APPENDIX B

investments

Summary of Questions by STUDY Objectives
and Bloom’s Taxonomy

Note: AN = Analysis AP = Application K = Knowledge

summary of questions by level of difficulty (LOD)

Note: E = Easy M = Medium H=Hard

CHAPTER STUDY OBJECTIVES

1. Identify reasons to invest, and classify investments. Companies purchase debt and equity securities of other companies for two main reasons: (1) for non-strategic reasons as a source of investment income, and (2) for strategic reasons, such as gaining control of a competitor, influencing strategic alliances, or moving into a new line of business.

Non-strategic investments are debt and equity securities that are purchased for purposes of earning interest or dividend revenue or for the purpose of selling them in the short-term at a gain. Investments purchased for selling in the short-term are referred to as trading investments and are reported at fair value. Debt investments reported at amortized cost may be short-term or long-term. Strategic investments are always investments in equity securities and are classified as long-term investments.

2. Account for debt investments that are reported at amortized cost. Companies reporting under IFRS report debt investments purchased for the purposes of earning interest income at amortized cost. Companies reporting under ASPE report all investments in debt instruments at amortized cost. Debt investments include money-market instruments, bonds, and similar items. Entries are required to record the (1) acquisition, (2) interest revenue, and (3) maturity or sale. Interest revenue is recognized as it accrues and any discount or premium is amortized using the effective-interest method.

3. Account for trading investments. Trading investments are reported at fair value. Under IFRS, these investments can be either debt or equity securities that are purchased for the purpose of selling in the short-term at a gain. Under ASPE, only investments in equity securities will be reported at fair value. An equity investment may be in either preferred or common shares of another corporation. Entries are required to record the (1) acquisition, (2) investment revenue, (3) fair value adjustments, and (4) sale. The gains and losses resulting from fair value adjustments are reported in profit.

Exercises

Exercise 1

For each item listed below determine if it is a non-strategic investment (NS) or a strategic investment (S).

1. Bonds

2. Term deposits

3. Equity investment purchased to trade

4. Short-term debt instrument held to earn interest

5. Treasury bill

6. Preferred shares

7. Long-term debt instrument held to earn interest

8. Short-term debt instrument purchased to trade

9. 60% of the common shares of the investee

10. Money market funds

Exercise 2

On July 2, 2014, Midtown Corp. purchased at 101, $100,000 of 6%, 10 year bonds issued by Smallville Inc., with the intention of holding the bonds to earn interest income. The bonds pay interest semi-annually on January 1 and July 1. Both companies have December 31 year ends. The relevant amortization amount for the period ending December 31, 2014 is $50.

Instructions

a. Record the purchase of the bond by Midtown and record any entries it will make related to this investment for the year end December 31, 2014.

b. Record the issue of the bond by Smallville and record any entries they will make related to this liability for the year end December 31, 2014.

c. Record the receipt of interest by Midtown on January 1, 2015.

d. Record the payment of interest by Smallville on January 1, 2015.

Exercise 3

Anil Denim Products had the following transactions during the year ended December 31, 2014. The debt investments were purchased to earn interest income.

Jan 1 Invested $10,000 in a money market fund.

Mar 31 Notified by fund manager that interest of $125 had been added to the money market fund.

Apr 1 Purchased a 180 day treasury bill maturing on September 30 for $58,600.

Jun 30 Notified by fund manager that interest of $125 had been added to the money market fund.

Jul 31 Cashed the money market fund and received $10,290.

Aug 1 Purchased a 6 month, 3% term deposit for $15,000.

Sep 30 Received $59,500 at maturity of treasury bill.

Instructions

Record the transactions and prepare any December 31, 2014 adjusting entries.

Exercise 4

Nickel District Company purchased the following instruments during the year. Assume the company’s fiscal year end is January 31, 2015.

Dec 1 2014 Purchased a $5,000 120 day treasury bill for $4,935. The treasury bills are trading at a market rate of interest of 4% annually.

Feb 1, 2015 Purchased at 101 a $15,000, 5% 5 year Laurentian Bond. Interest is paid semi-annually. The market rate of interest was 3.5%. The bonds were purchased to trade.

Mar 30, 2015 Treasury bill matured.

Aug 1, 2015 Received interest on the Laurentian Bond.

Aug 2, 2015 Sold the Laurentian Bonds at 99.

Instructions

Record the above transactions and any necessary adjusting entries for Nickel District required at January 31, 2015.

Exercise 5

The following is information about O’Hara Corporation’s, a public company, trading investments. O’Hara has a September 30 year end.

Sep 1: On hand:

$50,000, 5% FMC Co. bond, purchased previously by O’Hara at 101. Interest on the bond is payable semi-annually on January 1 and July 1.

$100,000 3% Government of Canada bond, previously purchased by O’Hara at 98. Interest on the bond is payable semi-annually on March 31, and September 30.

Sep 1: Purchased $40,000 4% Alpha Inc. bond at 99. Interest is payable annually on August 31.

Sep 30: Received interest on Government of Canada bond.

Sep 30: Sold the Government of Canada bond at 97.

Sep 30: Fair value on FMC Co. bond is $52,500 and fair value of Alpha Inc. bond is $38,700.

Instructions

Record the transactions that occurred in September and prepare any adjusting entries required at September 30.

Exercise 6

Trainor Inc., a public company, had the following transactions pertaining to debt investments held as trading investments:

Jan 1 Purchased 60, 8%, $1,000 Terry Corp. bonds for $60,000. Interest is payable semi-annually on July 1 and January 1. On December 31 the bonds were trading at 101.

Jul 1 Received semi-annual interest on Terry Corp. bonds.

1 Sold 30 Terry Corp. bonds for $32,000.

Instructions

a. Journalize the transactions.

b. Prepare the required adjusting journal entries at December 31.

Exercise 7

The following transactions were made by Weiss Inc., a public company. Assume all investments are trading investments.

Jun 2 Purchased 200 Avery Corporation common shares for $45 per share.

Jul 1 Purchased 200 Lewis Corporation bonds for $220,000.

30 Received a cash dividend of $2 per share from Avery Corporation.

Sep 15 Sold 60 shares of Avery Corporation for $50 per share.

Dec 31 Received semi-annual interest cheque for $11,000 from Lewis Corporation.

31 Received a cash dividend of $2 per share from Avery Corporation.

31 The shares of Avery Corporation are worth $60 each on this date. The Bonds are worth $237,000.

Instructions

Journalize the transactions and required adjusting journal entries at December 31, the company’s fiscal year end.

Exercise 8

Sanajevah Corp. had the following transactions pertaining to its trading investments:

Jan 1 Purchased 900 Punji Inc. shares for $9,450.

Jun 1 Received cash dividends of $0.50 per share on Punji shares.

Sep 15 Sold 400 Punji shares for $4,300.

Dec 1 Received cash dividends of $0.50 per share on Punji shares.

On December 31, the shares of Punji Inc. were trading for $10 each.

Instructions

a. Journalize the transactions.

b. Indicate the income statement and/or comprehensive income effects of the transactions.

Exercise 9

On January 5, 2013, Barker Limited purchased the following securities as trading investments:

300 McRae Corporation common shares for $4,200

500 Gupta Corporation common shares for $10,000

600 May Corporation common shares for $19,800

On June 30, 2013, Barker received the following cash dividends:

McRae Corporation $2.00 per share

Gupta Corporation $1.00 per share

May Corporation $2.25 per share

On November 15, 2013, Barker sold 100 May Corporation common shares for $4,000.

On December 31, 2013, the market value of the securities held by Barker is as follows:

Per Share

McRae Corporation common shares $15

Gupta Corporation common shares 18

May Corporation common shares 35

Instructions

Prepare the appropriate journal entries that Barker Limited should make on the following dates: January 5, 2013; June 30, 2013; November 15, 2013; and December 31, 2013.