 13,500
Dividend Revenue................................. 13,500

To record dividends received from investments where Fellows does not

have significant influence (Admin Importers, $9,000 and Craxi Electric,
$4,500)

Cash.............................................................. 25,000
Investment in Associate ........................ 25,000

To record dividend received from Yukasato Inc., accounted for using

the equity method.

Solutions Manual 9-157 Chapter 9

PROBLEM 9.14 (CONTINUED)

a. (continued)

Entry 5
The entry for recording Fellows’ share of Yukasato’s reported net
income, under the equity method, is in accordance with IFRS.
There is, however, an entry missing for the amortization of the
excess of purchase price over carrying amount of the assets of
Yukasato.

Purchase price $588,000

Carrying amount of net assets (25% X $1,800,000) (450,000 )
Excess of purchase price over carrying amount 138,000
Amortization ($138,000 / 20 years) $6,900

Investment Income or Loss........................... 6,900

Investment in Associate ........................ 6,900

The circumstances where it would be inappropriate to use the equity

method of accounting, even though the investor owns 25% of the
investee’s common shares, would be when the investor does not
have significant influence over the operating and financial policies of
the investee.

The investment would then be classified according to the nature of

the investment and management’s investment strategy. It could be
classified as trading (FV-NI model) and adjusted to fair value if it
meets the criteria or if management wants to use the fair value
option. Alternatively, it could be accounted for using the FV-OCI
model. The FV-OCI method would be more appropriate if the
investor intends to hold the investment for longer-term, relationship
purposes.

The nature of the investment in Yukasato indicates a longer-term

investing strategy rather than the trading classification (using the
FV-NI model) would require. The recommended accounting model
would be the FV-OCI model.

Solutions Manual 9-158 Chapter 9

PROBLEM 9.14 (CONTINUED)

c.
To be accounted for using the FV-OCI model, the investment under
IFRS must not be held for the purposes of trading either for debt or
equity securities.

For example, an entity may acquire an investment for longer-term

strategic purposes (but where the investor does not have significant
influence or control). These shares or debt are not held for realizing
direct investment gains. Therefore, a special election may be made,
on acquisition, to classify the investment as FV-OCI. With respect to
share investments classified as FV-OCI, gains and losses
are not recycled back through net income. Conversely, debt
investments classified as FV-OCI do have gains and losses
recycled back through net income when the instrument is sold
(when realized).

In addition, the standard indicates that any dividends received from

such an investment are recognized in net income unless the
dividend is determined to be a return of capital rather than a return
on the investment. They can be classified as either current or long-
term assets depending on management’s intention.

Trading investments accounted for using the FV-NI model, on the

other hand, are financial assets that are reported at fair value, with
unrealized and realized holding gains and losses reported as part of
net income.

Fellows appears to make some investments for the purposes of

short-term trading (Craxi, Renoir, Seferis, and Mer), while other,
larger holdings are acquired for longer-term purposes. Admin
Importers and Yukasato Inc. are examples of the latter.

LO 3,4,6 BT: AP Difficulty: C Time: 50 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-159 Chapter 9

PROBLEM 9.15

a. Investment Accounted for Using the FV-OCI Model

FV-OCI Investments...................................... 375,000

Cash (15,000 X $25)............................. 375,000
To record investment purchase

Cash ($5,000 X 15/50).................................. 1,500

Dividend Revenue................................. 1,500
To record dividend received

Unrealized Gain or Loss – OCI1.................... 15,000

FV-OCI Investments.............................. 15,000
1
[15,000 shares X ($24 – $25)]
To record fair value adjustment
b. Equity Method (15,000 shares = 30% holding)

Cost of 30% interest $375,000

Carrying amount
Assets ($290,000 + $860,000) $1,150,000
Liabilities (150,000)
$1,000,000
X .30 300,000
Excess paid above share of book value $ 75,000
Allocated to:
Assets subject to depreciation
[($960,000 – $860,000) X .30] 30,000
Unexplained excess to Goodwill $ 45,000

Subsequent amortization needed:

On undervalued depreciable assets ($30,000 ÷ 8) $3,750
On unrecorded Goodwill – not amortized 0
$3,750

Solutions Manual 9-160 Chapter 9

PROBLEM 9.15 (CONTINUED)

b. (continued)

Alternatively, the amount of goodwill is calculated as follows:

Cost $375,000
Fair value of net identifiable assets
Assets ($290,000 + $960,000) $1,250,000
Liabilities (150,000)
$1,100,000
X .30 330,000
Excess assumed to be goodwill $ 45,000

Equity Method Entries

Investment in Associate................................ 375,000

Cash...................................................... 375,000
To record investment purchase

Cash ($5,000 X .30)...................................... 1,500

Investment in Associate......................... 1,500
To record dividend received

Investment in Associate................................ 30,000

Investment Income or Loss2.................. 30,000
2
($100,000 X .30)
To record investment income

Investment Income or Loss........................... 3,750

Investment in Associate......................... 3,750
To record amortization of fair value difference

c. The answer to part a. would remain the same. The entries do not
relate to a particular time frame but rather reflect cash dividends
as income received in December and show the investment at fair
value at the reporting date.

Solutions Manual 9-161 Chapter 9

PROBLEM 9.15 (CONTINUED)

c. (Continued)

For part b., the two entries that record the proportionate share of
the associate’s net income and the depreciation of the
undervalued assets would need to be pro-rated to reflect a half-
year of ownership. The general concept is that you can only earn
income on assets from the point in time that you own/control them.
The entry to record dividends would be the same as the dividends
were paid in December 2023.
d.
If Melbourne Corp. was a private entity following ASPE, and did
not have significant influence, then the investment in Noah Corp.
shares would be accounted for using the cost method. Because
the shares are not actively traded, it is unlikely the FV-NI method
would be chosen. ASPE does not recognize the FV-OCI method.

Investment Accounted for Using Cost Model

Other Investments......................................... 375,000

Cash (15,000 X $25)............................. 375,000
To record investment purchase

Cash ($5,000 X 15/50).................................. 1,500

Dividend Revenue................................. 1,500
To record dividend received

If Melbourne Corp. has significant influence, the equity method

could be used as illustrated in part b.

Solutions Manual 9-162 Chapter 9

PROBLEM 9.15 (CONTINUED)

e.
Financial Statement Amounts Reported
ASPE Choices from d.

Equity Method Cost Method

Investment in Noah Corp.,

Dec. 31, 2023 $399,7501 $375,000
Investment income, year
ended Dec. 31, 2023 $26,2502 $1,500
1
Refer to b. $375,000 - $1,500 + $30,000 - $3,750 = $399,750
2
Refer to b. $30,000 - $3,750 = $26,250

Assuming Melbourne has significant influence over the operating,

financing, investing, and dividend policies of Noah Corp., the equity
method provides the more relevant and faithful representation of the
economic events and circumstances. If management’s influence has
been positive in an accounting period, the effect will be a positive one
on Melbourne’s statement of income; if Noah’s results are not good, the
poor result will be reflected on Melbourne’s financial statements. As
Noah’s net assets increase due to earning profits, so will Melbourne’s
carrying amount of its investment representing its share of Noah’s
increased net assets. When Noah pays out a dividend and its net
assets decrease, so will the carrying value of Melbourne’s investment in
Noah.

The cost method has some support when the investor cannot
significantly influence the policies of the investee. Because the investor
cannot control or even influence in any real way the paying of dividends
to the investor, no income should be reported as earned until received.
This is consistent with the revenue recognition principle when there are
collectibilty issues. However, if possible, the estimated fair value of the
investment would be useful information for users.

LO 2,6,8 BT: AP Difficulty: M Time: 45 min. AACSB: None CPA: CPA: cpa-t001 Reporting

Solutions Manual 9-163 Chapter 9

PROBLEM 9.16

a. January 1, 2023

Fair value of FV-OCI equity investments......................$240,000

Accumulated other comprehensive income.................. (30,000)
Thus, cost of FV-OCI equity investments =..................$210,000

The breakdown of balances at January 1, 2023:

Sold Unsold Total
Cost $70,000 $140,000 $210,000
Fair value 80,0001 160,000 240,000
Amount in AOCI $10,000 $20,000 $30,000

1
(1/32 of $240,000)
2
($70,000 / $210,000)
Because there were no new investments acquired, the reduction in
the cost of the FV-OCI investments must be the cost of the
investments sold: $ 70,000
Gain on disposal given as............................................ 30,000
Thus, proceeds on the sale (fair value)........................ $100,000

FV-OCI Investments ..............................................20,000

Unrealized Gain or Loss – OCI3.................... 20,000
To adjust to fair value at date of disposal
3
(fair value at sale $100,000 less fair value Jan. 1 $80,000)

Cash........................................................... 100,000
FV-OCI Investments................................ 100,000
Sale of FV-OCI investments
b.
Accumulated Other Comprehensive Income.... 30,000
Retained Earnings.................................... 30,000
To reclassify realized gains

Solutions Manual 9-164 Chapter 9

PROBLEM 9.16 (CONTINUED)

c. December 31, 2023

Fair value of FV-OCI equity investments................. $185,000

Cost of FV-OCI equity investments refer to (a)....... (140,000)
Thus, accumulated other comprehensive income. . . $ 45,000

FV-OCI Investments......................................... 25,000

Unrealized Gain or Loss – OCI 4............... 25,000
Fair value adjustment
4
(fair value at Dec. 31 $185,000 less fair value Jan. 1 $160,000)

AOCI continuity:
Beg. Bal. January 1, 2023 refer to (a) above........... $30,000
Fair value adjustment to date of disposal................ 20,000
Reclassification to Retained Earnings..................... (30,000)
Fair value adjustment Dec. 31, 2023....................... 25,000
Ending balance December 31, 2023........................ $45,000

d. Net Income:

Dividend revenue.......................................................... $ 5,000

Gain on disposal of investments- FV-NI....................... 40,000
Net income.................................................................... $45,000

Acker Ltd.
Statement of Comprehensive Income
For the Year Ended December 31, 2023

Net income............................................................................ $45,000

Other comprehensive income
Items that may not be reclassified subsequently
to net income:
Holding gains arising during the year 5.......................... 45,000
Comprehensive income..........................................................$90,000
5
($20,000 + $25,000)

Solutions Manual 9-165 Chapter 9

PROBLEM 9.16 (CONTINUED)

e.
Acker Ltd.
Statement of Financial Position
As of December 31, 2023

Assets Equity
FV-OCI equity Contributed capital $260,000
investments $185,000 Retained earnings7 75,000
Cash6 195,000 Accumulated other
_________ comprehensive income8 __45,000

Total assets $380,000 Total equity $380,000

6
Cash balance:

Beginning balance..................................................................$50,000
Dividend revenue....................................................................... 5,000
Additional cash from purchase and resale of FV-NI Inv...........40,000
Cash proceeds on sale of FV-OCI investments..................... 100,000
Ending balance ....................................................................$195,000
7
Retained Earnings Balance:
Beginning balance....................................................................$ 0
Net income...............................................................................45,000
Reclassification of FV-OCI realized gains.............................. 30,000
Ending balance ......................................................................$75,000
8
Refer to part c. continuity

Solutions Manual 9-166 Chapter 9

PROBLEM 9.16 (CONTINUED)

f. The opening SFP at January 1, 2023 (December 31, 2022), aside

from describing the investments as FV-NI investments, would also
show retained earnings of $30,000 instead of AOCI of $30,000.
Because the assets are measured at fair value in both cases, the
only difference is that the unrealized gains or losses would have
been recognized in net income and closed into retained earnings
under ASPE.
Net Income would be made up of:
Dividend revenue $ 5,000
Gain on purchase and resale of
FV-NI investments (other) 40,000
Investment income from fair value adjustment
Holding gain for the year ($20,000 + $25,000) 45,000
Net income $90,000
Retained Earnings on SFP:
Fair value adjustment FV-NI investments of 2022
($240,000 – cost $210,000, Refer to a.) $ 30,000
Net income – Income statement 90,000
Retained Earnings Dec. 31, 2023 $120,000

The same holds true for the closing SFP at December 31, 2023.
The investments will be described as FV-NI investments, and
because they are measured at the same fair value that the FV-OCI
classified investments were, the total shareholders’ equity must be
the same amount as well: $380,000. Because the contributed
capital is not affected, the retained earnings would be $380,000 -
$260,000 = $120,000.

Solutions Manual 9-167 Chapter 9

PROBLEM 9.16 (CONTINUED)

f. (continued)

With an opening retained earnings of $30,000 and an ending

balance of $120,000, net income for 2023 was $90,000 (as given
earlier) - the same as comprehensive income under the FV-OCI
model. Why is this? Because unrealized and realized gains and
losses are recognized under both models, and there is no “other
comprehensive income” under the FV-NI model; all gains and
losses must be recognized in net income in the period they arise.
Under the FV-OCI approach, they are split between net income
and OCI.

g.
Acker Ltd.
Statement of Financial Position
As of December 31, 2023

Assets Equity
FV-NI investments $185,000 Contributed capital $260,000
Cash 195,000 Retained earnings 120,000
Total assets $380,000 Total equity $380,000

LO 3,4,8 BT: AP Difficulty: C Time: 60 min. AACSB: None CPA: CPA: cpa-t001 Reporting

PROBLEM 9.17

a.
2023
Hysenaj Ltd. shares (FV-NI)
Mar. 18 Cash ($3 X 6,400)................................. 19,200
Investment Income or Loss......... 19,200
To record dividends received

Sept.17 Cash1..................................................... 367,488

FV-NI Investments....................... 316,300
Gain on Disposal of Investment –
Solutions Manual 9-168 Chapter 9
Copyright © 2022 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.
Kieso, Weygandt, Warfield, Wiecek, McConomy Intermediate Accounting, Thirteenth Canadian Edition

FV-NI........................................ 51,188
1
(6,400 X $58) X 99%

Growthpen Corp. shares (FV-OCI)

Jan. 2 FV-OCI Investments2............................. 1,675
Unrealized Gain or Loss – OCI....... 1,675
To adjust to fair value at date of disposal
2
At Dec. 31/22, 1,000 shs FV = 1,000/4,000 X $26,100 $6,525
FV of shares on Jan. 2/23 = 1,000 X 8.50 8,500
Less commission ( 300) 8,200
Increase in fair value in 2023 $1,675

Cash (1,000 X $8.50) ˗ $300................. 8,200

FV-OCI Investments........................ 8,200
To record disposal

Accumulated Other Comprehensive

Income3........................................ 1,000
Retained Earnings........................... 1,000
To reclassify holding gain
$1,675 – (25% X $2,700 loss) = $1,0003 gain in AOCI and OCI

Mar. 18 Cash (3,000 X $1)................................. 3,000

Dividend Revenue........................... 3,000
To record dividends received

Solutions Manual 9-169 Chapter 9

PROBLEM 9.17 (CONTINUED)

a. (continued)

Dec. 31 FV-OCI Investments.............................. 1,425

4
Unrealized Gain or Loss – OCI ...... 1,425
To adjust to fair value
4
Balance in FV-OCI investment account:
($26,100 + $1,675 - $8,200) ..........= $19,575
FV of shares at Dec. 31/23:
$7 X 3,000 shares..........................= 21,000
Unrealized gain to OCI........................= $ 1,425

Metal Corp. bonds at amortized cost

May 1 Cash (6% X $500,000) X 6/12 ……… 15,000

Interest Receivable ……………… 5,000
Interest Income ($13,047 X 4/6)... 8,698
Investment in Bonds at Amortized Cost5 1,302
5
($1,953 X 4/6) = $1,302
Date Cash Interest Premium Investment
received income 2.5% amort’n balance
Nov 1/22 $521,878
May 1/23 $15,000 $13,047 $1,953 519,925
Nov 1/23 15,000 12,998 2,002 517,923
May 1/24 15,000 12,948 2,052 515,871

Jun.30 Interest Receivable ($15,000 X 2/6)……. 5,000

Interest Income ($12,998 X 2/6). …….. 4,333
Investment in Bonds at Amortized Cost6 667
6
$2,002 X 2/6
To accrue interest
Balance in Investment in Bonds of Metal at June 30, 2023:
$521,227 – $1,302 – $667 = $519,258

Solutions Manual 9-170 Chapter 9

PROBLEM 9.17 (CONTINUED)

a. (continued)

Jun.30 Cash ($500,000 X 1.02) + $5,000……... 515,000

Loss on Disposal of Investments-
Cost/Amortized Cost ……… 9,258
Interest Receivable ……………… 5,000
Investment in Bonds at Amortized Cost 519,258
To record disposal

Investment in Lloyd Corp. shares

It appears that Minute Corp. can exercise significant influence over

Lloyd’s operations and finances, and there is a 3,600/12,000 = 30%
equity interest, therefore the equity method should be used.

Jan. 3 Investment in Associate …………... 234,000

Cash………………………………. 234,000
To record purchase of investment
Analysis:
Paid……………………………….…… $234,000
For 30% of BV: ($1,400,000 - $750,000) X .3 = 195,000
+ 30% of patent FV: ($60,000 X .3) = 18,000
213,000
Excess = goodwill $21,000
Patent FV difference to be amortized at a rate
of $18,000/6 years = $3,000 per year

Oct. 15 Cash (3,600 x $1)…………………………… 3,600

Investment in Associate ………... 3,600
To record dividends received

Solutions Manual 9-171 Chapter 9

PROBLEM 9.17 (CONTINUED)

a. (continued)

Dec. 31 Investment in Associate…………… 14,400

Investment Income or Loss 7…… 14,400
7
$48,000 X 30%
To record investment income

Dec. 31 Investment Income or Loss……… 3,000

Investment in Associate ………. 3,000
To record amortization of fair value difference

The carrying amount of the Investment in Lloyd Corp. in Minute’s

accounts is now:
$234,000 - $3,600 + $14,400 - $3,000 = $241,800
Although the fair value of the investment is only $217,800, no
information is provided to indicate there has been a permanent
impairment in the investment’s value. Because of this, and the fact that
this investment is not measured at fair value, no adjustment to its fair
value is required.

b.
Partial Statement of Financial Position, December 31, 2023

Long-term Assets
Equity Investments, at fair value
with gains and losses in OCI $ 21,000
Investment in associate company,
at equity 241,800

Shareholders’ Equity
Accumulated other comprehensive
income (loss)8 $(600)
8
(-$2,700 + $1,675 - $1,000 + $1,425) = -$600

Solutions Manual 9-172 Chapter 9

PROBLEM 9.17 (CONTINUED)

c.
Investment income-related accounts included in net income:
Investment income on FV-NI investments
($19,200 + $51,188) $70,388
Dividend revenue on FV-OCI investments 3,000
Interest income on amortized cost investments
($8,698 +$4,333) 13,031
Loss on disposal of investment in bonds (9,258)
Equity in income of associate company
($14,400 - $3,000) 11,400

Statement of Comprehensive Income

Year ended December 31, 2023
Net income $1,422,600
Other Comprehensive Income
Items that will not be reclassified to
net income:
Holding gains on investments9 3,100
Comprehensive Income $1,425,700
9
($1,675 + $1,425)

Solutions Manual 9-173 Chapter 9

PROBLEM 9.17 (CONTINUED)

d.
Statement of Changes in Shareholders’ Equity (Partial)
For the Year Ended December 31, 2023
Accumulated
Other
Retained Comprehensive
Earnings Income
Beginning balance $1,980,000 $(2,700)

Comprehensive income
Net income 1,422,600
Other comprehensive Income 3,100
Reclassification of realized gains 1,000 (1,000)
Ending balance $3,403,600 $(600)

Underlying investment related to balance of AOCI

Cost of 3,000 shares of Growthpen:
3,000/4,000 X $28,800 = $21,600
Fair value, Dec. 31, 2023 21,000
Unrealized loss in AOCI $( 600)

e.
Certain investments in debt and equity instruments may be accounted
for using FV-OCI. Gains and losses are accumulated in the OCI
account which adjusts net income to arrive at comprehensive income.
The OCI account is closed out to a SFP account called Accumulated
Other Comprehensive Income. The OCI account accumulates gains
and losses which, by definition, are excluded from net income under
IFRS.

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Solutions Manual 9-174 Chapter 9

Solutions Manual 9-175 Chapter 9

CASES

See the Case Primer on the Student Website as well as the summary case primer
in the front of the text.

CA 9.1 INVESTMENT COMPANY LIMITED (ICL)

Case Overview:
ICL is a private company owned by 10 doctors and created for the purpose of
investing. Therefore, there is no legal constraint or requirement to use GAAP. The
bank, who is looking at lending the company money, might want GAAP statements
since they are relevant and reliable. The owners may also want GAAP statements
so that they can assess stewardship of the two managers. Under GAAP, the
company may follow ASPE or IFRS. The bank may want one or the other. Both will
be considered in the analysis.

As the accountant, you will want to provide the bank with useful information in order
to secure the loan required to expand the company’s investment holdings.

Solutions Manual 9-176 Chapter 9

CA 9.1 ICL (CONTINUED)

Analysis and Recommendations:

Issue: ICL owns 15% of IA’s outstanding shares. Given this ownership interest,
ICL is permitted to appoint one of IA’s three board of director members. One of
ICL’s shareholders has been hired as a consultant by IA to support its day-to-day
operations. ICL is unclear as to how long it wishes to hold this investment, but two
ICL shareholders wish to hold it for the long term.

Significant influence Non-strategic investment - At cost or fair

value
- Since at least two owners are - Under ASPE, 15% does not usually
interested in holding onto the represent significant influence as it is
below the 20% threshold.
shares for the longer term, this - Investments in equity shares are
could be considered a long-term generally carried at cost under ASPE
investment. unless there is significant influence or
- This is also supported by the unless the shares are quoted in an
active market (these do not appear to
interchange of resources, be). Therefore, under ASPE the
specifically technology investment would likely be carried at
(company uses lab equipment), cost.
the representation on Board (1 - Under IFRS, the investment may be
carried at FV-NI or FV-OCI. It may
out of 3 represents significant
make sense to use the former if they
influence), and the interchange plan to trade the shares. It appears at
of managerial personnel (owner least 2 of the owners would like to
hired as consultant). keep the shares for the longer term so
- If this relationship is deemed to perhaps FV-OCI makes more sense.
An election is required to classify
be significant influence, ICL instruments under FV-OCI. If FV-OCI
should use the equity method. is used, dividend income from these
Record at cost and recognize investments is reported directly in net
pro-rata share of income/losses. income while remeasurement gains
and losses are recorded in OCI.
- Under FV-OCI, there is no recycling of
unrealized gains and losses to income
when those investments are sold.

Recommendation: The involvement of the owners would appear to indicate

significant influence exists. Therefore, the equity method should be used.

Solutions Manual 9-177 Chapter 9

CA 9.1 ICL (CONTINUED)

Issue: ICL purchased 25% of IB shares to be held for two months. The fair value of
the shares is available.

Under ASPE, IB would be carried at cost for the same reasons as IA above. Under
IFRS, IB would be carried at fair value (as noted above using either FV-NI or FV-
OCI). Note that these are preferred shares. Therefore, the shares would not be
accounted for under the equity method.

Recommendation: Given that the intention is to resell the shares in the near term,
FV-NI method makes the most sense. The fair value is known, making it easy to
measure.

Issue: ICL purchased 25% of IC shares two years ago. IC is heavily involved in
R&D activities related to drug development. An IC drug with $10 million invested in
R&D activities was recently not approved in the USA for use. Most of the $10
million was capitalized in IC’s statements.

Analysis:
This is likely a significant influence investment since there is a 25% ownership
interest. However, the actual interrelationship of ICL’s management and board with
the management and board of directors of IC needs to be considered before
making this decision. It appears that there is an impairment in the value of this
investment. If the $10 million is written off by IC, ICL’s share value is $2.5 million.
Using the equity method as required under IFRS, this would wipe out the carrying
value of the investment and may create a liability. Even though IC’s financial
statements will not be prepared for another two months, this information must be
considered. It would appear this is a non-temporary decline, since it affects a drug
that was meant to provide 50% of the profits of the company going forward.
Consequently, impairment testing should be performed.

A liability should be created if ICL is committed to making up the cash shortfall, is

required to make up the cash shortfall, or if a turnaround is imminent. There is no
evidence of any of these. Therefore, using the equity method should result in
writing off the investment and not creating a liability. Under both IFRS and ASPE,
an investment that results in significant influence is assessed at each financial
statement position date to determine if there are any indications that the investment
may be impaired. If there are indicators, the investment’s carrying amount is
compared with the investment’s recoverable amount, and the difference is written
off. The recoverable amount is the higher of its value in use and fair value less
costs to sell, both of which are discounted cash flow concepts.

Solutions Manual 9-178 Chapter 9

CA 9.1 ICL (CONTINUED)

Alternatively, if the ICL managers and owners cannot significantly influence the
policies and operations of the management and board of IC, the equity method
cannot be used under either ASPE or IFRS. Under ASPE, ICL would likely account
for the investment at cost (along with recognizing an impairment loss) as IC is a
private company without a reliable FV share price. Under IFRS, it is likely that the
shares would be measured at fair value, even though there may not be an active
market price. In either case, a loss in FV would have to be recognized, reported in
net income if a FV-NI approach is chosen, or in OCI under a FV-OCI approach. In
the latter case, the loss would not be recycled. FV-NI is appropriate if the
investment is being held for trading or for speculative purposes while FV-OCI is
more appropriate if the investment is held for longer periods or for strategic
purposes. To classify the investment as FV-OCI, management must make an
election upon initial designation.

Recommendation: Given that the owners of ICL have employed managers to

manage their investments with a view to maximizing their return on investment (an
assumed but very likely objective), it is likely that they would prefer full FV valuation
for ICL’s assets. However, because the investments are in smaller private
companies instead of publicly traded entities, the owners might very well prefer
reliable cost measures instead.

Solutions Manual 9-179 Chapter 9

CA 9.2 CANDO COMMUNICATIONS (CC)

Case Overview:
CC is a conglomerate with investment in many companies. A financial analyst will
want to ensure that the accounting treatment reflects the true nature of the
business relationship and that it assists in predicting future cash flows, which are
used in valuing a company.

Net income is down substantially ($42 million lower than prior year), even though
revenues are up 15%. This requires further investigation, specifically confirming
that aggressive accounting has not been used to mitigate the impact of the loss.
IFRS is a constraint since this is a public company.

Note that all the investments appear in line with the company’s main business of
operating in the telecommunications industry and unless otherwise noted, would be
assumed to be long-term investments.

Analysis and Recommendations:

Issue: CC owns 15% of the shares and all the convertible and subordinated
debentures of Australia TV. The convertible debentures are convertible into shares
that would represent 50% of the company’s total issued shares at the time of
conversion. As a result, the investment in Australia TV yields a distribution that is
equivalent to 57.5% of all distributions paid by Australia TV. CC also has a
contractual right to be represented on the board of directors and has appointed
three of the board’s 12 members.

Solutions Manual 9-180 Chapter 9

CA 9.2 CC (CONTINUED)

Significant Influence – equity method Subsidiary - consolidation

- CC owns 15% of Australia TV, this is - The percentage share ownership
close to the 20% benchmark. along with the convertible debentures
- CC has representation on the board establishes effective control. If the
in the amount of 3 out of 12 board debentures were converted, CC would
members. This does not indicate have approximately 50% of the
control, possibly only influence. shares, which is equal to control in
terms of voting rights.
- If this is treated as a subsidiary this
would result in consolidation,
combining 100% of the assets,
liabilities, revenues, and expenses.
This would provide a better
assessment of what net assets are
under the control of CC.
- CC would also report non-controlling
interest on its financial statement
representing the portion of Australia
TV not owned by CC.

Recommendation: This is likely a subsidiary, because of the potential to exercise

control. Consolidation provides greater transparency in terms of the underlying
business. (Note: IFRS 10.B47 indicates that potential voting rights as well as
existing voting rights are considered by the investor in determining whether there is
control if the potential voting rights are substantive.)

Issue: CC has tried to influence control through its investment in Ulster TV. CC
has been unsuccessful and does not hold a seat on the board of directors, even
though it has almost a 30% equity interest in Ulster TV. Therefore, the equity
method of accounting is not appropriate. The accounting issue is whether this
investment should be carried at fair value with changes in value being recognized in
net income, or whether changes in value should be recognized through OCI.

Solutions Manual 9-181 Chapter 9

CA 9.2 CC (CONTINUED)

FV-NI FV-OCI
- If CC expects to hold this investment - If CC expects to hold this investment
for the short term and will likely for strategic purposes in the longer
realize any gains or losses in the term so that the variability in the
investee’s fair value, net income investee’s fair value is not expected to
treatment would be a better predictor be realized, OCI treatment would
of future cash flows and the effect on produce a better result. The current
CC related to changes in the FV of fair value of the investment is
Ulster TV. provided, but the variability does not
- If CC’s management affects the affect net income or EPS since FV-
performance of Ulster TV, changes in OCI equity investments are not
its value would be more appropriately recycled to income.
recognized in net income and its EPS. - If CC does not influence the economic
performance of Ulster TV, then
including changes in its FV would
introduce “noise” to the net income
number that is not warranted.

Recommendation: Given that it appears CC does not have any effect on Ulster
TV’s performance and its future prospects at this point, changes in FV would be
better reported outside of net income through OCI.

Solutions Manual 9-182 Chapter 9

CA 9.3 IMPAIRED INVESTMENTS LIMITED (IIL)

Case Overview:
IIL is an investment company that is considering going public within the next five
years and has decided to adopt IFRS this year. Therefore, the firm must prepare
GAAP financial statements. It seems that the investment values are in question.
The controller must ensure transparency; however, there may be a bias to convince
shareholders that the current investment decisions were appropriate. It is important
this bias does not get reflected in how the financial statements are prepared.

Analysis and Recommendations:

Issue: There is currently a 5% investment in Bonds which are being carried at cost.
During the year similar risk bonds in the marketplace are yielding 6%.

- The bond investment would be carried at amortized cost where the intent is
to hold to contractual maturity and the instrument is debt-like. This appears
to be the case since the investment is structured as a bond with interest
payments. There is no indication of the intent of management, so this needs
to be determined.
- For investments carried at amortized cost, IFRS would require IIL to use the
expected loss model to determine impairment. More specifically,
management needs to determine whether the credit risk of the investment
has significantly increased. If not, a 12-month timeframe would be used to
assess defaults. Otherwise, defaults would have to be considered over the
lifetime of the investment.
- In this case, the change in interest rate in the marketplace is not significant
enough evidence of impairment since the change appears to be due to
general economic factors in the marketplace and not specific problems
related to this instrument. Moreover, it is difficult to determine if the credit risk
change is significant or not. The evidence is vague as to whether there is
objective evidence of a decline in value.
- If the investment was recorded as FV-OCI, management would have to use
the fair value impairment model. It is not likely that FV-NI would be used
since there is no indication of management’s intent to hold the bonds for the
short term only.

Recommendation: Do not write down the value of the bonds based on the
current evidence.

Solutions Manual 9-183 Chapter 9

CA 9.3 IIL (CONTINUED)

Issue: IIL has investments in the common shares of Company A with no significant
influence or control and the shares are not held for trading. Company A is listed
on the stock exchange. The shares are currently carried at fair value, with gains
and losses booked to income. At the end of the period the fair value of the
shares is significantly below cost.

- The company has a choice under IFRS to classify these shares as FV-NI or
FV-OCI. This is an accounting policy choice.
- If IIL chooses FV-OCI, this is an irrevocable election. The amounts in OCI
are not subsequently transferred to net income.
- If IIL chooses FV-NI, all gains and losses will flow through net income and
introduce volatility.
- There is no need to worry about impairment for this asset since it is already
adjusted to fair value with the gains/losses being allocated to income. The
fair value model is used for FV-NI investments. Therefore, no separate
impairment testing is performed since the assets are continually revalued to
fair value. The accounting policy choice (FV-NI or FV-OCI) will affect the
accounting for impairment on a going forward basis, however.

Should IIL decide to account for the investment using FV-OCI, impairment
testing would not be performed since impairment losses on equity
investments are not recycled to net income.

Issue: IIL has investments in the common shares of Company B. Company B is

listed on the stock exchange. The shares are currently carried at fair value, with
gains and losses booked to income. At the end of the period the fair value of the
shares is below cost, but the controller believes that this is just a temporary decline
and not necessarily an impairment. The controller plans to sell these shares as
soon as the decline in price reverses and a 10% return on investment is achieved.

- The company has a choice under IFRS to classify these shares as FV-NI or
FV-OCI. This is an accounting policy choice.
- If IIL chooses FV-OCI, this is an irrevocable election. Amounts in OCI are
not subsequently transferred to net income, this includes impairment losses.
- If the company chooses FV-OCI, all gains and losses will be reported
outside of net income. It looks like the investment may be declining in value,
but the controller believes this is ‘temporary.’
- If the company chooses FV-NI, all gains and losses will be reported as part
of net income. Since the controller’s intention is to sell the shares as soon as
a 10% return on investment is achieved, it would be preferable to account for
the investment at FV-NI so that the realized gain is included in net income.

Solutions Manual 9-184 Chapter 9

CA 9.3 IIL (CONTINUED)

Recommendation for the treatment of Company A and Company B shares:

Whether IIL chooses FV-NI or FV-OCI for these investments depends on how the
financial statement information will be used. If management is to be evaluated on
the performance of the investments through dividend income, interest income and
changes in the fair value of the investment holdings, the FV-NI choice is better. If
the intent is to hold these shares for the short term, perhaps for more strategic
purposes, the FV-NI choice would probably be better.

Solutions Manual 9-185 Chapter 9

INTEGRATED CASES

IC 9.1 EMI INC.

Case Overview: EMI incorporated two years ago. This is a new business model
since the company previously operated as a Trust. As a corporation, EMI is
undertaking new investment activities. These complex transactions may increase
EMI's risk of misstatement from misapplied accounting policies.

The equity analyst will use the financial statements for financial analysis,
particularly to determine the economic performance of the company and its new
strategy. Specific questions that the equity analysts would like answered include:

 Has the new strategy provided opportunities for increased cash flows to
investors in the future?
 Is the company earning more on these investments than the investors could
if the cash had been distributed to them directly?

The analysts will want the financial statements to be prepared with transparency
and based on substance over legal form.

Other users include EMI's shareholders and board of directors. These users will
review the financial statements to evaluate management, in addition to the
prospects for future cash flows.

EMI is a public company. Therefore, it must use GAAP for the preparation of the
financial statements in accordance with IFRS for financial reporting purposes.
ASPE is not an option; however, references to ASPE have been included for
information and comparative purposes.

Solutions Manual 9-186 Chapter 9

IC 9.1 EMI INC. (CONTINUED)

Issue - EMI purchased 40% of the outstanding voting shares of ABC. ABC pays
management fees to EMI to have two of EMI’s executives participate on its
strategic committee. Also, as part of the investment, one member of EMI’s board of
directors is eligible to serve as a member of ABC’s board of 12 executive members.
Prior to year-end, EMI signed as a guarantor for ABC’s newly issued debt, provided
it could use ABC’s existing movie theatres as future collateral. ABC is also a public
company. Of ABC’s remaining 60% of outstanding shares, no individual
shareholder holds more than 1%.

Significant Influence Control

- EMI only owns 40% of the voting -The remaining 60% ownership of ABC
shares of ABC which does not imply shares is widely held with no
legal control. individual shareholder holding more
than 1% of the outstanding shares.
- EMI has only one of twelve seats on
the board of directors providing it with - EMI is a guarantor for ABC's
the ability to influence, but not control outstanding debt and has the right to
ABC's operations. use ABC's fixed assets as collateral.

- ASPE allows for a choice of the - EMI's two executives participate in

equity or cost method of accounting ABC's strategic committee.
to be used.
- In substance, EMI has the risks and
- IFRS requires the equity method be rewards of control and has the ability
used. to control ABC's strategic and
financial operations.

- IFRS requires consolidated

statements.

- ASPE allows for a choice to use

either the equity or cost method.

- EMI would be required to show the

minority interest (the non-controlling
interest, specifically the portion of the
company not owned by EMI) in both
its income statement and balance
sheet.

Solutions Manual 9-187 Chapter 9

IC 9.1 EMI INC. (CONTINUED)

Recommendation: EMI should consolidate its investment in ABC due to its ability
to control ABC's resources despite not having legal control. Under consolidation,
the combined assets of ABC and EMI would be shown on the consolidated
statement of financial position. 100% of ABC’s net assets would be included and a
noncontrolling interest would be shown in Shareholders’ Equity to recognize the
portion of net assets not owned by EMI.

Issue -EMI has invested excess cash into corporate bonds with a face value of
$100,000, for $94,758 at the beginning of the year. The bonds pay a 6% semi-
annual interest rate and provide an effective interest rate of 8% over three years.
The bonds mature on January 1, 2027. At the annual board meeting, management
had stated its intention to hold these corporate bonds as an investment for earning
income, even though management has purchased similar corporate bonds in the
past for short-term profits and continues to do this with its existing bonds

Amortize using the Cost Model Fair Value - NI or FV-OCI

- Management has stated its intention - Historically, EMI has always

of holding the investment for long- purchased corporate bonds for short-
term interest earning (cash flow) term trading, which would be
purposes, signalling the investment accounted for under the FV-NI model.
will be measured using the amortized
cost model. -Under FV-NI model, the investment is
adjusted to fair value at the end of
- For this type of debt investment, each reporting period. All unrealized
IFRS requires that interest is gains/losses and interest earned is
recognized using the effective reported in net income.
interest rate method.
- Another option is to use the FV-OCI
- ASPE permits interest to be recorded model (assuming that the bonds will
using either the straight-line or the either be held to collect principal and
effective interest rate method. interest payments or for sale). Gains
and losses would be reflected through
OCI (with recycling), but interest
earned is reported in net income.

- Under ASPE, the fair value option can

be used to account for the investment
at FV-NI.

Solutions Manual 9-188 Chapter 9

IC 9.1 EMI INC. (CONTINUED)

Recommendation: EMI should account for the corporate bonds at amortized cost
given management's intention for the investment. Interest should be recorded using
the effective interest method as shown in the amortization table below. In addition,
given management’s intention of holding the bonds to earn income, this investment
should be shown as a non-current asset. Other bonds held for short-term trading
would be shown as current assets.

6% Corporate Bonds Purchased to Yield 8%

Bond
Interest Discount Amortized
Cash Interest Income Amortized Cost of Bonds

1/1/2024 $ 94,758

7/1/2024 $ 3,000 $ 3,790 $ 790 95,548

1/1/2025 3,000 3,822 822 96,370

7/1/2025 3,000 3,855 855 97,225

1/1/2026 3,000 3,889 889 98,114

7/1/2026 3,000 3,925 925 99,039

1/1/2027 3,000 3,961 961 100,000

$18,000 $23,242 $ 5,242

Journal entry - upon inception 1/1/2024

Dr. Bond Investment at Amortized Cost 94,758

Cr. Cash 94,758

Journal entry - to record the first receipt of interest on July 1, 2024

Dr. Cash 3,000

Dr. Bond Investment at Amortized Cost 790
Cr. Interest Income 3,790

Solutions Manual 9-189 Chapter 9

IC 9.1 EMI INC. (CONTINUED)

Issue - EMI has invested funds into two stock portfolios, A and B. Management’s
intention for the investment is unclear; however, in the past, similar stock portfolios
were purchased with the intention of being held only to generate a short-term gain.
Portfolio A consists of a 5% ownership of shares in a publicly traded company,
Masrani Corp., for a total investment of $25,000. Portfolio B consists of a 3%
ownership in another private movie theatre, for a total investment of $15,000.
Transaction costs for both portfolios were 2% of the purchase price. At year end,
the fair value of portfolio A had dropped to $19,222.

FV-NI or FV-OCI Model Cost Model

- In the past, management has held - Management has not explicitly stated
similar portfolios for the purpose of its intention to only hold the portfolio
trading and to earn short-term profits. investments for the short-term.
For these investments, the FV-NI -Transaction costs are added to the
method would have been appropriate. cost base.
- Under the FV-NI method: - Changes in FV are not applicable and
 Transaction costs of 2% of the not adjusted for.
purchase price are expensed. - Under IFRS, the cost method is used
 Changes in FV, unrealized gains for a portfolio of equity instruments
and losses, are recognized when fair value is not measurable.
through net income. - Under ASPE, the cost method is used
 Each portfolio must be re- for a portfolio of equity instruments
measured to FV at each balance with no quoted market price.
sheet date.
 This option is available under
both ASPE and IFRS.
- Under IFRS, there is the option to use
FV-OCI when the investment is first
recognized.
 Transaction costs would be
included in the cost of the
investment.
 Changes in fair value would be
recognized through OCI.
 Realized gains and losses on
disposal would not be recycled
and would be transferred to
retained earnings from AOCI.

Note that the investments in Portfolios A and B are relatively minor in relation to the
company’s total assets.

Solutions Manual 9-190 Chapter 9

IC 9.1 EMI INC. (CONTINUED)

Recommendation: Portfolio A should be measured using the FV-NI model;
however, Portfolio B must remain at cost because there is no quoted market price.
The 2% transaction costs for Portfolio A must be expensed. Transaction costs for
Portfolio B must be added to the cost base. Portfolio A must record an investment
loss to bring the portfolio to its fair value at the end of the year.

Journal entry - to adjust to fair value - December 31, 2024.

Dr. Investment Income or Loss 5,778

Cr. FV-NI Investments 5,778

Management’s intention will also determine the classification of these investments

on the company’s statement of financial position. If the portfolios are held for
trading, the portfolios would be shown as current assets. If it is management’s
intention to hold them for a longer term, the portfolios would be shown as non-
current assets.

Since the 3% investment in Portfolio B is in a movie theatre, EMI management

might choose a different strategy in accounting for this investment. This may be the
beginning of an increasing ownership interest in this movie theatre over time;
therefore, EMI may take a more strategic approach in accounting for this
investment. The accounting method and strategy should be monitored going
forward. Accounting for this investment at FV with changes going to OCI may be an
option (with no recycling). Although for now, the immateriality of the investment
gives EMI management some time to determine what its longer-term plans are.

Solutions Manual 9-191 Chapter 9

RESEARCH AND ANALYSIS

RA 9.1 Royal Bank of Canada

a.
($ millions) Oct. 31, 2020 Oct. 31, 2019
Securities $275,814 $249,004
Total Assets 1,624,548 1,428,935
Percentage of total assets 17.0% 17.4%
Loans (net) 660,992 618,856

Banks are primarily in the business of lending money. A significant portion of

their assets are made up of loans receivable from businesses and individuals.
The investments (securities) are shown on the balance sheet after cash
resources and before loans receivable. The balance sheet is not classified
between current and non-current assets and liabilities. The banking industry
operates in a unique environment where investments in securities do not
reflect the same motivations, goals, or risks as they do for other companies.
The usual corporate classification of investments as temporary investments,
because the investments reflect excess cash invested for the short term, is
not relevant to the banking industry. Financial institutions tend not to present
classified balance sheets since the classification does not present useful
information to readers.
b.
($ millions) 2020 2019
Interest income from securities A $6,488 $6,827
Total interest and dividend income 34,883 41,333
Percentage of total interest income 18.6% 16.5%
Additional “comprehensive income” items relating to securities:
Trading revenue B 1,239 995
Commissions on securities transactions C 1,439 1,305
Net gain on investment securities D 90 125
Net change in unrealized gains (losses) on
available-for-sale securities (in OCI) E (172) 45
Net securities income
(A + B + C + D + E) F 9,084 9,297
Net income + E 11,265 12,916
Percentage of securities income to net income + E 80.6% 72.0%
Investment in securities G 275,814 249,004

Solutions Manual 9-192 Chapter 9

Return on investment in securities (F/G) 3.3% 3.7%

RA 9.1 ROYAL BANK OF CANADA (CONTINUED)

b. (continued)
The return on investment in securities decreased slightly from 2019 to 2020
with a relatively low 3.7% to 3.3% return on investment, consistent with the
relatively low but stable market interest rates over the 2019 – 2020 period.
The investment income on the securities as a percentage of net income
increased in 2020 (including the net OCI income (losses) on the same
investments), due in large part to a lower net income base in 2020. Total
investment in securities increased by a larger proportion than the increase in
percentage of securities to net income, thereby generating a lower return on
investment.

c. Securities consist of “Trading”, and “Investment, net of applicable allowances”.

The valuation methods used by RBC, based on Note 2 (Securities), are as
follows:

Trading securities comprise debt and equity securities purchased and

measured subsequently at fair value at each reporting date. Unrealized gains
and losses are recognized directly in net income as a component of non-
interest income as the fair values change in each reporting period. Investment
securities also represent debt and equity investments that are remeasured to
their fair value at the end of each reporting period. However, any unrealized
gains and losses are recognized in Other Comprehensive Income (OCI) rather
than net income. Once a debt investment is sold, the realized gain or loss
(proceeds on disposal less the original cost of the investment) is recognized in
net income as a component of non-interest income for debt securities. The
unrealized gains (losses) previously included in OCI related to such
investments are transferred to net income for debt securities and are included
in the realized gains and losses. Unrealized gains (losses) on equity securities
are not reclassified.

Solutions Manual 9-193 Chapter 9

RA 9.1 ROYAL BANK OF CANADA (CONTINUED)

c. (continued)
Dividend income and interest income related to all types of securities are
reported directly in net income. The equity securities are reported at their fair
value at each reporting date and are not subject to impairment testing as all
changes in their fair values go directly to net income. The debt trading
securities provision for credit losses.

Solutions Manual 9-194 Chapter 9

RA 9.2 NUTRIEN LTD.

a. Nutrien Ltd. has the following investment interests:

Profertil 50% Ownership Interest and Voting Rights – Equity accounted

Canpotex 50% Ownership Interest and Voting Rights – Equity accounted
Sinofert 22% Ownership Interest and Voting Rights – FVTOCI accounted

The accounting policy choice for the investment in Sinofert requires judgment to
be applied by management. As described in Note 15, Nutrien Ltd. does not have
any representation on the board of directors of Sinofert. Despite having over
20% ownership, a percentage that can commonly be indicative that significant
influence exists, this investment is more appropriately accounted for using fair
value. In order to have significant influence over an investee, there must be
factors such as board representation, inter-company transactions, etc., present.
As pointed out in the note, this does not exist. FVTOCI is deemed to be more
appropriate than FVTPL (FV-NI) due to the management’s intention to hold this
investment over the long term.

b. As per Note 25, Business Combinations, Nutrien Ltd. reported “Various”

acquisitions in 2020 totalling $233 million related to the purchase price, net of
cash acquired and $133 million in Goodwill. The note also provides a detailed
account of how the $233 million is allocated between various assets and
liabilities.

In Note 25, Nutrien Ltd. provides information about an acquisition from 2019
related to Ruralco. The key information in this presentation is related to the fair
value adjustments on each of the acquired assets and liabilities. The company
reports that a thorough review and assessment was completed with
independent experts involved in the process. Normally, this kind of review and
assessment would be done upon the acquisition of the assets and liabilities.
While the company does not indicate that there were any shortfalls or lack of
assessment at time of acquisition, there was a preliminary assessment. The
timing of when the fair value assessment was being carried out likely carried
over into 2020.

Acquisition information, including the descriptions of the acquisitions provided, is

valuable to the users of the financial statements. Business combinations such

Solutions Manual 9-195 Chapter 9

as these are often done for long term value creation. Any information that
provides the user insights into the types of assets and resources acquired that
will contribute to future value creation would be of high relevance to the user.

Solutions Manual 9-196 Chapter 9

RA 9.2 NUTRIEN LTD. (CONTINUED)

c. There are 15 entities listed under Note 30 in the Basis of Consolidation section.
These organizations are located across various counties including Canada, US,
Australia, and Trinidad. The company also provides information about the
principal activities of each entity.

Nutrien Ltd. fully consolidates the entities as of the date that control is acquired
and continues until control ceases. Intercompany balances and transactions are
eliminated on consolidation.

Solutions Manual 9-197 Chapter 9

RA 9.3 IMPAIRMENT MODELS

An investment is recognized as impaired when there is not reasonable

assurance that the future cash flows associated with the investment will be
collected on time or in the full amount, under the incurred loss model. To determine
when there is not reasonable assurance of the future cash flows, a triggering event
that would impact the amount or timing of future cash flows is considered.
Examples of triggering events include when the investee has been late making
payments, the existence of significant negative economic conditions, and if the
investee is experiencing significant financial difficulty and potential bankruptcy. If a
triggering event does occur, impairment is recognized. The investment will be
valued at the estimated realizable amount, which is calculated using the revised
payments and interest rates or the net proceeds that would be received from
collecting collateral or the realizable amount from selling the investment. Interest
income on the impaired investment is recognized based on the discount rate used
in calculating the present value of cash flows from the investment. Changes in the
net realizable value of the investment are recognized when they occur (which would
be noted with a triggering event).

The benefit of the incurred loss model is that an impairment is recognized

and measured at the balance sheet date only when there has been a specific
triggering event. Therefore, the cost of measurement is lower, and the amount of
the loss is based on objective information. A weakness of this model is that it only
recognizes the losses that have been incurred at that point rather than continuously
measuring the loss.

The expected loss impairment model is continuous and estimates the

expected future cash flows from an investment throughout the period. The
recognition of impairment for investments under this model does not depend on a
triggering event; rather impairment is recognized based on changing cash flow
projections. The discount rate stays at the same effective interest rate that the
instrument was initially measured with, so the measurement of the investment is
cost-based. The impairment loss is recognized as the difference between the
carrying amount and the revised present value of cash flows. Interest income after
an impairment is recognized, is based on the original effective interest rate. Since
cash flows are continuously estimated, this model recognizes impairments that
have been incurred to date as well as future expected losses.

Solutions Manual 9-198 Chapter 9

RA 9.3 IMPAIRMENT MODELS (CONTINUED)

The benefit of the expected loss impairment model is that impairment losses
(or the reversal of losses) are recognized sooner under this model, which improves
the quality of the information. Transparency is improved with this model since users
are provided with information as soon as it is available rather than only at the end of
the period. The weakness of the expected loss model is that it is both costly and
difficult to consistently measure the estimated future cash flows from an investment.

IFRS requires that all instruments valued at cost/amortized cost and debt
investments carried at FV-OCI use the expected loss model as opposed to the
incurred loss model, primarily because this model provides more transparent
information to users.

ASPE uses the incurred loss model for all investments measured at
cost/amortized cost.

Solutions Manual 9-199 Chapter 9

RA 9.4 SPECIFIC DISCLOSURE REQUIREMENTS

One of the objectives of financial instrument disclosure is to communicate to
users the significance of financial instruments to the financial position and
performance of the company. The requirement to disclose carrying values and any
impairment allowances supports this objective since the user can clearly see how
significant the value of financial instruments is when compared to the company’s
total balance sheet.

Another objective is to explain the risks an entity is exposed to as a result of

their financial instruments. Impairment losses and reversals must be disclosed by
the company, which indicate some of the risks relating to financial instruments and
the losses or gains they have experienced. Disclosure of financial risks relating to
investments and their changes over time also supports this objective.

The third objective of disclosure is to ensure companies describe their risk

management strategies. To address this objective, IFRS specifically has provisions
for the disclosure of management strategies for financial risks.

Solutions Manual 9-200 Chapter 9

RA 9.5 PUBLIC SECTOR PENSION (PSP) INVESTMENT

BOARD
a. As per Note 1 of the financial statements, the PSP Investment Board (PSP)
is a Crown Corporation that was created to manage and invest the amounts
transferred to it pursuant to the applicable Superannuation Acts. The
corporation is responsible for the management of, and investment decisions
related to, the pensions of the public service (federal government
employees), the RCMP, the Canadian Forces, and the Reserve Force. As
part of its responsibility, the decisions made by the PSP should always be in
the best interests of both the beneficiaries and the contributors to the
pension funds.

b. The following is a presentation of the composition of the investment assets

that the PSP Investment Board holds (in millions):

Public Markets 2020 2019

Canadian Equity $ 3,360 1.62% $ 3,394 1.71%
Foreign Equity $ 29,073 14.03% $ 32,424 16.29%

Private markets
Real estate $ 29,763 14.36% $ 28,142 14.14%
Private equity $ 22,087 10.66% $ 20,234 10.17%
Infrastructure $ 22,428 10.82% $ 20,099 10.10%
Natural resources $ 10,443 5.04% $ 7,513 3.77%

Fixed Income
Cash and Money market $ 4,840 2.34% $ 11,904 5.98%
Government and Corporate bonds $ 31,403 15.15% $ 26,249 13.19%
Inflation-linked bonds $ 16,557 7.99% $ 14,017 7.04%
Private debt securities $ 17,441 8.41% $ 15,644 7.86%

Alternative Investments $ 11,077 5.34% $ 10,039 5.04%

Investment-related assets $ 8,807 4.25% $ 9,363 4.70%

Total $ 207,279 $ 199,022

Solutions Manual 9-201 Chapter 9

RA 9.5 PUBLIC SECTOR PENSION (PSP) INVESTMENT

BOARD (CONTINUED)
Page 30 of the annual report does include a presentation of the various
asset classes as a percentage of assets under management (AUM), using
net assets of $169.8 billion as the base. While the total assets above are
shown as $207.3 billion (comparatively), it is important to factor in the
liabilities that are incurred to support the operation of the investment asset
portfolio.

The overall annual return for 2020 is -0.6%, which is based on a

Comprehensive Loss of $1.042 billion over $169.682 billion of Net Assets.
As per page 26 of the annual report, the benchmark return for 2020 was -
1.6%. At -0.6%, the PSP Investment Board outperformed expectations.
Additionally, the 5-year benchmark was 5.1%, and the realized return was
5.8%. The 10-year benchmark return was also outperformed at 8.5% against
a 7.5% benchmark. It appears that the PSP Investment Board has a pattern
of exceeding expectations.

c. On page 11 of the 2020 Responsible Investment Report, the PSP Board

indicates that engagement is a key component of its responsible investment
approach. Rather than only investing in specific projects or assets that
contribute to ESG goals, the PSP Board looks to create and foster
engagement with its investees. The PSP Board conducts an engagement
selection process to ensure that the materiality of the ESG issues is high
enough to realize a beneficial impact as a result of its investment and
engagement. Engagement is more than just investing. The PSP Board looks
for opportunities to actively participate as board members and/or exert
significant influence on its investees to contribute to ESG goals.
Engagement themes include climate change, human capital management,
human rights, and board effectiveness. The report provides a good visual
that demonstrates the progress achieved. For example, the PSP Board has
affected a positive change related to climate change with 132 of its 226
investees included as a part of its engagement processes.
There are numerous other excellent examples of how the PSP Board’s
investment decisions and management practices contribute to positive ESG
outcomes as an institutional investor highlighted throughout the report.

Solutions Manual 9-202 Chapter 9

RA 9.5 PUBLIC SECTOR PENSION (PSP) INVESTMENT

BOARD (CONTINUED)

d. There are several minor changes in portfolio distribution as noted in part b. A

reader might gravitate to the change in level of investment in Natural
Resources (an increase from 3.77% to 5.04% of the total asset base).
However, as noted in part c, the PSP Board achieves a great deal of positive
outcomes and ESG goal realization by doing more than investing in Natural
Resources. A reader would need to review the PSP Board’s activities by
asset class in tandem with the activities outlined in the responsible
investment report by asset class to understand how each class contributes
to the overall ESG strategy.

Solutions Manual 9-203 Chapter 9

CUMULATIVE COVERAGE AND TASK-BASED SIMULATION:

CHAPTERS 6 TO 9

Part A – Cash and investments

Required: Determine whether each financial instrument should be presented with

the cash and cash equivalents or investments section of the statement of financial
position.

Instruction: Place an X in the appropriate column in the table below.

Financial Instrument Cash and Investments

cash
equivalents
Euro currency X
Bank account X
90-day Canadian government treasury bill X
Western Hotel Company common shares X
Dufort Corp. common shares X

Part B – Bank reconciliation

Required: Prepare a bank reconciliation for PHL as at December 31 to determine

the adjusted cash balance per the general ledger.

Instruction: Enter the description and amount of any adjustment in the table below.

To be completed by To be completed
student (Description) by student ($)
Cash per bank account: $158,293
Add: Outstanding deposits 15,487

Deduct: Outstanding cheques 52,375

Adjusted cash per general ledger: $121,405

Solutions Manual 9-204 Chapter 9

CUMULATIVE COVERAGE (CONTINUED)

Part C: Investment income

Required: Calculate the carrying value as at December 31 and the amount of

investment income for the year ended December 31 for each of the financial
instruments listed below.

Instruction: Enter the total investment income in the box in the table below.

Financial Carrying Investment Notes for instructor

Instrument Amount ($) income ($)
90-day Canadian $98,693 $654 $98,039 + (8% X $98,039
government X 1/12)*
treasury bill

Using: Amortized
Cost ($100,000 - $98,039) X
30/90
Western Hotel
Company common
shares
$5,045,000 $75,000 See Note 1 below
Using: Equity
Method

Western Hotel
Company common
shares $30,000 dividend
$5,100,000 $130,000
Using: FV - OCI $100,000 FV gain

Dufort Corp.
$500 dividend
common shares
$47,000 $(500)
$1,000 FV loss
Using: FV-NI

Note 1 - Investment in Western Hotel Company

Original cost $5,000,000
Add: Share of income $250,000 x 30% 75,000
Less: Dividend received $100,000 x 30% (30,000)
Ending balance $5,045,000

Solutions Manual 9-205 Chapter 9

CUMULATIVE COVERAGE (CONTINUED)

Part D: Inventory carrying values

Required: Calculate the carrying value of each inventory item as at December 31.
Identify any inventory that requires a write-down.

Instruction: Enter the carrying value in the box in the table below. Place an X in the
box for any inventory that requires a write-down.

Carrying Writedown Instructor

Amount ($) Required notes
Food:
Chicken dinners 102.00 See Note 1
Beef dinners 152.50 below
Vegetable servings 82.50
Fruit servings 82.50
Desserts 310.00
Bathrobes and towels:
Bathrobes 1,980.00 See Note 1
Towels, extra-large 360.00 X below
Towels, large 300.00

Note 1 – Calculations:

Food:
Chicken dinners (Note A) (40-20) x ($5 + $0.10) $ 102.00
Beef dinners (Note A) (35-10) x ($6 + $0.10) 152.50
Vegetable servings 75 x ($1 + $0.10) 82.50
Fruit servings 75 x ($1 + $0.10) 82.50
Desserts 100 x ($3 + $0.10) 310.00
Sub-total (all have cost lower than NRV) 729.50

Bathrobes and towels:

Bathrobes 40 X $49.50 cost 1,980.00
Towels, extra-large 25 X ($18.00 X 80%) NRV 360.00
Towels, large 20 X $15 cost 300.00
Sub-total 2,640.00
Total $3,369.50

Note A – The spoiled food has been written off and has no balance. Accordingly,
the amounts have been deleted from both inventory items.

Solutions Manual 9-206 Chapter 9

CUMULATIVE COVERAGE (CONTINUED)

Part E: Accounts receivable

Required: Calculate the accounts receivable, allowance for expected credit losses,
and loss on impairment balances as at December 31.

Instruction: Enter the dollar amount for each item in the box in the table below.

Amount as at December 31 Note for instructor

Accounts receivable $20,500 see below Note 1

Allowance for expected credit $525 see below Note 2

losses

Loss on impairment $22,525 Note 3

Note 1 - Accounts receivable:

Short Term Accrued (given) $ 10,500
Suites Amount expected to be collected – corporate 1 10,000
Total $ 20,500

Note 2 - Allowance for expected credit losses

Opening balance Given $15,000 cr.
Accounts written off during year 32,000 dr.
Balance before adjustment 17,000 dr.
Desired ending balance 5% X $10,500 525 cr.
Adjustment needed $17,525 cr.

Note 3 – Loss on impairment

Adjustment to obtain desired ending
balance in Allowance for expected
credit losses $17,525
Uncollectible amount on suite written $45,000 x 4/12 -
off as uncollectible $10,000 5,000
Ending balance $22,525

Solutions Manual 9-207 Chapter 9

CUMULATIVE COVERAGE (CONTINUED)

Part E: (Continued)
1. For the amount to be collected for the corporate suite, the wording in the
question suggests that Posh Hotels would have accrued 4 months of rental
income as follows:
Accounts Receivable (4/12 X $45,000) $15,000
Service Revenue $15,000

At year-end since only $10,000 is expected to be collected, Posh Hotels can

set up an Allowance for Expected Credit Losses in the amount of $5,000 in
order to leave a net realizable amount of $10,000. The presentation above
suggests that the outstanding receivable has been partially written off. This
might be the case since the company is in bankruptcy proceedings.

An additional issue relates to the service (rental) revenue. The revenue should
not be recorded unless it is realizable. When expecting $45,000 as a
prepayment on July 1, Posh Hotel would have expected payment. Later with
the bankruptcy and “allowing the tenant to stay to the end of October” the
amount of revenue is still questionable because at that point they know it won’t
be the full year’s $45,000. Certainly, by year end they know the realizable value
is $10,000 and that should correspond to the AR (gross less allowance or just
net). This raises the issue of whether the revenue on the income statement
should be $15,000 or only $10,000, with loss on impairment of only $17,525.
We end up with 3 alternative answers based on the following journal entries:

Accounts Receivable $15,000

Service Revenue $15,000
To record the accrual of rental income from July to October.

Alternative 1:
Loss on Impairment $5,000
Allowance for Expected Credit Losses $5,000
To set up an allowance for the uncollectible portion

Alternative 2:
Service Revenue $5,000
Accounts Receivable $5,000
To write-off a portion of the receivable since the revenue is known not to be
realizable at year end. This also does not overstate receivables

Alternative 3:
Loss on Impairment $5,000
Accounts Receivable $5,000
To write off a portion of receivables to bad debts expense since the company is
in bankruptcy proceedings (approach used in the solution)

Solutions Manual 9-208 Chapter 9

CUMULATIVE COVERAGE (CONTINUED)

Alternative 1 Alternative 2 Alternative 3

(consistent with (used above)
Ch. 7)

Accounts $25,500 ($10,500 $20,500 ($10,500 $20,500

receivable accrued + $15,000 accrued + $10,000 ($10,500
from suites) from suites) accrued +
$10,000 from
suites)

Allowance for $5,525 ($525 + $525 $525

expected credit $5,000 for the
losses suites).

Net realizable $19,975 $19,975 $19,975

value

Service revenue $15,000 $10,000 $15,000

Loss on $22,525 $17,525 $22,525

impairment

Net impact on $(7,525) $(7,525) $(7,525)

income statement

All 3 approaches create the same net realizable value on the SFP and the
same net impact on the income statement. Alternative 3 is preferable over
Alternative 1, because it does not overstate accounts receivable.

Solutions Manual 9-209 Chapter 9

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.

MMIXXI xii F1

Solutions Manual 9-210 Chapter 9

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