Investments Test Bank Chapter 9 13th Canadian Edition v1 - Intermediate Accounting v1 13e | Canada | Test Bank by Donald E. Kieso. DOCX document preview.
CHAPTER 9
INVESTMENTS
CHAPTER STUDY OBJECTIVES
1. Understand the nature of and basic accounting for investments, including which types of companies have significant investments. This chapter deals with investments in basic debt and equity instruments of other companies. Debt instruments such as bonds generally carry contractual rights to receive principal and interest payments. Equity instruments such as shares may carry contractual rights to receive dividends (depending on the type of share) and may also carry voting rights and/or rights to receive residual assets on windup of a company. Care must be taken to determine exactly what rights the investments entitle the holder to because this will help determine the accounting. Not all companies carry significant investments. It depends on the business model. Examples of types of companies that generally carry significant investments are financial institutions, insurance companies, and pension funds. There are three basic models for accounting for investments: the cost/amortized cost model, the FV-NI model, and the FV-OCI model
2. Explain and apply the cost/amortized cost model of accounting for investments. At acquisition, the cost of the investment is recognized as its fair value plus transaction costs. If the investment is a debt instrument, any premium or discount is amortized to interest income. Holding gains are recognized only when realized, as are holding losses, unless the investment is impaired. The investment is reported at its cost or amortized cost as either a current asset or a long-term investment, depending on its maturity and management’s intention to hold it. ASPE uses this model for most investments excluding equity investments where an active market exists for trading the shares and derivatives. IFRS 9 uses this model for debt instruments where the entity’s business model is to hold the investments to maturity.
3. Explain and apply the fair value through net income model of accounting for investments. At acquisition, the investment is recognized at its fair value, with transaction costs being expensed. At each reporting date, the investment is revalued to its current fair value, with holding gains and losses recognized in net income. Dividend and interest income is also recognized in net income. If held for trading or other current purposes, the investment is reported as a current asset. ASPE uses this for equity instruments where there is an active market and for derivatives. IFRS 9 uses this model for all investments not accounted for under the cost/amortized cost model or the FV-OCI model. ASPE and IFRS both allow any investment to be accounted for using FV-NI under the fair value option.
4. Explain and apply the fair value through other comprehensive income model of accounting for investments. At acquisition, the investment is recognized at fair value plus transaction costs. At each reporting date, the investment is revalued to its current fair value, with the holding gains or losses reported in other comprehensive income. On disposal, the accumulated holding gains or losses are either recycled to net income (debt securities) or transferred directly to retained earnings (equity securities). Investments are reported as current or long-term assets, depending on marketability and management intent. ASPE does not allow this method. IFRS 9 allows this method for certain equity investments and debt securities where the business model is achieved by both holding to maturity and selling (depending on the investment and circumstances).
5. Explain and apply the incurred loss, expected loss, and fair value loss impairment models. The three impairment loss models differ in the timing of the recognition of impairment losses and the discount rate used. Under the incurred loss approach, a triggering event is required before a loss is recognized and measured, and the revised cash flows are discounted using either the historical or a current market rate. Under the expected loss approach, no triggering event is required, and revised cash flows and impairment losses are determined on a continual basis. The discount rate is the historical/original rate. Using the fair value loss model, the asset is written down to fair value taking into account market information (refer back to chapters 2 and 3). ASPE uses the incurred loss model for all cost/amortized cost investments, although the post-impairment carrying values are measured differently. IFRS 9 uses the expected loss model for all cost/amortized cost investments as well as FV-OCI debt securities. Under IFRS 9, impairment losses on FV–OCI equity investments are not recognized in net income. Where the FV-NI model is used, there is no need to specifically assess impairment because the investment is continually revalued to fair value and any gains or losses are booked to income.
6. Explain the concept of significant influence and apply the equity method. Significant influence is the ability to have an effect on strategic decisions made by an investee’s board of directors, but not enough to control those decisions. The equity method, sometimes called one-line consolidation, is used because income is recognized by the investor as it is earned. The investor’s income statement will reflect the performance of the investee company. Under this method, the investment account is adjusted for all changes in the investee’s book value and for the amortization of any purchase discrepancy. IFRS requires use of the equity method for its associates (investees a company can significantly influence). ASPE provides a policy choice: either the equity method or the cost method, except that associates with a quoted price in an active market cannot be accounted for at cost. Instead, the FV-NI model can be used.
7. Explain the concept of control and when consolidation is appropriate. Control relates to the ability to direct the strategic decisions of another entity and to generate returns for your own benefit or loss. When one company controls another, it controls all the net assets of that entity and is responsible for all its revenues and expenses. Therefore, all of the subsidiary’s assets and liabilities, and revenues and expenses, are reported by the parent investor on a line-by-line basis in consolidated financial statements. The interests of the noncontrolling shareholders in the subsidiary company are reported separately as noncontrolling interest. Under IFRS, all subsidiaries are consolidated. ASPE, on the other hand, allows consolidation or a choice of the equity or cost method. Investments in companies with shares traded in an active market cannot be reported using the cost method, but may use FV-NI.
8. Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analytics. The objectives of disclosure are to provide information so users can assess the significance of the financial asset investments to the entity’s financial position and performance, the extent of risks to which the company is exposed as a result, and how those risks are managed. As a result, the investments are identified on the statement of financial position according to how they are classified for accounting purposes, with the income statement reporting information on the returns by method of classification. Extensive disclosure is required, particularly under IFRS, on the entity’s risk exposures and how it manages those risks.
9. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. The differences are noted in Illustrations 9.7, 9.9, 9.10, and 9.11. There are significant differences, partly because ASPE has adopted a more simplified approach.
Multiple Choice questions
Answer No. Description
c 1. Debt securities
b 2. Investment in debt instruments
c 3. Equity instruments
d 4. Definition of equity security
a 5. Definition of debt security
b 6. Accounting for investments
a 7. Valuation of debt instruments
a 8. Transaction costs
a 9. Motivation for debt investment
c 10. Measurement of investments
d 11. Cost model for debt securities
a 12. Holding gains under cost model
d 13. Cost model for debt securities
c 14. Equity investments and the cost model
b 15. Recognition of interest for bond investment
b 16. Amortization of premium or discount
a 17. Recording amortization of bond discount
b 18. Accounting for investments in associates
b 19. Amortization of premium or discount
c 20. Accrued interest treatment
b 21. Acquisition of long-term investment in bonds
c 22. Recording purchase of bonds
c 23. Carrying value of long-term investment in bonds – cost model
d 24. Carrying value of long-term investment in bonds – cost model
a 25. Calculation of income from long-term investment in bonds
b 26. Calculation of income from long-term investment in bonds
c 27. Determine gain on disposal of bond investment
c 28. Cost model of accounting for share investment
b 29. Recognition of interest income from bond
d 30. Calculation of bond discount to be amortized
d 31. Carrying value of long-term investment in bonds
b 32. Net carrying value of bonds
a 33. FV-NI model
b 34. Fees under the FV-NI model
a 35. FV-NI model
c 36. Holding gains with FV-NI model
d 37. FV-NI model and transaction costs
c 38. Accounting method for investment
d 39. Temporary investments in equity securities
a 40. Year-end adjustments for FV-NI investment
c 41. Accounting for fair value adjustments
d 42. Valuation of marketable equity securities
b 43. Valuation of marketable equity securities
b 44. Application of cost model to an investment
b 45. Unrealized gains and losses with FV-OCI
a 46. Fees under the FV-OCI model
c 47. Classification of comprehensive income
c 48. FV-OCI with recycling
b 49. Inclusions in OCI
d 50. Accumulated other comprehensive income
a 51. The concept of “recycling”
c 52. Accounting method for investment
b 53. Recognition of investment disposals
d 54. Accounting for impairment losses
a 55. Accounting for impairment losses
b 56. Impairment – incurred loss model
c 57. Indicators of potential impairment
c 58. Impairment – incurred loss model
b 59. Impairment – expected loss model
c 60. Impairment – fair value loss model
c 61. Amortized cost of a bond
a 62. Impairment – expected loss model
a 63. Accounting for a controlling interest
a 64. Equity investments and significant influence
b 65. Conditions for using the equity method
a 66. Significant influence
d 67. Degree of control
a 68. Recording of dividends received under the equity method
c 69. Recognition of earnings of investee using the equity method
c 70. Effect of using the cost method in error
c 71. Accounting for investments in associates
c 72. Accounting for investments in associates
d 73. Investor paying more than book value
b 74. Equity investments traded in active market
a 75. Equity method of accounting for share investment
b 76. Equity method of accounting for share investment
c 77. Equity method of accounting for share investment
b 78. Equity method of accounting for share investment
b 79. Equity method of accounting for share investment
a 80. Balance of investment account using the equity method
c 81. Investment income recognized under the equity method
c 82. Balance of investment account using the equity method
b 83. Balance of investment account using the equity method
c 84. Investment income recognized using the equity method
c 85. Investment income recognized under the equity method
a 86. Balance of investment account using the equity method
c 87. Sale of share investment
Answer No. Description
d 88. Calculate acquisition price of an investment in associate
a 89. Equity method – Excess payment over acquisition cost
b 90. Equity method – Allocation of excess payment of acquisition cost
c 91. Implications of control
a 92. Investing in subsidiaries
d 93. Accounting for subsidiary
b 94. Reporting model for control
d 95. Accounting policies for control – ASPE
c 96. Accounting policies for control – IFRS
a 97. Description of investee corporation
d 98. Classification as current assets
b 99. Objectives of disclosure requirements
b 100. Disclosures for private entities
a 101. Consolidation under IFRS and ASPE
c 102. Reporting of equity method
d 103. Financial disclosures regarding acquisitions
c 104. Financial statement presentation for long-term investment assets
c 105. Differences in disclosure for IFRS and ASPE
c 106. Transaction costs under IFRS and ASPE
c 107. Accounting for Investments using FV-NI ASPE
d 108. Treatment of interest and dividend income under IFRS and ASPE
Exercises
Item Description
E9-109 Shares acquired on margin
E9-110 Types of companies that have investments and why
E9-111 Types of companies that have investments
E9-112 Transaction costs
E9-113 Bonds – fair value and amortized cost
E9-114 Investment in debt securities – discount
E9-115 Investment in shares of other entities – cost model
E9-116 Application of cost/amortized cost method – straight line
E9-117 Investment in debt securities at a premium – effective interest
E9-118 Investment in debt securities at a premium
E9-119 Investments in debt securities – scenarios
E9-120 Cost and equity methods
E9-121 Fair value through net income method
E9-122 Year end adjustments for temporary investments
E9-123 Cost and equity methods
E9-124 Fair value through other comprehensive income investments – entries
E9-125 Incurred loss, expected loss, and impairment
E9-126 Significant influence
E9-127 Accounting for investment under APSE
E9-128 Significant influence
E9-129 Investment in equity securities
E9-130 Accounting entries for acquisition – equities
E9-131 Accounting entries for acquisition – equity method
Item Description
P9-132 Accounting for bonds – amortized cost model (IFRS)
P9-133 Expected loss model – bonds
P9-134 Accounting for debt investments purchased at a discount – FV-NI model
P9-135 Temporary investments – FV-NI model
P9-136 Accounting for debt investment purchased at a premium – FV-NI model
P9-137 Accounting for investments – FV-NI model
P9-138 Long-term investment – FV-NI model
P9-139 Equity method – ASPE
P9-140 Long-term investment – FV-OCI model
P9-141 Equity method – IFRS
MULTIPLE CHOICE QUESTIONS
1. Which of the following is NOT a debt security?
a) convertible bonds
b) commercial paper
c) loans receivable
d) government treasury bills
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
2. An investment in an entity's debt instruments makes that investor a(n)
a) owner of the issuing entity.
b) creditor of the issuing entity.
c) parent company.
d) subsidiary.
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
3. Which of the following is NOT an equity instrument?
a) common shares
b) preferred shares
c) convertible bonds
d) put options
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
4. Any contract that is evidence of a residual interest in an entity’s assets is called a(n)
a) debt security.
b) liability.
c) derivative.
d) equity security.
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
5. Which of the following is a debt security?
a) $500,000 Bond
b) $500,000 Preferred Shares
c) $500,000 Warrant
d) $500,000 Common Shares
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
6. How investments are accounted for does NOT usually depend on
a) the type of investment.
b) whether the investments are bought on margin.
c) management intent.
d) company strategy.
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
7. The price of a debt instrument is quoted as a percentage of its
a) face or par value.
b) fair market value.
c) book value.
d) present value.
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
8. Generally, transaction costs are
a) capitalized when investments are accounted for using a cost-based model.
b) capitalized when investments are accounted for using a fair value model.
c) always expensed.
d) never expensed.
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
9. Which of the following is NOT a motivation for investment in debt and equity instruments issued by other companies?
a) to assist those companies in meeting financial obligations
b) the returns provided by the investments
c) to have a special relationship, with a supplier, for example
d) to exercise influence or control over the operations of the investee
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
10. When it comes to measuring investments, which of the following statements is true?
a) Companies are required to measure at cost/amortized cost.
b) Companies are required to measure at fair value.
c) Both cost/amortized cost and fair value are permitted in appropriate circumstances.
d) The company may report using whichever method best aligns with their financial reporting objectives.
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
11. When the cost model is applied to an investment in debt securities, such as bonds, it is referred to as the
a) equity method.
b) fair value through net income model.
c) fair value through other comprehensive income model.
d) amortized cost model.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
12. Under the cost/amortized cost model, holding gains are
a) recognized in net income only when realized.
b) recognized in other comprehensive income.
c) recognized depending on management's intention.
d) not recognized at all.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
13. Thor Inc. owns a bond that is accounted for using the cost/amortized cost model. At the reporting period end, the carrying value of the bond is $960,000. Management believes that the fair market value of the bond is $980,000. What would the entry be for the gain/loss on the bond?
a) $20,000 Loss
b) $20,000 Gain
c) $20,000 Unrealized Gain
d) No entry required
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: No entry required because the cost method is being used to account for the investment
14. Equity investments that are accounted for under the cost model will result in
a) recognition of dividend income only when actually received.
b) expensing transaction costs when incurred.
c) recognition of a gain or loss in net income at disposal.
d) recognition of a gain or loss in other comprehensive income at disposal.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
15. To calculate the amount of interest to recognize each period for a bond investment (unless it held for trading purposes),
a) ASPE requires the use of the effective interest method.
b) IFRS requires the use of the effective interest method.
c) IFRS allows the use of either the effective interest or the straight-line method.
d) ASPE requires the use of the straight-line method.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
16. The premium or discount on bonds accounted for under the cost/amortized cost model is
a) amortized over the expected holding period.
b) amortized over the life of the bond.
c) not amortized.
d) treated as a transaction cost.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
17. A bond is purchased at a discount and will be accounted for under the amortized cost model. The entry to record the amortization of the discount includes a
a) debit to the investment account.
b) debit to “Gain from Discount.”
c) debit to Interest Income.
d) credit to the investment account.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
18. Under ASPE, for accounting for investments in associates,
a) the cost method must be used for all such investments.
b) the fair value method can be used for shares quoted in an active market.
c) the investor may use the cost method for one investment and the fair value for another.
d) the fair value method must be used for all such investments.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
19. In practice, under the cost/amortized cost method and ASPE, any discount or premium on a bond investment is
a) required to be recognized and reported separately and amortized using the effective interest rate method.
b) not recognized or reported separately; amortized using either the straight-line or effective interest method.
c) not recognized or reported separately; amortized using the effective interest method.
d) required to be recognized and reported separately and amortized using the straight-line method.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
20. An interest-bearing investment is sold mid-way through the year. At the time of sale, how is the accrued interest typically treated?
a) The seller forfeits the right to any interest payment and loses on the investment sale.
b) The original issuer (investee) must settle the interest owing before the sale can be completed.
c) The purchaser pays the seller an amount equal to the accrued interest since the last payment date.
d) At the next interest payment date, the original issuer (investee) splits the interest payments amongst anyone who held the investment over the period.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
21. On August 1, 2023, Franklin Inc. acquired $120,000 (face value) 10% bonds of Machu Corporation at 102 plus accrued interest. The bonds were dated May 1, 2023, and mature on April 30, 2026, with interest payable each October 31 and April 30. The bonds will be held to maturity. Assuming the amortized cost model is used, the entry to record the purchase of the bonds on August 1, 2023 is
a) Bond Investment at Amortized Cost 125,400
Cash 125,400
b) Bond Investment at Amortized Cost 122,400
Interest Receivable 3,000
Cash 125,400
c) Bond Investment at Amortized Cost 125,400
Interest Income 3,000
Cash 122,400
d) Bond Investment at Amortized Cost 120,000
Premium on Bonds 5,400
Cash 125,400
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Dr. Bond Investment at Amortized Cost: $120,000 × 1.02 = $122,400
Dr. Interest Receivable: $120,000 × 10% × 3 ÷ 12 = $3,000
Cr. Cash: $122,400 + $3,000 = $125,400
22. On August 1, 2023, Peterson Corp. acquired 10, $1,000, 8% bonds at 95 plus accrued interest. The bonds were dated May 1, 2023, and mature on April 30, 2023, with interest paid semi-annually on October 31 and April 30. The bonds will be held to maturity. Assuming the amortized cost model is used, the entry to record the purchase of the bonds on August 1, 2023 is
a) Bond Investment at Amortized Cost 9,700
Interest Income 200
Cash 9,500
b) Bond Investment at Amortized Cost 9,700
Cash 9,700
c) Bond Investment at Amortized Cost 9,500
Interest Receivable 200
Cash 9,700
d) Bond Investment at Amortized Cost 10,000
Interest Income 200
Discount on Debt Securities 500
Cash 9,700
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Dr. Bond Investment at Amortized Cost: 10 × $1,000 ×.95 = $9,500
Dr. Interest Receivable: $10,000 × 8% × 3 ÷ 12 = $200
Cr. Cash: $9,500 + $200 = $9,700
23. On October 1, 2023, Barrick Corp. purchased 800, $1,000, 9% bonds for $792,000, which included $12,000 accrued interest. The bonds, which mature on February 1, 2032, pay interest semi-annually on February 1 and August 1. The bonds will be held to maturity. Barrick uses the straight-line method of amortization. The bonds, which are accounted for under the amortized cost model, should be reported in the December 31, 2023 balance sheet at a carrying value of
a) $792,240.
b) $780,000.
c) $780,600.
d) $792,000.
Difficulty: Hard
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $780,000 + ($20,000 × 3 ÷ 100) = $780,600
24. On November 1, 2023, Jepson Ltd. purchased 300 of the $1,000 face value, 9% bonds of Carly Corp., for $316,000, which included accrued interest of $4,500. The bonds, which mature on January 1, 2028, pay interest semi-annually on March 1 and September 1. The bonds will be held to maturity. Assuming that Jepson uses the straight-line method of amortization and that the bonds are accounted for under the amortized cost method, the carrying value of the bonds should be shown on Jepson's December 31, 2023, statement of financial position at
a) $316,000.
b) $300,000.
c) $311,500.
d) $311,040.
Difficulty: Hard
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $316,000 – $4,500 = $311,500
$311,500 – ($11,500 × 2 ÷ 50) = $311,040
25. On November 1, 2023, Fluck Corp. purchased 10-year, 9%, bonds with a face value of $360,000, for $324,000. An additional $10,800 was paid for the accrued interest, which is paid semi-annually on January 1 and July 1. The bonds mature on July 1, 2030 and will be held to maturity. Fluck uses the straight-line method of amortization and the amortized cost method for these bonds. Ignoring income taxes, the amount to be reported in Fluck’s 2023 income statement as a result of this investment is
a) $6,300.
b) $6,000.
c) $5,400.
d) $4,800.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($360,000 × .09 x 2 ÷ 12) + ($36,000 × 2 ÷ 80) = $6,300
26. On October 1, 2023, Berlin Corp. purchased 250, $1,000, 9% bonds for $260,000. An additional $7,500 was paid for the accrued interest, which is paid semi-annually on December 1 and June 1. The bonds mature on December 1, 2027 and will be held to maturity. Berlin uses the straight-line method of amortization and the amortized cost model for these bonds. Ignoring income taxes, the amount to be reported in Berlin's 2023 income statement as a result of this investment is
a) $3,750.
b) $5,025.
c) $5,625.
d) $6,225.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: ($250,000 ×.09 × 3 ÷ 12) – ($10,000 × 3 ÷ 50) = $5,025
27. During 2023, Brandon Inc. purchased 2,000, $1,000, 9% bonds. The bonds mature on March 1, 2028 and pay interest on March 1 and September 1. The carrying value of the bonds at December 31, 2023 was $1,960,000. On September 1, 2024, after the semi-annual interest was received, Brandon sold half of these bonds for $988,000. Brandon uses straight-line amortization and has accounted for the bonds under the amortized cost model. The gain on the sale is
a) $11,200.
b) $8,000.
c) $4,800.
d) $0.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Discount amortization: $40,000 × 8 ÷ 50 = $6,400
($1,960,000 + $6,400) ÷ 2 = $983,200; $983,200 – $988,000 = $4,800 gain
28. On January 2, 2023, Fidel Corp. purchased 200 of the 1,000 outstanding common shares of Rindu Ltd. for $60,000. During 2023, Rindu declared total cash dividends of $10,000 and reported net income for the year of $40,000. If Fidel uses the cost model to account for its investment in Rindu, Fidel’s Investment in Rindu Ltd. account at December 31, 2023 should be
a) $68,000.
b) $66,000.
c) $60,000.
d) $58,000.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $60,000, acquisition cost
Use the following information for questions 29–30.
On July 1, 2023, Harry Ltd. purchased $200,000 (par value) of Prince’s 8% bonds. Because the market rate was 9%, Harry purchased them for $186,992. The bonds pay interest semi-annually on December 31 and June 30. Harry uses the amortized cost model and the effective interest method to recognize interest income on bond investments.
29. Rounding values to the nearest dollar (if necessary), the entry to recognize receipt of the first interest payment on December 31, 2023 will include a
a) debit to Cash of $9,000.
b) credit to Interest Income of $8,415.
c) debit to Cash of $8,415.
d) credit to Interest Income of $8,000.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Interest income = $186,992 x 9% x 6 ÷ 12 = $8,415 rounded
30. Rounding values to the nearest dollar (if necessary), the bond discount to be amortized on December 31, 2023 is
a) $8,415.
b) $8,000.
c) $7,585.
d) $415.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Cash received $8,000; interest income $8,415; discount amortized $415
31. On October 1, 2023, Moray Ltd. purchased 500 of the $1,000 face value, 8% bonds of Eel Ltd. for $585,000, including accrued interest of $10,000. The bonds, which mature on January 1, 2030, pay interest semi-annually on January 1 and July 1. Moray used the straight-line method of amortization and appropriately recorded the bonds as long-term. On Moray's December 31, 2024 balance sheet, the carrying value of the bonds would be
a) $575,000.
b) $570,000.
c) $568,000.
d) $560,000.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $585,000 – $10,000 = $575,000
$575,000 – ($75,000 × 15 ÷ 75) = $560,000
32. On January 1, 2023, Limoyo Corporation purchased 600 of $1,000 face value, 8% bonds of Leon Company, for $553,668, to yield 10%. The bonds, which mature on January 1, 2028, pay interest semi-annually on January 1 and July 1. Assuming that Limoyo uses the straight-line method of amortization and that the bonds are accounted for under the amortized cost method, the net carrying value of the bonds should be shown on Limoyo’s December 31, 2023, statement of financial position at
a) $557,351.
b) $562,934.
c) $600,000.
d) $553,668.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/ Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: Calculation: ($600,000 – $553,668) / 10 = $4,633.20 = semi-annual amortization
Value after 2 amortization periods = $553,668 + ($4,633.20 x 2) = $562,934
33. The fair value through net income (FV-NI) model is sometimes referred to as
a) the fair value through profit or loss (FVTPL).
b) held for trading.
c) discontinued operations.
d) available for sale.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
34. Hawkeye Ltd. holds equities securities in its portfolio and is accounting for those investments using the FV-NI method. On March 1, 2023, the company purchased 10,000 shares of a publicly traded company for $2,500,000 and paid a commission (brokerage fee) of $2,500 on the purchase transaction. What is the cost base of the investment to include for the recording of the portfolio value?
a) $2,502,500
b) $2,500,000
c) $2,497,500
d) None of the choices are correct.
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $2,500,000 as the commission is expensed
35. Regarding the reporting of investment income under the FV-NI method, for companies reporting in accordance with ASPE, which of the following statements is true?
a) Interest income must be separated from net gains or losses recognized on financial instruments.
b) Holding gains and losses are always tracked separately from interest and dividend income.
c) Interest income must be separated from dividends recognized on financial instruments.
d) None of the choices are correct.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
36. Under the fair value through net income model, holding gains are
a) recognized in other comprehensive income only.
b) recognized in either net income or other comprehensive income.
c) recognized in net income only.
d) ignored.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
37. The fair value through net income model requires that
a) investments are measured at fair value.
b) transaction costs are expensed.
c) investments are measured at fair value and transaction costs are capitalized.
d) investments are measured at fair value and transaction costs are expensed.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
38. In January 2023, Haddock Ltd. had purchased an investment for $150,000. By December 31, 2023, the fair market value of that investment had increased by $20,000. Assuming this gain was included in the company's 2023 net income, which accounting method did Haddock use to account for this investment?
a) cost
b) fair value through other comprehensive income (FV-OCI)
c) fair value through net income (FV-NI)
d) equity
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
39. On its December 31, 2023, balance sheet, Red Corp. reported a short-term investment in equity securities, under the fair value through net income model, at $330,000. At December 31, 2024, the fair value of the securities was $350,000. What should Red report on its 2024 income statement as a result of the increase in fair value of the investments during 2024?
a) $0.
b) loss on investments of $20,000
c) unrealized gain of $20,000
d) investment income of $20,000
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $350,000 – $330,000 = $20,000
40. George Inc. owns bonds that are accounted for under the fair value through net income model. On December 31, 2023, the bonds have a carrying value of $124,365. The fair value at that date is $123,000. The entry to record the year-end adjustment is
a) Investment Income or Loss 1,365
FV–NI Investments 1,365
b) Unrealized Gain or Loss OCI 1,365
FV–NI Investments 1,365
c) FV–NI Investments 1,365
Investment Income or Loss 1,365
d) No adjustment is required.
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $124,365 – $123,000 = $1,365 unrealized holding loss
41. At December 31, 2023, Silicon Corp.’s stock investment portfolio, which is being accounted for by the fair value through net income (FV-NI) model, shows a general ledger balance of $318,600. It is determined that the fair value of the securities is actually $326,200. The entry to adjust the portfolio to fair value will include a
a) debit to Investment Income or Loss of $7,600.
b) credit to Cash of $7,600.
c) debit to FV–NI Investments of $7,600.
d) credit to FV–NI Investments of $7,600.
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $326,200 – $318,600 = $7,600 increase to investment account
42. Masma Corp. began operations in 2023. An analysis of Masma’s equity securities portfolio acquired in 2023 shows the following totals at the end of the year. Masma accounts for these investments using the fair value through net income (FV-NI) model.
Total cost $182,400
Total fair market value 153,600
Based on this information, what amount should Masma report in its 2023 income statement for “Investment Income or Loss”?
a) $12,800 loss
b) $16,000 gain
c) $28,800 gain
d) $28,800 loss
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $153,600 – $182,400 = $28,800 loss
43. At December 31, 2023, Platinum Corp. has the following equity securities (no significant influence) that were purchased earlier in 2023, its first year of operation:
Cost Market
Security A $ 50,000 $ 51,875
B 70,000 77,500
Totals $120,000 $129,375
If the investments are being accounted for under the fair value through net income (FV-NI) model, the total book value of the investment accounts should
a) be decreased by $9,375.
b) be increased by $9,375.
c) be decreased by $20,000.
d) remain unchanged.
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $129,375 – $120,000 = $9,375 gain
44. Which of the following is NOT included in the application of the cost model for the investment one company makes in another entity’s shares?
a) recognition of the cost of the investment at the fair value of shares acquired
b) unless impaired, report the investment at its fair value at each balance sheet date
c) recognize dividend income when the entity has a claim to the dividend
d) derecognize the investment when the shares are disposed of and report a gain or loss on disposal in net income
Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Analytic
45. Under the fair value through other comprehensive income model, unrealized gains and losses are
a) recognized in net income.
b) recognized in other comprehensive income.
c) recognized in either net income or other comprehensive income.
d) ignored.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
46. Black Widow Corp. holds equity securities in its portfolio and is accounting for those investments using the FV-OCI method. On March 1, 2023, the company purchased 10,000 shares of a publicly traded company for $2,500,000 and paid a commission (brokerage fee) of $2,500 on the purchase transaction. What is the cost base of the investment to include for the recording of the portfolio value?
a) $2,502,500
b) $2,500,000
c) $2,497,500
d) None of the choices are correct.
Difficulty: Medium
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $2,500,000 + $2,500 = $2,502,500 as commissions are added to the cost base of FV-OCI investments
47. Accumulated other comprehensive income is included as part of
a) retained earnings.
b) net income.
c) shareholders’ equity.
d) unearned revenue.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
48. Under the fair value through other comprehensive income model, with recycling, previously unrealized holding gains and/or losses to the date of disposal are
a) ignored.
b) transferred to retained earnings.
c) transferred to net income.
d) transferred to “Unrealized Gain or Loss – OCI.”
Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
49. Other comprehensive income does NOT include
a) comprehensive income.
b) net income.
c) unrealized gains resulting from the application of the fair value through other comprehensive income model.
d) unrealized losses resulting from the application of the fair value through other comprehensive income model.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
50. Accumulated other comprehensive income includes
a) current year's net income.
b) all previous debits to other comprehensive income.
c) all previous credits to other comprehensive income.
d) all previous debits and credits to other comprehensive income.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
51. The concept of recycling within the context of investments
a) refers to the transfer of previously unrealized gains or losses to net income.
b) refers to the switch of income between different investments categories.
c) should be used in the fair value through net income model.
d) should not be used in the fair value through other comprehensive income model.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
52. Salmon Corporation purchased an investment in 2023 (an equity investment without significant influence). The purchase price of $94,000 included transaction costs of $1,000. Assuming the transaction costs were capitalized, and Salmon follows IFRS, which accounting method did Salmon use to account for this investment?
a) amortized cost
b) fair value through net income (FV-NI)
c) fair value through other comprehensive income (FV-OCI)
d) equity
Difficulty: Medium
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
53. At December 31, 2023, Swift Current Inc. has the following portfolio of common shares in which it does not have significant influence:
Cost Fair Value
Apple Corp. $100,000 $120,000
Chester Inc. 200,000 205,000
Dooley Ltd. 300,000 500,000
$600,000 $825,000
Assuming Swift Current uses the fair value through other comprehensive income (FV-OCI) model to account for this portfolio of investments, the most informative entry to record the year-end adjustment is
a) FV-OCI Investments 225,000
Unrealized Gain or Loss-OCI 225,000
b) FV-OCI Investment in Apple Corp. 20,000
FV-OCI Investment in Chester Inc. 5,000
FV-OCI Investment in Dooley Ltd. 200,000
Unrealized Gain or Loss–OCI on Apple Corp. 20,000
Unrealized Gain or Loss–OCI on Chester Inc. 5,000
Unrealized Gain or Loss–OCI on Dooley Ltd. 200,000
c) Unrealized Gain or Loss–OCI on Apple Corp. 20,000
Unrealized Gain or Loss–OCI on Chester Inc. 5,000
Unrealized Gain or Loss–OCI on Dooley Ltd. 200,000
FV-OCI Investment in Apple Corp. 20,000
FV-OCI Investment in Chester Inc. 5,000
FV-OCI Investment in Dooley Ltd. 200,000
d) Unrealized Gain or Loss–OCI 225,000
FV-OCI Investments 225,000
Difficulty: Medium
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $120,000 – $100,000 = $20,000 gain for Apple
$205,000 – $200,000 = $5,000 gain for Chester
$500,000 – $300,000 = $200,000 gain for Dooley
54. Realized gains and losses on investment disposals are recognized in net income for all investment instruments, EXCEPT those classified as
a) FV-NI.
b) FV-OCI with recycling.
c) cost/amortized cost.
d) FV-OCI without recycling.
Difficulty: Easy
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement—Fair Value through Other Comprehensive Income (FV-OCI) Model
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
55. Accounting of impairment losses is required for investments that are measured using the
a) cost/amortized cost model.
b) FV–NI model.
c) FV–OCI model.
d) All of these models require a method of accounting for impairment.
Difficulty: Easy
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement—Impairment Models
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
56. Iron Man Ltd. is holding a bond with a carrying value of $445,000 that is being accounted for using the amortized cost method. At the end of the reporting period, management has found indication that the bond is impaired as the interest payments for this past fiscal year have not yet been received. As a result, management has calculated the realizable amount of the bond to be $395,000 using revised cash flows and the current market rate of 6%, and $405,000 using the revised cash flows and the historical market rate of 5%. Iron Man Ltd. uses ASPE and the incurred loss impairment model. What is the amount of impairment that should be recorded?
a) $40,000
b) $50,000
c) $26,700
d) $31,150
Difficulty: Medium
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement—Impairment Models
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $395,000 – $445,000 = $(50,000)
57. Which of the following situations would NOT necessarily indicate the potential impairment of the underlying securities?
a) The issuing entity is experiencing major financial difficulties.
b) The issuing entity is unable to pay its liabilities.
c) The issuing entity has temporarily halted dividend payments in order to retain cash for future expansion.
d) The issuing entity is undergoing a major reorganization.
Difficulty: Medium
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement—Impairment Models
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
58. Assuming the revised amount and timing of cash flows for an investment can be reasonably determined, the incurred loss impairment model uses which discount rate?
a) the investor’s internal rate of return
b) the historical interest rate
c) the current market rate
d) either the historical rate or the current market rate
Difficulty: Easy
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement—Impairment Models
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
59. Assuming the revised amount and timing of cash flows for an investment can be reasonably determined, the expected loss impairment model uses which discount rate?
a) the investor’s internal rate of return
b) the historical interest rate
c) the current market rate
d) either the historical rate or the current market rate
Difficulty: Easy
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement—Impairment Models
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
60. The fair value loss impairment model
a) is used for all investments that are not accounted for as FV-NI.
b) requires a separate impairment test.
c) calculates the impairment loss as the difference between the asset’s fair value and its current carrying amount.
d) calculates the impairment loss as the difference between the asset’s original cost and its current carrying amount.
Difficulty: Easy
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement—Impairment Models
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
61. On January 1, 2023, Mack Co. purchased a 5-year, 8% bond with a face value of $200,000. The purchase price of $184,556 was consistent with a 10% yield. Interest is payable semi-annually on January 1 and July 1. The bonds mature on January 1, 2028. The amortized cost of the bond on the maturity date is
a) $185,556.
b) $195,000.
c) $200,000.
d) $190,000.
Difficulty: Medium
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement—Impairment Models
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
62. Iron Man Ltd. is holding a bond with a carrying value of $445,000 that is being accounted for using the amortized cost method. At the end of the reporting period, management has found indication that the bond is impaired as the interest payments for this past fiscal year have not yet been received. As a result, management has calculated the realizable amount of the bond to be $395,000 using revised cash flows and the current market rate of 6%, and $405,000 using the revised cash flows and the historical market rate of 5%. Iron Man Ltd. uses IFRS and the expected loss impairment model. What is the amount of impairment that should be recorded?
a) $40,000
b) $50,000
c) $26,700
d) $31,150
Difficulty: Medium
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement—Impairment Models
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $405,000 – $445,000 = $(40,000)
63. When one corporation has a controlling interest in another corporation whose shares are not actively traded, under ASPE, the investment is accounted for using
a) either the consolidation method or the equity method or the cost method.
b) the consolidation method.
c) either the consolidation method or the equity method.
d) either the consolidation method or the equity method or the cost method or the FV–OCI method.
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
64. The accounting for investments in another entity's equity instruments depends mainly on
a) the level of influence the investor is able to exert.
b) the level of influence the investor actually exerts.
c) the quality of earnings of the investee.
d) whether the investee pays dividends.
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
65. When a public company holds between 20% and 50% of the outstanding common shares of an investee, which of the following statements applies?
a) The investor should always use the equity method to account for its investment.
b) The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.
c) The investor must use the cost method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
d) The investor should always use the cost method to account for its investment.
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
66. An investor who owns 15% of an entity's voting shares can
a) potentially have influence over the investee if the other outstanding shares are widely held.
b) always be assumed to have little or no influence over the investee.
c) be assumed to be using the cost model.
d) be assumed to always use the equity method.
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
67. An investor who owns 11% of an entity's voting shares
a) must use the equity method.
b) would be likely to prepare consolidated statements.
c) may have significant influence over the investee if the other outstanding shares are closely held.
d) may have significant influence over the investee if the other outstanding shares are widely held.
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
68. Olde Corp. accounts for its investment in the common shares of Young Inc. under the equity method. Olde Corp. should record a cash dividend received from Young as
a) a reduction of the carrying value of the investment.
b) additional paid-in capital.
c) an addition to the carrying value of the investment.
d) dividend income.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
69. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
a) investor sells the investment.
b) investee declares a dividend.
c) earnings are reported by the investee in its financial statements.
d) investee pays a dividend.
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
Bloomcode: Knowledge
AACSB: Analytic
70. Jabba Inc. owns 35% of Hutt Corp., and has significant influence over Hutt. During the calendar year 2023, Hutt reported net income of $300,000 and paid dividends of $30,000. Jabba mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on Jabba’s investment account, net income, and retained earnings, respectively?
a) understate, overstate, overstate
b) overstate, understate, understate
c) understate, understate, understate
d) overstate, overstate, overstate
Difficulty: Hard
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Evaluation
AACSB: Analytic
71. When an investor is using the equity method and receives dividends from the investee, the journal entry will include a
a) credit to Dividend Revenue.
b) credit to Retained Earnings.
c) credit to the Investment account.
d) debit to the Investment account.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
72. When an investor is using the equity method and the investee reports a net loss, the journal entry will include a
a) debit to the Investment account.
b) debit to Retained Earnings.
c) credit to the Investment account.
d) credit to Investment Income or Loss.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
73. When an investor, using the equity method, pays more than its share of the investee’s book value, the difference
a) is ignored.
b) is accounted for on the investor’s books by a debit to Goodwill.
c) is accounted for on the investee’s books by a debit to Goodwill.
d) requires that the investor’s Investment account and any investment income from the associate be adjusted over time.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
74. Current IFRS rules for equity investments that are traded in an active market require that they
a) can be accounted for under the cost model.
b) can be accounted for under the fair value through net income model.
c) should generally be accounted for under the fair value through other comprehensive income model.
d) cannot be accounted for under the fair value through net income model.
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
Use the following information for questions 75–78.
The summarized balance sheets of Thunder Bay Corp. and Fort William Corp. at December 31, 2023, are as follows:
THUNDER BAY CORP.
Balance Sheet
December 31, 2023
Assets $400,000
Liabilities $ 50,000
Common shares 200,000
Retained earnings 150,000
Total equities $400,000
FORT WILLIAM CORP.
Balance Sheet
December 31, 2023
Assets $300,000
Liabilities $ 75,000
Common shares 185,000
Retained earnings 40,000
Total equities $300,000
75. If Thunder Bay acquired a 20% interest in Fort William on December 31, 2023, for $65,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Fort William Corp. would have been
a) $65,000.
b) $60,000.
c) $45,000.
d) $37,000.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $65,000, acquisition cost
76. If Thunder Bay acquired a 30% interest in Fort William on December 31, 2023, for $75,000 and the equity method of accounting for the investment were used, the amount of the debit to Investment in Fort William Corp. would have been
a) $90,000.
b) $75,000.
c) $67,500.
d) $60,000.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $75,000, acquisition cost
77. If Thunder Bay acquired a 20% interest in Fort William on December 31, 2023, for $45,000, and during 2024 Fort William reported net income of $25,000 and paid a total cash dividend of $10,000, applying the equity method would give a debit balance in the Investment in Fort William Corp. account at the end of 2024 of
a) $37,000.
b) $45,000.
c) $48,000.
d) $50,000.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $45,000 + ($25,000 x.2) – ($10,000 x.2) = $48,000
78. If Thunder Bay acquired a 30% interest in Fort William on December 31, 2023, for $67,500 and during 2024 Fort William reported net income of $25,000 and paid a total cash dividend of $30,000, applying the equity method would give a debit balance in the Investment in Fort William Corp. account at the end of 2024 of
a) $67,500.
b) $66,000.
c) $62,500.
d) $58,500.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $67,500 + ($25,000 ×.3) – ($30,000 ×.3) = $66,000
79. On January 2, 2023, Fidel Corp. purchased 200 of the 1,000 outstanding common shares of Rindu Ltd. for $60,000. During 2023, Rindu declared total cash dividends of $10,000 and reported net income for the year of $40,000. If Fidel uses the equity method of accounting for its investment in Rindu, Fidel’s Investment in Rindu Ltd. account at December 31, 2023 should be
a) $68,000.
b) $66,000.
c) $60,000.
d) $58,000.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Finance
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $60,000 + ($40,000 ×.2) – ($10,000 ×.2) = $66,000
Use the following information for questions 80–81.
During calendar 2023, Davel Corp. reported net income of $45,000 and paid total cash dividends of $15,000. Ryan Inc. owns 2,250 of the 7,500 outstanding shares of Davel and exercises significant influence.
80. What amount should Ryan show in the investment account at December 31, 2023 if the beginning of the year balance in the account was $60,000?
a) $69,000
b) $73,500
c) $60,000
d) $90,000
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
Feedback: $60,000 + ($45,000 ×.3) – ($15,000 ×.3) = $69,000
AACSB: Analytic
81. How much income from its investment in Davel should Ryan report in 2023?
a) $45,000
b) $15,000
c) $13,500
d) $22,500
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $45,000 ×.3 = $13,500
82. On December 31, 2023, Ryan Corp. acquired a 40% interest in Gosling Corp. for $315,000. During 2024, Gosling reported net income of $200,000 and paid total cash dividends of $50,000. Assuming Ryan uses the equity method, at December 31, 2024, the balance in the investment account should be
a) $395,000.
b) $295,000.
c) $375,000.
d) $255,000.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $315,000 + ($200,000 x 40%) – ($50,000 x 40%) = $375,000
Use the following information for questions 83–84.
Red Corp. owns 3,000 of the 10,000 outstanding common shares of Grey Corp. and exercises significant influence. During 2023, Grey reported net income of $120,000 and paid total cash dividends of $40,000.
83. If the beginning 2023 balance in the Investment in Grey Corp. account was $180,000, the balance at December 31, 2023 should be
a) $260,000.
b) $204,000.
c) $180,000.
d) $132,000.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $180,000 + ($120,000 ×.3) – ($40,000 ×.3) = $204,000
84. Red Corp. should report investment revenue for 2023 of
a) $12,000.
b) $24,000.
c) $36,000.
d) $48,000.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $120,000 ×.3 = $36,000
Use the following information for questions 85–87.
On January 1, 2023, Abalone Ltd. acquired 30% of Flounder Corp.'s common shares for $240,000. During 2023, Flounder reported net income of $100,000 and paid total dividends of $60,000. Abalone's 30% interest in Flounder gives Abalone the ability to exercise significant influence over their operating and financial policies. During 2024, Flounder reported net income of $150,000 and paid total dividends of $30,000 on April 1 and $40,000 on October 1. On July 1, 2024, Abalone sold half of its shares in Flounder for $158,000 cash.
85. Before income taxes, what income should Abalone include in its 2023 income statement as a result of this investment?
a) $100,000
b) $60,000
c) $30,000
d) $18,000
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: $100,000 × 30% = $30,000
86. The carrying amount of this investment in Abalone's December 31, 2023, statement of financial position should be
a) $252,000.
b) $240,000.
c) $270,000.
d) $275,000.
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: $240,000 + $30,000 – ($60,000 × 30%) = $252,000
87. The gain on disposal of this investment in Abalone's 2024, income statement should be
a) $8,000.
b) $20,750.
c) $25,250.
d) $32,000.
Difficulty: Hard
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: $252,000 – ($30,000 × 30%) + ($150,000 × 50% × 30%) = $265,500
$158,000 – ($265,500 ÷ 2) = $25,250
88. On January 1, 2023, Scallop Corp. purchased 25% of Prawn Corp.'s common shares; no goodwill resulted from the purchase. Scallop correctly uses the equity method to account for this investment at equity. The Investment in Associate account related to the Scallop investment was reported on the December 31, 2023, statement of financial position at $360,000. Prawn had reported net income of $225,000 for calendar 2023, and paid dividends totalling $90,000 during 2023. How much did Scallop pay for its 25% interest in Prawn?
a) $393,750
b) $382,500
c) $360,000
d) $326,250
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $360,000 – ($225,000 × 25%) + ($90,000 × 25%) = $326,250
89. Spider Sense Inc. purchased 30% of the outstanding common shares of Venom Corp. for $450,000, which is based on a market price that is higher than the book value of the shares. At the time of the purchase, the total book value of shareholders equity of Venom Corp. was $1,200,000. What is the amount of the difference that needs to be adjusted to Spider Sense’s investment income over time?
a) $90,000
b) $300,000
c) $450,000
d) $360,000
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $1,200,000 x 30% = $360,000
$450,000 – $360,000 = $90,000
90. Spider Sense Inc. purchased 30% of the outstanding common shares of Venom Corp. for $450,000, which is based on a market price that is higher than the book value of the shares. The difference to be adjusted to investment income over time is $90,000. Management paid in excess of the book value on this transaction as they believed that the fair market value of a significant piece of real estate (a building) is much higher than the carrying value of the asset on the books. The remaining useful life of the building is 30 years. How much is the adjustment on a yearly basis?
a) $90,000
b) $3,000
c) $450,000
d) $6,000
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments—Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Feedback: $90,000 / 30 years = $3,000 per year
91. When one corporation has control over another corporation, the investor corporation
a) is referred to as an associate.
b) is referred to as the subsidiary.
c) can determine the investee’s strategic operating and financing policies.
d) must have obtained at least 50% of the investee’s issued common shares.
Difficulty: Easy
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments—Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
92. An investor that has subsidiaries
a) is required to prepare consolidated financial statements under IFRS.
b) is required to prepare consolidated financial statements under ASPE.
c) does not have to prepare consolidated financial statements under IFRS.
d) ignores the noncontrolling interest on the consolidated financial statements.
Difficulty: Easy
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments—Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
93. If a parent company owns 90% of a subsidiary’s outstanding shares, the parent should generally account for the subsidiary's income under the
a) cost/amortized cost model.
b) fair value through net income model.
c) fair value through other comprehensive model.
d) consolidation method.
Difficulty: Easy
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments—Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
94. When the investor has control over the investee, the reporting model to be used is the
a) cost model.
b) consolidation model.
c) market value model.
d) equity method.
Difficulty: Easy
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments—Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
95. War Machine Corp. owns 100% of the 8,000,000 outstanding common shares of Happy Inc. In order to generate much needed cash, management of War Machine sold 2,500,000 shares for $10,000,000. How should management account for the investment in Happy if it is using ASPE as a standard?
a) cost method
b) equity method
c) consolidation
d) Management can choose from any of the above methods.
Difficulty: Medium
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments—Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: (8,000,000 – 2,500,000) / 8,000,000 = 68.75% ownership, which means that War Machine still has control
96. War Machine Corp. owns 100% of the 8,000,000 outstanding common shares of Happy Inc. In order to generate much needed cash, management of War Machine sold 2,500,000 shares for $10,000,000. How should management account for the investment in Happy if it is using IFRS as a standard?
a)cost method
b) equity method
c) consolidation
d) Management can choose from any of these methods.
Difficulty: Medium
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments—Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: (8,000,000 – 2,500,000) / 8,000,000 = 68.75% ownership, which means that War Machine still has control
97. When one corporation acquires control of another entity, the investor corporation is referred to as the parent and the investee corporation as the
a) subsidiary.
b) joint venture.
c) associate.
d) child.
Difficulty: Easy
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments—Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
98. Under IFRS, which of the following is NOT a characteristic for an investment to have to be classified as current?
a) It is held primarily for trading purposes.
b) It is a cash equivalent.
c) It is expected to be sold or realized within 12 months from the statement of financial position date.
d) It is accounted for under the cost model.
Difficulty: Easy
Learning Objective: Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analytics.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
99. The objectives of disclosures required for investments in debt and equity investments do NOT include
a) how significant the investments are to the investor's financial position and performance.
b) whether the investments are classified as current or long-term.
c) the nature and extent of the risks that the investor faces as a result of the investments.
d) how the risks that the investor faces as a result of the investments are managed.
Difficulty: Easy
Learning Objective: Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analytics.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
100. The disclosure requirements for private entities are usually less extensive as compared to those for public entities because
a) investors in private entities are expected to have less information about the company.
b) investors in private entities are expected to have more information about the company.
c) investors in private entities tend to be more sophisticated.
d) investors in private entities tend to be less sophisticated.
Difficulty: Easy
Learning Objective: Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analytics.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
101. The standards relating to consolidation differ under ASPE and IFRS. Which of the following statements best describes the difference?
a) IFRS requires consolidation whereas ASPE offers a choice of methods.
b) ASPE requires consolidation whereas IFRS offers a choice of methods.
c) Consolidation is specifically excluded as one of the choices under ASPE.
d) Consolidation is specifically excluded as one of the choices under IFRS.
Difficulty: Easy
Learning Objective: Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analytics.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
102. Which of the following is NOT required to report for associates accounted for using the equity method?
a) the fair value of any of these investments that has a price quoted in an active market
b) separate disclosure of income related to equity-accounted associates
c) the investor’s strategy and motivation for holding equity ownership in the associate
d) information about associates’ year ends that are different from the investor’s year end
Difficulty: Easy
Learning Objective: Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analytics.
Section Reference: Presentation, Disclosure, and analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
103. Necessary financial disclosures regarding acquisitions require that
a) readers are able to relate the investment category on the SFP to the investment income reported on the income statement.
b) readers are able to understand the effects of the accounting methods that are used for different categories of investments.
c) major acquisition dates are disclosed, as the SFP contains all assets, and the P&L only contains income earned by the subsidiary after it was acquired.
d) All of these described financial disclosures are required regarding acquisitions.
Difficulty: Easy
Learning Objective: Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analytics.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
104. Red Skull Holdings Inc. purchased 250,000 shares of Tesseract Corp. for $15 a share. This transaction has given Red Skull a 35% ownership position in Tesseract. Management intends to hold this investment for the long-term due to the strategic benefits it will experience resulting from the acquisition and the significant influence that it now holds. How should the investment be presented on the financial statements of Red Skull Holdings?
a) $3,750,000 Investment FV-NI Non-current Liability
b) $3,750,000 Investment FV-NI Non-current Asset
c) $3,750,000 Investment in Associate Non-current Asset
d) $3,750,000 Investment FV-OCI Non-current Asset
Difficulty: Medium
Learning Objective: Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analytics.
Section Reference: Presentation, Disclosure, and Analytics
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: 250,000 x $15 = $3,750,000, which is a non-current asset due to management intention and Investment in Associate due to 35% ownership and significant influence.
105. Which of the following is a reason for the differences in the disclosure requirements for investments in associates under IFRS and ASPE?
a) ASPE requires that the associate must be a private entity.
b) ASPE does not include an "associates" category.
c) ASPE allows the use of methods other than the equity method.
d) ASPE does not allow the equity method.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
106. The standards relating to the treatment of transaction costs differ under ASPE and IFRS. Which of the following statements best describe the difference?
a) ASPE requires that transaction costs are capitalized, except for those investments that are accounted for under the fair value through net income model.
b) ASPE requires that transaction costs are expensed whenever cost-based measures are used.
c) IFRS requires that transaction costs are capitalized, except for those investments that are accounted for under the fair value through net income model.
d) IFRS requires that all transaction costs are capitalized.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
107. On Oct 1, 2023, an investment of $125,000 was made by purchasing the shares of a publicly traded company. At December 31, 2023, none of the shares have been sold. The fair market value of the investment is now $150,000, and a cash dividend of $1,500 was received. Which of the following entries would NOT be correct for an entity using ASPE and fair value accounting for its investments?
a) Cr. Dividend Revenue $1,500
b) Cr. Investment Income or Loss $25,000
c) Cr. Unrealized Gain – OCI $25,000
d) Dr. Cash $1,500
Difficulty: Medium
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Analysis
AACSB: Analytic
Feedback: Unrealized Gain – OCI is incorrect as it does not exist under ASPE
108. The standards relating to the treatment of interest and dividend income differ under ASPE and IFRS. Which of the following statements is INCORRECT?
a) IFRS requires the use of the effective interest method when interest income is to be reported separately.
b) IFRS requires certain dividends to be recognized in other comprehensive income.
c) ASPE allows the use of either the straight-line or effective interest method.
d) When using the equity method, IFRS allows a dividend from an investee to be recorded as income, while ASPE does not.
Difficulty: Easy
Learning Objective: Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future.
Section Reference: IFRS/ASPE Comparison
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Analytic
EXERCISES
Ex. 9-109 Shares acquired on margin
What does it mean when an investment in shares is acquired on margin and how is the asset recorded?
Solution 9-109
Investments in shares acquired on margin means that the investor pays only part of the purchase price to acquire the shares. The balance is financed by the broker. Since the shares legally belong to the investor, the asset is recorded at the full share price and a liability to the broker for the amount that was financed is also recognized.
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 9-110 Types of companies that have investments and why
Consider the financial statements of a publishing house, a reinsurance provider, and a charitable foundation.
Instructions
a) What types and proportions of investments would you expect to find on the financial statements of these companies?
b) List three reasons why an entity would choose to invest in securities.
Solution 9-110
a) A publishing house is unlikely to have a significant portion of investments. Their main activity is selling publications and would use a large amount of their working capital to invest in the creation of new content. If they do business in a foreign currency, they may hold some investments to hedge foreign exchange risk.
A reinsurance provider will hold a significant proportion of investments as movement in the value of these investment pools is meant to assist in possible payment of insurance policies. Investments would be the main asset of these companies.
A charitable foundation is in place solely to finance the objectives of the charity with which it is affiliated. If it holds investments, they are likely in the form of endowments that have been gifted to it by donors over its lifetime. Charitable foundations are not in the business of actively trading investments, but would rather hold their funds in ultra-low risk securities such as T-bills, commercial paper, money market funds, etc.
b) The reasons for investing in securities would include the following:
1. for the returns provided (interest, dividends, capital appreciation)
2. to develop a special relationship with a supplier or customer
3. to establish a long-term operating relationship with the investee (usually by influencing or controlling the investee)
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Communication
CPA: Financial Reporting
Bloomcode: Comprehension
AACSB: Communication
Ex. 9-111 Types of companies that have investments
Two types of companies that carry significant amounts of investments are banks and pension plans. Explain how these companies use their investment holdings to add value for their customers.
Solution 9-111
Banks add value by investing other people’s money and earning a return that is higher than their cost of capital. Their expertise lies in understanding how and when to buy and sell shares and debt instruments in order to maximize profits. They often buy and sell shares and debt instruments over the short term for profit (referred to as trading).
Pension plans collect money from employees and pay out funds as pensions when employees retire. In order to maximize the payout on retirement, pension plans generally invest the money in the interim and try to maximize the value of investments.
Difficulty: Easy
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Communication
CPA: Strategy & Governance
Bloomcode: Comprehension
AACSB: Communication
Ex. 9-112 Transaction costs
Punisher Ltd. has been very successful in its operations over the last decade. As a result, it has a significant amount of retained earnings established. Management invests a portion of these retained earnings in the stock market as it is excess cash in the company. Each trade that management makes (purchasing stocks) results in a $15 trading fee. In 2023, management of Punisher made 155 trades.
Instructions
a) If Punisher Ltd. uses ASPE, what would the journal entry be for these trading fees?
b) If Punisher Ltd. uses IRFS, and chooses FV–OCI as the accounting method for these investment transactions, what would the journal entry be?
c) CRITICIAL THINKING – Noting the difference between IFRS and ASPE, why are the trading fees treated differently in this way? (Hint. Think in terms of management’s intentions and measuring their performance)
Solution 9-112
a) Investment Trading Expenses 2,325
Cash 2,325
b) Investment FV–OCI 2,325
Cash 2,325
c) CRITICAL THINKING: Under ASPE, management can choose between the Cost Method and FV–NI. Regardless of which accounting treatment management chooses, the trading expenses would be immediately expensed as they are incurred.
Under IRFS, management can choose between Cost Method (unless there is an active market), FV–NI, and FV–OCI. If management wants to communicate to users that the investment decisions are based on a short-term horizon and/or maximizing profit, then FV–NI would be the appropriate accounting treatment. Under this method, trading fees are expensed immediately as all gains/losses (unrealized or otherwise) are recognized in net income at each reporting period. Therefore, matching of expenses to related revenues is happening effectively. If management wants to communicate to users that the investment decisions are based on a long-term horizon, while being profit focused or for other reasons, then FV–OCI is the most appropriate accounting treatment. By adding trading expenses to the cost base of the investment account on the financial statements, the gains/losses that will eventually be realized will incorporate the fees incurred to acquire those investments at that time. This is again an effective matching of expenses to related revenues in the appropriate period.
Difficulty: Medium
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-113 Bonds – Fair value and Amortized Cost
Ajax Inc. has received the following quotes to purchase bonds in the market.
1. 102
2. 100
3. 98
Instructions
a) If Ajax is using FV–NI to account for the bonds, record the journal entries for each quote above.
b) Ajax is uncertain how to account for these bond purchases, explain to Ajax the difference between the cost/amortized cost model used under ASPE versus IFRS 9?
Solution 9-113
a)
1. FV–NI Investments 102,000
Cash 102,000
$100,000 x 102% = $102,000
2. FV-NI Investments 100,000
Cash 100,000
$100,000 x 100% = $100,000
3. FV-NI Investments 98,000
Cash 98,000
$100,000 x 98% = $98,000
b) ASPE uses the cost/amortized cost model for most investments, excluding equity investments where an active market exists for trading the shares and derivatives. IFRS 9 uses this model for debt instruments where the entity’s business model is to hold the investments to maturity.
Difficulty: Medium
Learning Objective: Understand the nature of and basic accounting for investments, including which types of companies have significant investments.
Section Reference: Understanding Investments
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-114 Investment in debt securities – Discount
On April 1, 2023, Chitauri Corp. purchased 5%, $100,000 face value bond for $92,038 plus accrued interest. The present value of the bond at Jan 1, 2023, was $ 91,683. Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2028. Chitauri uses the amortized cost model to account for this investment and intends to hold the bonds to maturity. Chitauri Corp. follows ASPE.
Instructions
a) Prepare the journal entry to record the purchase on April 1, 2023 and the journal entry to record the first coupon payment on July 1, 2023.
b) The bonds are sold on November 1, 2024 at 98.5. Amortization was recorded when interest was received using the effective interest rate method. Prepare all entries required to properly record the sale. Round values to the nearest dollar, if necessary.
Solution 9-114
a) Bond Investment at Amortized Cost 92,038
Interest Receivable ($100,000 ×.05 × 3 ÷ 12) 1,250
Cash 93,288
Discount on bond: $100,000 – $92,038 = $7,962
Cash 2,500
Bond Investment at Amortized Cost 354
Interest Receivable 1,250
Interest Income 1,604
Interest Income = 91,683 x 3.5% x 6 / 12 = 1,604
b) Bond Investment as Amortized Cost 524
Interest Receivable ($ 100,000 ×5% × 4 ÷ 12) 1,667
Interest Income 2,191
To update the bond Carrying Value. Interest Income = 93,885 x 3.5% x 4/6
Cash 98,500
Interest Receivable 1,667
Gain on Disposal of Investments – Cost/Amortized Cost 2,424
Bond Investment at Amortized Cost 94,409
Difficulty: Hard
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Synthesis
AACSB: Analytic
Ex. 9-115 Investment in shares of other entities – cost model
Manson Corp. acquired 10,000 shares of Digicex Corp. on July 1, 2023 at $15 per share. There is no quoted market price for Digicex shares as it is a private company. Manson reports under ASPE and has elected to account for the investment using the cost method. On September 1, Digicex declared and paid a $0.75 per share dividend and on December 31, Manson sells the shares at $12 per share.
Instructions
Prepare the journal entries to record the above transactions.
Solution 9-115
July 1 Other Investments 150,000
Cash 150,000
(10,000 shares × $15.00) = $150,000
Sept 1 Cash 7,500
Dividend Revenue 7,500
(10,000 shares × $0.75)
Dec 31 Cash 120,000
Loss on Disposal of Investments – Cost/Amortized Cost 30,000
Other Investments 150,000
(10,000 shares × $12) – (10,000 × $15) = $30,000 loss
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-116 Application of cost/amortized cost method – straight line
Luke Corporation purchased $60,400 of 6-year, 7% bonds of Reed Inc. for $57,566 to yield an 8% return and classified the purchase as an amortized cost method investment. The bonds pay interest semi-annually.
a) Assuming Luke Corporation applies IFRS, prepare its journal entries for the purchase of the investment and receipt of semi-annual interest and discount amortization for the first two interest payments that will be received.
b) Assuming Luke Corporation applies ASPE and has chosen the straight-line method of discount amortization, prepare the same three entries requested in part a).
Solution 9-116
a) Bond Investment at Amortized Cost 57,566
Cash 57,566
To record the purchase of the investment
Cash 2,114
Bond Investment at Amortized Cost 189
Interest Income 2,303
To record the receipt of the semi-annual interest payment
Cash: ($60,400 x 7% x 6/12) = $2,114
Interest Income ($57,566 x 8% x 6/12) = $2,303
Cash 2,114
Bond Investment at Amortized Cost 196
Interest Income 2,310
To record the receipt of the semi-annual interest payment
Interest Income ([$57,566 + $189] x 8% x 6/12) = $2,310
b) Bond Investment at Amortized Cost 57,566
Cash 57,566
To record the purchase of the investment
Cash 2,114
Bond Investment at Amortized Cost 236
Interest Income 2,350
To record the receipt of the semi-annual interest payment
Cash: ($60,400 x 7% x 6/12) = $2,114
Interest periods to maturity: 6 x 2 = 12
Amortization each interest period: $2,834 ÷12 = $236
Cash 2,114
Bond Investment at Amortized Cost 236
Interest Income 2,350
To record the receipt of the semi-annual interest payment
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-117 Investment in debt securities at a premium – effective interest
On April 1, 2023, Margarita Corp. purchased 6%, $120,000 (par value) bonds for $124,725 plus accrued interest. Interest is paid on July 1 and January 1 and the bonds mature on July 1, 2028. Margarita uses the amortized cost model to account for this investment and intends to hold the bonds to maturity. Margarita Corp. follows ASPE.
Instructions
a) Prepare the journal entry to record the purchase.
b) The bonds are sold on November 1, 2024 at 103 plus accrued interest. Amortization was recorded when interest was received by the straight-line method. Prepare all entries required to properly record the sale. Round values to the nearest dollar, if necessary.
Solution 9-117
a) Bond Investment at Amortized Cost 124,725
Interest Income ($120,000 ×.06 × 3 ÷ 12) 1,800
Cash 126,525
Premium on bond: $124,725 – $120,000 = $4,725
b) Interest Income ($4,725 × 4 ÷ 63) 300
Bond Investment at Amortized Cost 300
Cash ($120,000 ×.06 × 4 ÷ 12) 2,400
Interest Income 2,400
Cash 123,600
Gain on Disposal of Investments – Cost/Amortized Cost 300
Bond Investment at Amortized Cost 123,300
$124,725 – ($4,725 x 19 ÷ 63)
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-118 Investment in debt securities at a premium
On January 1, 2023, Genevieve Ltd. purchased 8%, $100,000 (par value) bonds for $108,530. The bonds were purchased to yield 6%. Interest is paid on July 1 and January 1 and the bonds mature on January 1, 2028. Genevieve uses the amortized cost method and the effective-interest method to amortize the premium. Genevieve has a year end of December 31 and follows ASPE.
Instructions
a) Prepare the journal entry to record the purchase.
b) Prepare the journal entries for the receipt of interest and amortization of the premium for the remainder of 2023. Round all values to the nearest dollar.
c) To the nearest dollar, what is the carrying value of the investment at the end of 2024?
Solution 9-118
a) Bond Investment at Amortized Cost 108,530
Cash 108,530
b) July 1, 2023
Cash 4,000
Interest Income 3,256
Bond Investment at Amortized Cost 744
$108,530 ×.06 ×.5 = $3,256
December 31, 2023
Interest Receivable 4,000
Interest Income 3,234
Bond Investment at Amortized Cost 766
($108,530 – $744) ×.06 ×.5 = $3,234
c) ($108,530 – $744 – $766) ×.06 ×.5 = $3,211; $4,000 – $3,211 = $789
($108,530 – $744 – $766 – $789) ×.06 ×.5 = $3,187; $4,000 – $3,187 = $813
Carrying value at the end of 2024:
($108,530 – $744 – $766 – $789 – $813) = $105,418
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-119 Investments in debt securities – scenarios
Presented below are unrelated cases involving investments in debt securities:
Case 1:
A company owns another firm's debt securities in the form of bonds. The bonds were acquired at a discount and are accounted for under the amortized cost model.
Case 2:
An investment in notes receivable that had been held for several years is being sold. The investment was accounted for under the amortized cost model.
Case 3:
A portfolio of debt investments has been determined to be impaired.
Instructions
Indicate the accounting required and/or available for each individual case.
Solution 9-119
Case 1: The bonds would have been recognized at their fair value plus transaction costs. The discount would be amortized to net income over the life of the bond.
Case 2: The accrued interest and discount or premium would have to be updated to the date of disposal. The resulting gain or loss (difference between carrying value and sales proceeds) would be recognized in net income and the investment would be removed from the investor's books.
Case 3: Depending on whether ASPE or IFRS is followed, once the investment has been determined to be impaired, three different models are available to recognize the loss: the incurred loss impairment model, the expected loss impairment model, and the fair value loss impairment model.
Difficulty: Hard
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/Amortized Cost Model
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement – Impairment Models
CPA: Communication
CPA: Financial Reporting
Bloomcode: Evaluate
AACSB: Communication
Ex. 9-120 Cost and equity methods
Compare the cost and equity methods of accounting for investments in shares subsequent to acquisition (when permitted by ASPE).
Solution 9-120
Under the cost method, the investment is originally recorded at fair value plus any direct transaction costs, i.e., cost. The investment remains at this value unless the investment becomes impaired. Dividends are reported as income.
Similarly, under the equity method, the investment is originally recorded at cost. Subsequently, however, the investment account is adjusted for the investor's share of the investee's net income or loss and this amount is recognized in the net income of the investor. Dividends received from the investee are recorded as reductions in the investment account.
Difficulty: Easy
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement – Cost/Amortized Cost Model
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
Ex. 9-121 Fair value through net income method
On October 1, Whiteside Ltd. purchased a 7% bond with a face value of $1,000 for trading purposes, accounting for the investment at fair value through net income. The bond was priced at 1.023 to yield Whiteside 5% and pays interest annually each October 1. Whiteside has a December 31 year end, and at this date, the bond’s fair value was $1,050. Assume Whiteside applies IFRS.
Instructions
a) Prepare Whiteside’s entry for the purchase of the investment.
b) Prepare Whiteside’s entry for the December 31 interest accrual.
c) (i) Prepare Whiteside’s entry for the year-end fair value adjustment.
(ii) Assume Whiteside applies ASPE, uses the effective-interest method, and follows a policy of reporting interest income separately.
Solution 9-121
a)
FV–NI Investments 1,023
Cash 1,023
To record purchase of the investment
Cash = ($1,000 x 1.023) = $1,023
b)
Interest Receivable 17.50
Investment Income or Loss 17.50
To record the December 31 interest accrual
Investment Income or Loss = (7% x $1,000 x 3/12) = $17.50
c) (i)
FV–NI Investments 27.00
Investment Income or Loss = ($1,050 – $1,023) 27.00
To record the year-end fair value adjustment
(ii) Under ASPE
Interest Receivable 17.50
FV–NI Investments………………………… 4.71
Interest Income 12.79
To record the December 31 interest accrual
Interest Receivable = 7% x $1,000 x 3/12 = $17.50
Interest Income = 5% x $1,023 x 3/12 = $12.79
FV–NI Investments 31.71
Investment Income or Loss 31.71
To record the year-end fair value adjustment
Unrealized Gain or Loss = $1,050 – ($1,023 – $4.71) = $31.71
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement – Fair Value through Net Income (FV–NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-122 Year-end adjustments for temporary investments
Mercury Corp. has the following portfolio of common shares (without significant influence) at December 31, 2023:
Investment Cost Fair value
Albania Inc. $480,000 $570,000
Bulgaria Ltd. 90,000 620,000
Czech Corp. 120,000 220,000
Total $690,000 $1,410,000
Instructions
Provide the entry to record the year-end adjustment for these investments, assuming Mercury uses one control account and has adopted the FV–NI model.
Solution 9-122
FV–NI Investments 720,000
Investment Income or Loss 720,000
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement – Fair Value through Net Income (FV–NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-123 Cost and equity methods
Fill in the dollar changes caused in the Investment account and Dividend Revenue or Investment Income account by each of the following transactions, assuming Norah Corp. uses
a) the Fair Value through Net Income (FV–NI) method and
b) the equity method for accounting for its investments in Jessica Ltd.
a) FV–NI Method b) Equity Method
Investment Dividend Investment Investment
Transaction Account Revenue Account Income or
Loss
——————————————————————————————————————————
1. At the beginning of Year 1, Norah bought
30% of Jessica's common shares at their
book value. At this time, the book value of
all Jessica's common shares was
$450,000.
——————————————————————————————————————————
2. During Year 1, Jessica reported $25,000
net income and paid a total of $12,500 in
dividends.
——————————————————————————————————————————
3. During Year 2, Jessica reported $10,000
net income and paid a total of $12,500
in dividends.
——————————————————————————————————————————
4. During Year 3, Jessica reported a net loss
of $6,000 and paid a total of $2,500 in
dividends.
——————————————————————————————————————————
5. Indicate the Year 3 ending balance in the
Investment account, and cumulative totals
for Years 1, 2, and 3 for dividend income
and investment income.
——————————————————————————————————————————
Solution 9-123
a) FV–NI Method b) Equity Method
Investment Dividend Investment Investment
Transaction Account Revenue Account Income or Loss
——————————————————————————————————————————
1. 135,000 135,000
——————————————————————————————————————————
2. 7,500 7,500
3,750 (3,750)
——————————————————————————————————————————
3. 3,000 3,000
3,750 (3,750)
——————————————————————————————————————————
4. (1,800) (1,800)
750 (750)
——————————————————————————————————————————
5. 135,000 8,250 135,450 8,700
——————————————————————————————————————————
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement – Fair Value through Net Income (FV–NI) Model
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-124 Fair value through other comprehensive income investments – entries
Lekan Corp provided you with the following information about its investment in Adoweye Inc. shares purchased May 2023, and accounted for using the FV–OCI method
Cost $29,500
Fair value, December 31, 2023 $30,900
Fair value, December 31, 2024 $23,800
Fair value, December 31, 2025 $26,900
Instructions
a) Prepare the adjusting journal entries needed on December 31, 2023, 2024, and 2025.
b) Determine the balance in the accumulated other comprehensive income on the statement of financial position on each of December 31, 2023, 2024, and 2025.
c) Assume Lekan sold its investment in Adoweye Inc. on February 13, 2026, for $28,100. Prepare the journal entry(ies) needed on this date.
Solution 9-124
a)
December 31, 2023
Fair Value–OCI Investments 1,400
Unrealized Gain or Loss–OCI 1,400
December 31, 2024
Unrealized Gain or Loss–OCI 7,100
Fair Value–OCI Investments 7,100
December 31, 2025
Fair Value–OCI Investments 3,100
Unrealized Gain or Loss–OCI 3,100
Dec. 31/23 | Dec. 31/24 | Dec. 31/25 | |
Fair value of FV–OCI investments | $30,900 | $23,800 | $26,900 |
Original cost of FV–OCI investments | 29,500 | 29,500 | 29,500 |
Balance in accumulated other comprehensive income | $1,400 | $(5,700) | $(2,600) |
Proof of balance: | |||
Entry, Dec. 31/23 | $1,400 | $1,400 | $1,400 |
Entry, Dec. 31/24 | 0 | (7,100) | (7,100) |
Entry, Dec. 31/25 | 0 | 0 | 3,100 |
Balance at year end | $1,400 | $(5,700) | $(2,600) |
b) Balance at year-end:
December 31, 2023 $1,400
December 31, 2024 $(5,700)
December 31, 2025 $(2,600)
c) Entries to record sale in 2026
February 13, 2026
Fair Value–OCI Investments 1,200
Unrealized Gain or Loss–OCI 1,200
Unrealized Gain or Loss ($28,100 – $26,900) = $1,200
To bring the investments to their fair value
February 13, 2026
Cash 28,100
Fair Value–OCI Investments 28,100
To record the proceeds of disposal
February 13, 2026
Loss on Disposal of Investments – FV–OCI 1,400
Unrealized Gain or Loss–OCI 1,400
February 13, 2026
Retained Earnings 1,400
Accumulated Other Comprehensive Income 1,400
Unrealized Gain or Loss ($29,500 – $28,100) = $1,400
Difficulty: Medium
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement – Fair Value through Other Comprehensive Income (FV–OCI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-125 Incurred loss, expected loss, and impairment
Tyne Corporation owns corporate bonds at December 31, 2023, accounted for using the amortized cost model. These bonds have a par value of $864,000 and an amortized cost of $851,000. After an impairment review was triggered, Tyne determined that the discounted impaired cash flows are $796,500 using the current market rate of interest but are $793,000 using the market rate when the bonds were first acquired. The company follows a policy of directly reducing the carrying amount of any impaired assets.
Instructions
a) Assuming Tyne Corporation is a private enterprise that applies ASPE, prepare any necessary journal entry(ies) related to the impairment at December 31, 2023.
b) Assuming Tyne Corporation is a private enterprise that applies ASPE, prepare any necessary journal entry(ies) related to a December 31, 2024, fair value of $821,000 and an adjusted carrying amount at that date of $801,000.
c) Assuming Tyne applies IFRS and has adopted IFRS 9, prepare any necessary journal entry related to the impairment at December 31, 2023.
d) Assuming Tyne applies IFRS and has adopted IFRS 9, prepare any necessary journal entry(ies) related to a December 31, 2024 fair value of $821,000 and an adjusted carrying amount at that date of $801,000.
e) CRITICAL THINKING: Give examples of what circumstances the management of Tyne would have observed or experienced to trigger an impairment review of the bonds it owns under ASPE and IFRS. Compare any differences.
Solution 9-125
a) December 31, 2023
Loss on Impairment 54,500
Bond Investment at Amortized Cost 54,500
Bond Investment at Amortized Cost ($851,000 – $796,500) = $54,500
Under ASPE, the carrying amount is reduced to the higher of the discounted cash flow using a current market rate or the bond’s net realizable value. This latter amount is not provided in this situation.
b) December 31, 2024
Bond Investment at Amortized Cost 20,000
Recovery of Loss from Impairment 20,000
Recovery of Loss from Impairment ($821,000 – $801,000) = $20,000
c) December 31, 2023
Loss on Impairment 58,000
Bond Investment at Amortized Cost 58,000
Bond Investment at Amortized Cost ($851,000 – $793,000) = $58,000
Under IFRS 9, the carrying amount of a debt instrument is reduced to the
discounted remaining estimated cash flows using the historic discount rate.
d) December 31, 2024
Allowance for Investment Impairment 20,000
Recovery of Loss from Impairment 20,000
Recovery of Loss from Impairment ($821,000 – $801,000) = $20,000
e) CRITICAL THINKING: Management could have observed that the company that issued the bonds was experiencing financial difficulties, or there was a missed or late interest and/or principal payment. Management may have become aware that the company in question was about to enter bankruptcy or undergo a financial reorganization, or the company could be in a market where management observed that the economy was experiencing negative economic conditions. These kinds of triggering events are looked for by management specifically. This a requirement under ASPE. Under IFRS, estimates of what the future cash flows associated with the bond are made on a continuous basis. Management should not be looking for only specific triggering types of events but rather anything that would impact the amount of future cash flows for the company.
Difficulty: Medium
Learning Objective: Explain and apply the incurred loss, expected loss, and fair value loss impairment models.
Section Reference: Measurement – Impairment Models
CPA: Financial Reporting
Bloomcode: Application
Bloomcode: Knowledge
AACSB: Analytic
Ex. 9-126 Significant influence
Julep Corporation purchases a 25% interest in Orange Corporation on January 2, 2023, for $800. At that time, the carrying amount of Orange’s net assets was $2,952. Any excess of the cost of the investment over Julep’s share of Orange’s carrying amount can be attributed to unrecorded intangibles with a useful life of 20 years. Orange declared and paid a dividend of $16 and reported net income of $52 for its year ended December 31, 2023.
Instructions
Prepare Julep’s 2023 entries to record all transactions and events related to the investment in its associate. Assume Julep is a publicly accountable enterprise that applies IFRS.
Solution 9-126
January 2, 2023
Investment in Associate 800
Cash 800
December 31, 2023
Cash 4
Investment in Associate 4
Dividend received from associate
December 31, 2023
Investment in Associate 13
Investment Income or Loss 13
Julep’s share of associate’s net income
December 31, 2023
Investment Loss 3
Investment in Associate 3
Amortization of Orange’s unrecognized intangible assets
Calculations:
Cost of 25% investment in Orange Corp. shares | $800 |
25% of Orange Corp.’s carrying amount (25% X $2,952) | 738 |
Payment in excess of book value of Orange Corp. | 62 |
Fair value allocation to unrecorded intangibles | (62) |
Goodwill (unexplained excess) | $0 |
Annual amortization of excess payment for unrecorded intangibles
$62 ÷ 20-year remaining life = $3 per year
Cash = ($16 x 25%) = $4
Investment Income or Loss = ($52 x 25%) = $13
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-127 Accounting for investments under ASPE
Charles Inc. purchased 30% of Nassar Corporation’s 29,000 outstanding common shares at a cost of $15 per share on January 3, 2023. The purchase price of $15 per share was based solely on the book value of Nassar’s net assets. On September 21, Nassar declared and paid a cash dividend of $37,800. On December 31, Charles’s year end, Nassar reported net income of $82,000 for the year. Nassar shares had a fair value of $14.75 per share at December 31. Charles Inc., a private Canadian corporation, applies ASPE.
Instructions
Under the assumption that the 30% holding of Nassar does not give Charles significant influence over Nassar, identify the possible accounting methods Charles could use under ASPE to account for its investment. Prepare all required 2023 entries under each acceptable method.
Solution 9-127
FV–NI Method:
January 3, 2023
FV–NI Investments 130,500
Cash 130,500
Cash (29,000 x 30%) = 8,700 shares x $15 = $130,500
September 21, 2023
Cash 11,340
Dividend Revenue 11,340
December 31, 2023
Unrealized Gain or Loss 2,175
FV–NI Investments 2,175
Cash ($37,800 x 30%) = $ 11,340
FV (8,700 shares x $14.75) = 128,325
Carrying amount = 130,500
Adjustment required = $(2,175)
Cost Method:
January 3, 2023
Other Investments 130,500
Cash 130,500
September 21, 2023
Cash 11,340
Dividend Revenue 11,340
December 31, 2023
No Entries
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-128 Significant influence
Describe how to determine if an investment results in significant influence.
Solution 9-128
If the ownership is less than 20%, it is presumed that the investor does not have significant influence. However, if there is evidence indicating that such influence exists, such as the investor having seats on the board of directors, then the investment should be accounted for as one with significant influence.
If the ownership is 20% or greater, then it is presumed the investor has significant influence. If the facts of the situation indicate that there is not significant influence, such as the existence of a larger shareholder and the investor having no seats on the board of directors, then the investment should be accounted for as one without significant influence.
Difficulty: Easy
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Communication
CPA: Financial Reporting
Bloomcode: Knowledge
AACSB: Communication
Ex. 9-129 Investment in equity securities
On January 1, 2023, Sally Corp. acquired 30% of Wally Ltd.’s common shares for $500,000. At that time, Wally had 1 million no par common shares issued and outstanding. During 2023, Wally paid total cash dividends of $220,000, and later declared and issued a 5% common stock dividend when the market value was $2 per share. Wally's net income for 2023 was $480,000. Sally is using the equity method to account for this investment. What should be the balance in Sally’s investment account at the end of 2023?
Solution 9-129
Cost $500,000
Share of net income (.3 × $480,000) 144,000
Share of dividends (.3 × $220,000) (66,000)
$578,000
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-130 Accounting entries for acquisition – Equities
Hanuman Corp is a medium-sized corporation that has long dominated their market. With a strong cash-flow position, they have decided to invest excess cash strategically. In particular, Hanuman made periodic investments with their main supplier, Shiva. Although Hanuman currently owns 18% of the common shares of Shiva, it does not yet have significant influence over the operations of this investee company. Hanuman accounts for its investments in Shiva using IFRS 9 and the fair value through other comprehensive income model without recycling.
The controller has gathered the following information about relevant transactions and requests your assistance in preparing required adjusting entries:
1. In 2023, Hanuman acquires shares of Ahimsa Corp and Metta Ltd, for short-term trading purposes. Hanuman purchased 100,000 shares of Ahimsa for $1.2 million and the shares currently have a fair value of $1.4 million. Hanuman’s investment in Metta has not been profitable: the company acquired 45,000 shares of Metta at $20 per share and they currently have a fair value of $634,500.
2. Before 2023, Hanuman had invested $22.4 million in Shiva and, at December 31, 2022, the investment had a fair value of $21.3 million. While Hanuman did not sell or purchase any Shiva shares this year, Hanuman declared and paid a dividend totaling $2.2 million on all its common shares and reported 2023 net income of $13.6 million. Hanuman’s 18% ownership of Shiva has a December 31, 2023, fair value of $21,405,000.
Instructions
a) Prepare the appropriate adjusting entries for Hanuman as at December 31, 2023.
b) Prepare the dividend and adjusting entries for the Shiva investment, assuming that Hanuman’s 18% interest results in significant influence over Shiva’s activities.
Solution 9-130
a) Adjusting entries for Hanuman as at December 31, 2023:
Investment Income or Loss 65,500
FV–NI Investments 65,500
To adjust the investments to their fair value
Investment in trading (FV–NI) securities:
Securities | Cost | Fair Value | Unrealized |
Ahimsa | $1,200,000 | $1,400,000 | $200,000 |
Metta | 900,000 | 634,500 | (265,500) |
Total of portfolio | $2,100,000 | $2,034,500 | $(65,500) |
FV–OCI Investments 105,000
Investment Income or Loss 105,000
To bring the investment to its fair value
Investment in FV–OCI securities – Shiva:
Fair value of investment in Shiva | $21,405,000 |
Carrying amount of investment | 21,300,000 |
Unrealized holding gain | $105,000 |
b) Dividend and adjusting entries for the Shiva investment, assuming that the 18% interest constitutes significant influence
Investment in Associate 2,448,000
Investment Income or Loss 2,448,000
To record Investment Income or Loss
($13,600,000 x 18%) = $2,448,000
Cash 396,000
Investment in Associate 396,000
To record the dividend received from investments
($2.2M x 18%) = $396,000
Hanuman has significant influence and therefore should apply the equity method. No fair value adjustments are recorded under the equity method.
Difficulty: Medium
Learning Objective: Explain the concept of control and when consolidation is appropriate.
Section Reference: Strategic Investments – Investments in Subsidiaries
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Ex. 9-131 Accounting entries for acquisition – Equity Method
In early January 2023, Janus Inc., a private enterprise that applies ASPE, purchased 40% of the common shares of Keqing Corp. for $484,000. Janus was now able to exercise considerable influence in decisions made by Keqing’s management. Keqing Corp.’s statement of financial position reported the following information at the date of acquisition:
Assets not subject to being amortized | $242,000 |
Assets subject to amortization (10 years average life remaining) | 732,000 |
Liabilities | 136,000 |
Additional information:
1. Both the carrying amount and fair value are the same for assets that are not subject to amortization and for the liabilities.
2. The fair value of the assets subject to amortization is $885,000.
3. The company amortizes its capital assets on a straight-line basis.
4. Keqing reported net income of $192,000 and declared and paid dividends of $132,000 in 2023.
Instructions
a) Prepare the journal entry to record Janus’s investment in Keqing Corp. Assume that any unexplained payment is goodwill.
b) Assuming Janus applies the equity method to account for its investment in Keqing, prepare the journal entries to record Janus’ equity in the net income and the receipt of dividends from Keqing Corp. in 2023.
c) Assume the same factors as above and in part (b), except that Keqing’s net income included a loss on discontinued operations of $45,000 (net of tax). Prepare the journal entries necessary to record Janus’s equity in the net income of Keqing for 2023.
Solution 9-131
a)
Investment in Associate 484,000
Cash 484,000
b)
Cash 52,800
Investment in Associate 52,800
To record dividends ($132,000 x.40)
Investment in Associate 76,800
Investment Income or Loss 76,800
To record net income ($192,000 x.40)
Investment Income or Loss 6,120
Investment in Associate 6,120
To record amortization ($61,200 ÷ 10)
c)
Loss on Discontinued Operations 18,000
Investment in Associate 76,800
Investment Income or Loss 94,800
To record net income and loss on discontinued operations:
($45,000 x.40)
Investment Income or Loss $237,000 x 0.40
Investment Income or Loss 6,120
Investment in Associate 6,120
To record amortization ($61,200 ÷ 10)
In 2023, Janus Inc. will include investment income in continuing operations of $94,800 – $6,120 = $88,680; and an investment loss of $18,000 in discontinued operations; for a total of $88,680 – $18,000 = $70,680 in net income. Note that this is the same total amount as reported in part b), but it is presented in two different places within net income.
Difficulty: Medium
Learning Objective: Explain how investments are presented and disclosed in the financial statements, noting how this facilitates analysis.
Section Reference: Presentation, Disclosure, and Analysis
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
PROBLEMS
Pr. 9-132 Accounting for bonds – amortized cost model (IFRS)
On January 1, 2023 its issue date, Diogenes Inc. purchased a 9%, $200,000, 10-year bond. Interest is paid annually on December 31. Diogenes uses the amortized cost model and the effective interest method for amortizing premium or discount. The current market rate was 10% and as a result Diogenes paid $187,711 for the bonds. On December 31, 2023, the bonds have a market value of $185,000.
Instructions
a) Record the receipt of interest for 2023.
b) Record the amortization of the discount for 2023.
Solution 9-132
a) Interest income = $187,711 ×.10 $18,771
Actual interest 18,000
Discount amortization $ 771
Cash 18,000
Bond Investment at Amortized Cost 771
Interest Income 18,771
b) No entry is required. Using the amortized cost model, an entry would only be required if there had been an impairment in value. Since this is not mentioned, we can assume there is no impairment. The investment is reported at amortized cost.
Difficulty: Medium
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Communication
CPA: Financial Reporting
Bloomcode: Application
AACSB: Communication
Pr. 9-133 Expected loss model – bonds
Wasp International Inc. is currently holding a bond as an investment. The bond is being accounted for using the amortized cost method as management intends to hold the investment to maturity and has planned on the contractual cash flows from the bond to support business operations. The face value of the bond is $10,000,000, with an 8% coupon paid semi-annually. There are 7 years remaining on the bond until it matures, and the market rate used to discount the bond is 5%. Management is continuously assessing the bonds’ estimated future cash flows.
Instructions
- What impairment model and accounting standard is Wasp using?
- Assume management believes that the company that issued the bond is starting to experience deteriorating financial performance. At present, management does not believe that the credit risk of the bond has significantly increased but has determined that there is a 2% probability that 15% of the present value of the bond will default in the next 12 months. Calculate the estimated impairment loss.
- Instead of the previous assumption, assume management believes that the credit risk of the bond has significantly increased over the remaining life of the bond. After conducting an assessment, management believes that there is a 40% probability that 75% of the remaining coupon payments and face value will be received and a 60% probability that only 50% of the remaining coupon payments and face value will be received. What is the amount of impairment that should be estimated on this bond? (Round to the nearest whole number.)
Solution 9-133
a) Given that management is continuously assessing the bond’s estimated future cash flows, the expected loss model is the model being used which means that Wasp is using IFRS.
b) The carrying value of the bond must first be calculated:
FV = $10,000,000, PMT = $400,000 , i = 2.5% , N = 14
Calculated PV = $11,753,637
Estimated impairment loss = $11,753,637 x 2% x 15% = $35,261
c) Probability 40% Expected PV of Cash Flow Probability 60% Expected PV of Cash Flow
FV = $10,000,000 x 75% = $7,500,000 FV = $10,000,000 x 50% = $5,000,000
PMT = $400,000 x 75% = $300,000 PMT = $400,000 x 50% = $200,000
i = 2.5% i = 2.5%
N = 14 N = 14
Calculated PV = $8,815,228 Calculated PV = $5,876,818
Total expected cash flow = (40% x $8,815,228) + (60% x $5,876,818) = $7,052,182
Impairment loss = $11,753,637 – $7,052,181 = 4,701,454
Difficulty: Hard
Learning Objective: Explain and apply the cost/amortized cost model of accounting for investments.
Section Reference: Measurement—Cost/Amortized Cost Model
CPA: Financial Reporting
Bloomcode: Synthesis
AACSB: Analytic
Pr. 9-134 Accounting for debt instruments purchased at a discount – FV-NI model
On January 1, 2023, Pluto Corp. which follows ASPE acquired 6%, $100,000 (face value) bonds of Uranus Ltd., to yield 8%. The bonds were dated January 1, 2023, and mature on December 31, 2028, with interest payable each January 1. Pluto intends to hold the bonds to maturity and will use the FV-NI model and the effective interest method of amortization of bond premium or discount.
Instructions
Prepare the following entries in Pluto’s books:
a) Acquisition of bonds on January 1, 2023,
b) Year-end adjusting entry at December 31, 2023,
c) Receipt of the first interest payment on January 1, 2024.
Round all values to the nearest dollar.
Solution 9-134
a) Acquisition of bonds on January 1, 2023
PV of principal: $$100,000 (PVF*5, 8%) = $100,000 x 0.68058 $68,058
PV of interest: (PVFOA 5, 8%) = $6,000 x 3.99271 23,956
Present value of bond $92,014
OR 5 N 8 I 6000 PMT 100000 FV CPT PV => 92,015
FV-NI Investments 92,015
Cash 92,015
b) Year-end adjusting entry at December 31, 2023
Interest Receivable 6,000
FV-NI Investments 1,361
Interest Income 7,361
$100,000 x 6% = $6,000
$92,015 x 8% = $7,361
$6,000 – $7,361 = $1,361
c) Receipt of first interest payment on January 1, 2024
Cash 6,000
Interest Receivable 6,000
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV–NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 9-135 Temporary investments – FV-NI model
During your examination of the financial statements of Venus Corporation for the year ended December 31, 2023, you found a new account called "Investments." Your examination revealed that during 2023, Venus began a program of investments, and all investment-related transactions were entered in this account. Your analysis of this account for 2023 follows:
VENUS CORPORATION
Analysis of Investments
Year Ended December 31, 2023
Date—2023 Debit Credit
(i)
Jupiter Ltd. Common Shares
Feb. 14 Purchased 3,000 shares @ $55 per share. $165,000
Jul. 26 Received 300 Jupiter common shares
as a stock dividend. (Memorandum entry)
Sep. 28 Sold the 300 Jupiter common shares
received July 26 @ $70 per share. $21,000
(ii)
Debit Credit
Mars Ltd. Common Shares
Apr. 30 Purchased 5,000 shares @ $40 per share. $200,000
Oct. 28 Received dividend of $1.20 per share. $6,000
Additional information:
1. The market values for each security during 2023 follow:
Security Feb 14 Apr 30 Jul 26 Sep 28 Dec 31
Jupiter Ltd. $55 $62 $70 $72
Mars Ltd. $40 32
Venus Corp. 25 28 30 33 35
2. All of the investments of Venus are nominal in respect to percentage of ownership (five percent or less).
3. Each investment is considered by Venus’s management to be temporary.
4. The company has adopted ASPE and intended to use the FV–NI method to account for these investments.
5. Venus follows a policy of separately reporting dividend income.
Instructions
a) Prepare any necessary correcting journal entries related to investments (i) and (ii).
b) Prepare the entry, if necessary, to record the proper valuation of these investments at December 31, 2023.
Solution 9-135
a) (i) Jupiter Ltd. original purchase 3,000 shares
stock dividend 300 shares
total holding 3,300 shares
Total cost of $165,000 ÷ Total shares of 3,300 = $50 average cost per share
Sold 300 shares
Correct entry:
Cash (300 × $70) 21,000
FV-NI Investments—Jupiter (300 x $50) 15,000
Investment Income or Loss 6,000
Entry made:
Cash 21,000
Investments 21,000
Correction:
Investments 21,000
FV-NI Investments 15,000
Investment Income or Loss 6,000
(ii) Mars Ltd. - should record cash dividend as dividend income.
Correct entry:
Cash 6,000
Dividend Revenue 6,000
Entry made:
Cash 6,000
Investments 6,000
Correction:
Investments 6,000
Dividend Revenue 6,000
b) Valuation at year end:
Increase
Quantity Cost Market Value (Decrease)
Jupiter 3,000 shares $150,000 $216,000 $66,000
Mars 5,000 shares 200,000 160,000 (40,000)
$350,000 $376,000 $26,000
Year-end Adjustment:
FV-NI Investments—Jupiter 66,000
Investment Income or Loss 66,000
Investment Income or Loss 40,000
FV-NI Investments—Mars 40,000
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 9-136 Accounting for debt investments purchased at a premium – FV-NI model
On January 1, 2023, Pluto Corp. acquired 8%, $100,000 (face value) bonds of Uranus Ltd., to yield 6%. The bonds were dated January 1, 2023, and mature on December 31, 2028, with interest payable each January 1. Pluto follows ASPE and will use the FV–NI model and the effective-interest method of amortization of bond premium or discount.
Instructions
Prepare the following entries in Pluto’s books:
a) Acquisition of bonds on January 1, 2023,
b) Year-end adjusting entry at December 31, 2023,
c) Receipt of the first interest payment on January 1, 2024.
Round all values to the nearest dollar.
Solution 9-136
a) Acquisition of bonds on January 1, 2023
PV of principal: $100,000 (PVF*5, 6%) = $100,000 x 0.74726 $ 74,726
PV of interest: (PVFOA 5, 6%) = $8,000 x 4.21236 $33,699
Present value of bond $108,425
OR 5 N 6 I 8000 PMT 100000 FV CPT PV => 108,425
FV-NI Investments 108,425
Cash 108,425
b) Year-end adjusting entry at December 31, 2023
Interest receivable 8,000
FV-NI Investments 1,494
Interest Income 6,506
$100,000 x 8% = $8,000
$108,425 x 6% = $6,506
$8,000 – $6,506 = $1,494
c) Receipt of first interest payment on January 1, 2024
Cash 8,000
Interest Receivable 8,000
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV–NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 9-137 Accounting for investments – FV-NI model
On December 31, 2023, Hubble Corp. has the following securities in its portfolio of temporary investments:
Cost Market
5,000 common shares of Orion Corp. $ 80,000 $ 69,500
10,000 common shares of Rigel Ltd. 91,000 92,500
$171,000 $162,000
All of the securities had been purchased in 2023. In 2024, Hubble completed the following securities transaction:
Apr 1 Bought 300 common shares of Aries Corp. @ $50 each, plus fees of $550.
On December 31, 2024, Hubble’s portfolio of trading equity securities appeared as follows:
Cost Market
5,000 common shares of Orion Corp. $ 80,000 $ 78,000
10,000 common shares of Rigel Ltd. 91,000 99,250
300 common shares of Aries Corp. 15,000 12,750
$186,000 $190,000
Instructions
Assuming Hubble uses the FV-NI model, prepare the general journal entries for:
a) the 2023 year-end adjusting entry,
b) the purchase of the Aries Corp. shares,
c) the 2024 year-end adjusting entry.
Solution 9-137
a) December 31, 2023
Investment Income or Loss 9,000
FV–NI Investments 9,000
($171,000 – $162,000)
b) April 1, 2024
FV–NI Investments 15,000
Cash [(300 x $50) + $550] 15,550
c) December 31, 2024
FV–NI Investments 13,000
Investment Income or Loss 13,000
$190,000 – ($162,000 + $15,000) = $13,000
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV–NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 9-138 Long-term investment – FV-NI model
Ceres Corporation is considering making a significant long-term investment in Pisces Ltd., a young and very promising company. Ceres decides to make a smaller investment first, and if Pisces turns out to be successful, Ceres intends to make an additional investment to reach significant influence. Pisces has 200,000 shares authorized, and 110,000 shares outstanding.
On January 1, 2023, Pisces issues Ceres 10,000 shares for $400,000 in cash (so now there are 120,000 shares outstanding).
Additional information:
1. On November 1, 2023, Pisces declares a total cash dividend of $180,000.
2. Pisces reports $225,000 net income for 2023. Its stock price on December 31, 2023 is $38.
3. On November 1, 2024, Pisces announces a total dividend of $270,000 to be paid on January 2, 2025.
4. Pisces reports $360,000 net income for 2024. Its stock price on December 31, 2024 is $44.
5. On March 15, 2025, Ceres is approached by an investment fund which offers to buy all its Pisces shares for $55 per share, a 25% premium over the current stock price of $44. Ceres accepts the offer and sells the shares on that day.
Instructions
Assuming Ceres uses the fair value through net income model (FV-NI) to account for this investment:
a) Prepare the journal entries in Ceres’s books for the 2023 calendar year.
b) Prepare the journal entries in Ceres’s books for the 2024 calendar year.
c) Prepare the journal entries in Ceres’s books for the 2025 calendar year.
Solution 9-138
a) 2023 Entries
FV-NI Investment 400,000
Cash....................................................................... 400,000
To record the initial investment on January 1, 2023
Cash 15,000
Dividend Revenue 15,000
To record Ceres’s share of the dividend on November 1, 2023
$180,000 x 10,000 ÷ 120,000 = $15,000
Investment Income or Loss................ 20,000
FV-NI Investment................................................ 20,000
To record holding loss on December 31, 2023
($38 – $40) x 10,000 = $20,000
b) 2024 Entries
Dividend Receivable........................................ 22,500
Dividend Revenue 22,500
To record Ceres’s share of the dividend declared on November 1, 2024
$270,000 x 10,000 ÷ 120,000 = $22,500
FV-NI Investment . 60,000
Investment Income or Loss........................... 60,000
To record holding gain on December 31, 2024
($44 – $38) x 10,000 = $60,000
c) 2025 Entries
Cash...................................... 22,500
Dividend Receivable.................................................. 22,500
To record receipt of dividend on January 2, 2025
Cash 550,000
FV-NI Investment 440,000
Gain on Disposal of Investments—FV-NI 110,000
To record gain on disposal of Pisces shares on March 15, 2025
$55 x 10,000 = $550,000
($55 – $44) x 10,000 = $110,000
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement—Fair Value through Net Income (FV-NI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 9-139 Equity method – ASPE
On January 1, 2022, Titanic Corp. bought 30,000 shares of the available 100,000 common shares of Iceberg Inc., a publicly traded firm. This acquisition provided Titanic with significant influence. Titanic paid $700,000 cash for the investment. At the time of the acquisition, Iceberg reported assets of $2,500,000 and liabilities of $1,200,000. Asset values reflected fair market value, except for capital assets that had a net book value of $500,000 and a fair market value of $730,000. These assets had a remaining useful life of five years. For 2022 Iceberg reported net income of $400,000 and paid total cash dividends of $100,000.
On May 16, 2023, Titanic sold 15,000 of its shares in Iceberg for $425,000. Titanic has no immediate plans to sell its remaining investment in Iceberg.
Iceberg is actively traded, and stock price information follows:
January 1, 2022 $23
December 31, 2022 $25
January 1, 2023 $26
Instructions
a) Assuming Titanic is using the equity method under ASPE, did the initial investment include a payment for goodwill? Provide support for your answer.
b) At the end of 2022, what would appear on the income statement and balance sheet of Titanic in connection with its investment in Iceberg? Show supporting calculations.
c) Provide the entry to account for Titanic’s sale of the shares in May 2023. How should Titanic account for its remaining investment in Iceberg?
d) CRITICAL THINKING: Why is it common, particularly under ASPE, to encounter situations like this where the fair market value of some assets is higher than the book value? Give examples of the types of assets that are commonly found or circumstances that would create this difference.
Solution 9-139
a)
Purchase price $700,000
Market value of identifiable assets* $2,730,000
Less: liabilities (1,200,000)
Total market value of net assets acquired 1,530,000
Portion purchased (30% x $1,530,000) (459,000)
Goodwill $241,000
*$2,500,000 + ($730,000 – $500,000)
b)
Share of net income ($400,000 x 30%) $120,000
Less: amortization of fair value increment
($730,000 – $500,000) ÷ 5 $46,000
Investor portion 30% (13,800)
Investment income on income statement $106,200
Cost $700,000
Plus: investment income 106,200
Less: dividends received ($100,000 x 30%) (30,000)
Investment account on balance sheet $776,200
c)
Cash 425,000
Investment in Associate 388,100
Gain on Disposal of Investments in Associate 36,900
To record the sale of the shares
$776,200 x 50% = $388,100
After this sale, Titanic will no longer have significant influence over Iceberg. As a result, the use of the equity method will no longer be appropriate. Under ASPE, Titanic can choose the cost or fair value through net income (FV–NI) model for its remaining investment in Iceberg.
d) CRITICAL THINKING: Under ASPE, capital assets are recorded using the historical cost principle. As a result, the book value of these assets is the original cost, less any applicable depreciation. Capital assets such as buildings and land typically have fair market values that increase over time. This will create a difference between the fair market value and the book value. Under IRFS, this would be less likely for entities that choose to use the revaluation method as an accounting policy. A circumstance that would give rise to a difference between fair market value and book value would be for assets that have gone unrecorded on the financial statements. The book value would be zero, since the asset was never recorded, but a fair market value exists. An example of this may be an intangible asset such as a patent, where the costs to create/protect that patent have not been capitalized, but the patent has a fair market value.
Difficulty: Medium
Learning Objective: Explain and apply the fair value through net income model of accounting for investments.
Section Reference: Measurement – Fair Value through Net Income (FV–NI) Model
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Communication
CPA: Financial Reporting
Bloomcode: Application
AACSB: Communication
Pr. 9-140 Long-term investment – FV-OCI model
Zeus Corporation is considering making a significant long-term investment in Ares Ltd., a young and very promising company. Zeus decides to make a smaller investment first, and if Ares turns out to be successful, Zeus intends to make an additional investment to reach significant influence. Ares has 200,000 shares authorized, and 110,000 shares outstanding.
On January 1, 2023, Ares issues Zeus 10,000 shares for $400,000 in cash (so now there are 120,000 shares outstanding).
Additional information:
1. On November 1, 2023, Ares declares a total cash dividend of $180,000.
2. Ares reports $225,000 net income for 2023. Its stock price on December 31, 2023 is $38.
3. On November 1, 2024, Ares announces a total dividend of $270,000 to be paid on January 2, 2025.
4. Ares reports $360,000 net income for 2024. Its stock price on December 31, 2024 is $44.
5. On March 15, 2025, Zeus is approached by an investment fund which offers to buy all its Ares shares for $55 per share, a 25% premium over the current stock price of $44. Zeus accepts the offer and sells the shares on that day.
Instructions
Assuming Zeus uses the fair value through Other Comprehensive Income model (FV–OCI) to account for this investment:
a) Prepare the journal entries in Zeus’ books for the 2023 calendar year.
b) Prepare the journal entries in Zeus’ books for the 2024 calendar year.
c) Prepare the journal entries in Zeus’ books for the 2025 calendar year.
Solution 9-140
a) 2023 Entries
FV–OCI Investment 400,000
Cash....................................................................... 400,000
To record the initial investment on January 1, 2023
Cash 15,000
Dividend Revenue 15,000
To record Zeus’ share of the dividend on November 1, 2023
$180,000 x 10,000 ÷ 120,000 = $15,000
Unrealized Gain or Loss—OCI 20,000
FV–OCI Investment................................................ 20,000
To record holding loss on December 31, 2023
($38 – $40) x 10,000 = $20,000
b) 2024 Entries
Dividend Receivable........................................ 22,500
Dividend Revenue 22,500
To record Zeus’ share of the dividend declared on November 1, 2024
$270,000 x 10,000 ÷ 120,000 = $22,500
FV–OCI Investment . 60,000
Unrealized Gain or Loss—OCI........................... 60,000
To record holding gain on December 31, 2024
($44 – $38) x 10,000 = $60,000
c) 2025 Entries
Cash...................................... 22,500
Dividend Receivable.................................................. 22,500
To record receipt of dividend on January 2, 2025
FV–OCI Investment 110,000
Unrealized Gain or Loss—OCI 110,000
To adjust to fair value at date of disposal
($55 – $44) x 10,000 = $110,000
Cash 550,000
FV–OCI Investment 550,000
To record disposal of Ares shares on March 15, 2025
$55 x 10,000 = $550,000
Accumulated Other Comprehensive Income........................... 150,000
Retained Earnings 150,000
To record recycling from OCI to Retained earnings
Difficulty: Medium
Learning Objective: Explain and apply the fair value through other comprehensive income model of accounting for investments.
Section Reference: Measurement – Fair Value through Other Comprehensive Income (FV–OCI) Model
CPA: Financial Reporting
Bloomcode: Application
AACSB: Analytic
Pr. 9-141 Equity method – IFRS
Capricorn Corporation decided to purchase 35% of the outstanding shares of Aquarius Ltd. Capricorn’s CFO conducted an extensive evaluation of the financial statements of Aquarius and reported his findings to the board of directors in the following memo:
Dear Board of Directors,
Following your request, I conducted a detailed analysis of Aquarius Ltd. I found out that the liabilities reported in its books at December 31, 2022 in the amount of $20M fairly represent their economic values. As for the assets, their book value is $45M. The company owns an office building in downtown Toronto where its headquarters are located. The net book value of this building, including the land, is $10M. Aquarius purchased the land for $6M some 20 years ago and then constructed the building. I consulted with real estate experts and currently the fair value of the land is $9M and the fair value of the building is $8M. The remaining useful life of the building in Aquarius’s books is 20 years and I find this estimate realistic.
The firm has developed a patent. According to my analysis, the fair value of the patent is $12M. Given future advances in technology, I expect the value of the patent to decline and become worthless 6 years from now. The patent was developed by the company and all the related costs were recorded as research and development expenses.
Sincerely,
Jake Connor, CPA
The board of directors of Capricorn Corporation adopted the report by Mr. Connor and on January 1, 2023, purchased 35% of the shares of Aquarius, based on its fair value according to Mr. Connor’s analysis. After the acquisition of the shares, Capricorn was able to exercise significant influence over Aquarius.
In 2023, Aquarius reported net income of $10M and distributed 40% of it as cash dividends.
In 2024, the earnings of Aquarius doubled compared with 2023. Aquarius distributed 60% of its income as cash dividends.
On December 31, 2024, Capricorn sold its investment in Aquarius Ltd. for $20M.
Instructions
Assuming Capricorn accounts for this investment using the method required under IFRS,
a) Record the initial purchase by Capricorn Corp.
b) Record the entries related to the investment in Aquarius Ltd. for 2023.
c) Record the entries related to the investment in Aquarius Ltd. for 2024.
Solution 9-141
a) Calculation of amount paid
Net book value of Aquarius ($45 – $20) $25,000,000
Fair value of patent 12,000,000
Excess value of land ($9 – $6) 3,000,000
Excess value of building ($8 – ($10 – $6)) 4,000,000
Fair value of Aquarius 44,000,000
Shares held 35%
Amount paid $15,400,000
b) Journal entries for 2023
Investment in Associate 15,400,000
Cash............................................ 15,400,000
To record initial investment
Calculation of income to be recorded by Capricorn:
Aquarius’s net income $10,000,000
Capricorn’s ownership 35%
Capricorn’s share of net income 3,500,000
Amortization of patent (12M ÷ 6) x 35% (700,000)
Excess depreciation of the building ($4M x 35%) ÷ 20 (70,000)
Capricorn’s adjusted share in Aquarius’s net income $ 2,730,000
Investment in Associate 2,730,000
Investment Income or Loss 2,730,000
Cash 1,400,000
Investment in Associate 1,400,000
To record dividend distribution ($10M x 40% x 35%)
c) Journal entries for 2024
For recording its share in Aquarius’s net income, the only adjustment to the 2023 calculations is that income now is $20M and Capricorn’s share is $7M, an increase of $3.5M compared with 2023. Thus, investment income increases to $6,230,000 ($2,730,000 + $3,500,000).
Investment in Associate 6,230,000
Investment Income or Loss................................. 6,230,000
Cash 4,200,000
Investment in Associate.......................... 4,200,000
To record dividend distribution ($10,000,000 x 2 x 60% x 35%)
By the end of 2024, the value of the investment in Capricorn’s books is as follows:
Initial investment $15,400,000
Investment income 2023 2,730,000
Dividend 2023 (1,400,000)
Investment income 2024 6,230,000
Dividend 2024 (4,200,000)
Investment in Aquarius Dec 31/24 18,760,000
Selling price 20,000,000
Gain on disposal of investment $ 1,240,000
Cash......................................... 20,000,000
Investment in Associate 18,760,000
Gain on Disposal of Investments in Associate 1,240,000
Difficulty: Medium
Learning Objective: Explain the concept of significant influence and apply the equity method.
Section Reference: Strategic Investments – Investments in Associates
CPA: Communication
CPA: Financial Reporting
Bloomcode: Application
AACSB: Communication
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