ACCT 434: Advanced Financial Accounting Module 01 Activities

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1 ACCT 434: Advanced Financial Accounting Module 01 Activities Question 1 Part 1: On January 1, 2014, Phantom Corp. acquires $300,000 of Spider Inc. 9% bonds. The interest is payable each June 30 and December 31, and the bonds mature on December 31, The investment will provide Phantom Corp. with a 10% yield. Phantom Corp. applies IFRS and accounts for this investment using the amortized cost model. (a) Calculate the cost of the investment in the Spider Inc bonds FV PMT N I/Y CPT PV 300,000 13, ,386 (b) Prepare a three year bond amortization schedule, rounding to the nearest dollar Date Cash Interest Amortization Carrying Value Jan 01, ,386 Jun 30, 14 13,500 14,619 (1,119) 293,505 Dec 31, 14 13,500 14,675 (1,175) 294,680 Jun 30, 15 13,500 14,734 (1,234) 295,914 Dec 31, 15 13,500 14,796 (1,296) 297,210 Jun 30, 16 13,500 14,861 (1,361) 298,571 Dec 31, 16 13,500 14,929 (1,429) 300,000 (c) Record the purchase of the bonds and the receipt of interest on June 30, 2014 Jan 01, 14 Investment in bonds (HTM) 292,386 Cash 292,386 Jun 30, 14 Cash 13,500 Investment in bonds (HTM) 1,119 Interest revenue 14, , Dr. Harjinder Deol Page 1

2 Part 2: On January 1, 2014, Phantom Corp. acquires $300,000 of Spider Inc. 9% bonds for $307,863. The interest is payable each June 30 and December 31, and the bonds mature on December 31, Phantom Corp. applies IFRS and accounts for this investment using the FVOCI model. (a) Calculate the effective yield on the investment in the Spider Inc bonds FV PMT N PV CPT I/Y 300,000 13, ,863 (b) Prepare a three year bond amortization schedule, rounding to the nearest dollar Date Cash Interest Amortization Carrying Value Jan 01, ,863 Jun 30, 14 13,500 12,315 1, ,678 Dec 31, 14 13,500 12,267 1, ,445 Jun 30, 15 13,500 12,218 1, ,163 Dec 31, 15 13,500 12,167 1, ,830 Jun 30, 16 13,500 12,113 1, ,443 Dec 31, 16 13,500 12,057 1, ,000 (c) Record the purchase of the bonds and the receipt of interest on June 30, 2014 Jan 01, 14 Investment in bonds (AFS) 307, ,863 Cash Jun 30, 14 Cash 13,500 Investment in bonds (AFS) 1,185 Interest revenue 12,315 Part 3: On January 1, 2014, Phantom Corp. acquires $300,000 of Spider Inc. 9% bonds at par. The interest is payable each June 30 and December 31, and the bonds mature on December 31, Phantom Corp. applies IFRS and accounts for this investment using the FVTPL model. (a) Record the purchase of the bonds and the receipt of interest on June 30, 2014 Jan 01, 14 Temporary Investment in bonds (HFT) 300,000 Cash 300,000 Jun 30, 14 Cash 13,500 Interest revenue 13, , Dr. Harjinder Deol Page 2

3 Question 2 Arabica Corporation, a public company, made the following purchases and sales of investments during 2014, the first year in which Arabica invested in equity securities: 1. On January 15, purchased 9,000 shares of Noranda Corp. s common shares at $33.50 per share plus commission of $ On April 1, purchased 5,000 shares of Orange Corp. s common shares at $52.00 per share plus commission of $1, On May 20, 2014, Arabica sold 3,000 of the Noranda common shares at a market price of $35 per share less brokerage commissions of $600. Arabica Corporation received a dividend of $1 per share from Noranda Corp on June 15, and $0.80 per share from Orange Corp on October 1, (a) Prepare journal entries to record the transactions related to these investments for the year 2014 under the FVTPL model Jan 15, 14 Trading securities (HFT) 301,500 Investment income/loss (or commission exp) 720 Cash 302,220 Apr 01, 14 Trading securities (HFT) 260,000 Investment income/loss (or commission exp) 1,000 Cash 261,000 May 20, 14 Cash (3,000*35-600) 104,400 Investment income/loss (or gain on sale) 3,900 Trading securities (HFT) 100,500 Jun 15, 14 Cash 6,000 Investment income/loss (or dividend income) 6,000 Oct 01, 14 Cash 4,000 Investment income/loss (or dividend income) 4,000 (b) Prepare journal entries to record the transactions related to these investments for the year 2014 under the FVOCI model Jan 15, 14 Investment in Noranda Corp (AFS) 302,220 Cash 302,220 Apr 01, 14 Investment in Orange Corp (AFS) 261,000 Cash 261,000 May 20, 14 Cash (3,000*35-600) 104,400 Gain on sale of Noranda Corp shares (AFS) 3,660 Investment in Noranda Corp (AFS) 100,740 Jun 15, 14 Cash 6,000 Dividend income 6,000 Oct 01, 14 Cash 4,000 Dividend income 4, , Dr. Harjinder Deol Page 3

4 Question 3 On March 20, 2014, Financial Corp. commits to an investment to acquire a $50,000 bond from insurance company on March 23, March 20 is the purchase commitment date (purchase trade date) and March 23 is the purchase delivery (settlement date). Due to market value changes, the fair value of the bond on March 23 is $50,200. Assuming the bonds are accounted for as FVOCI, (a) Prepare the required journal entries for the investment in bonds on March 20 and March 23, following trade date accounting, Mar 20, 14 Investment in bonds (AFS) 50,000 Payable 50,000 Mar 23, 14 Payable 50,000 Investment in bonds (AFS) 200 Holding gain on investment in bonds (OCI) 200 (b) Prepare the required journal entries for the investment in bonds on March 20 and March 23, following settlement date accounting. Mar 20, 14 No entry Mar 23, 14 Investment in bonds (AFS) 50,200 Holding gain on investment in bonds (OCI) 200 (c) Repeat parts (a) and (b), assuming the bonds are accounted for as amortized cost Trade date accounting Mar 20, 14 Investment in bonds (HTM) 50,000 Payable 50,000 Mar 23, 14 Payable 50,000 No adjustment for fair value change Settlement date accounting Mar 20, 14 No entry Mar 23, 14 Investment in bonds (HTM) 50,200 No adjustment for fair value change 2014, Dr. Harjinder Deol Page 4

5 (d) Repeat parts (a) and (b), assuming the bonds are accounted for as FVTPL Trade date accounting Mar 20, 14 Temporary Investment in bonds (HFT) 50,000 Payable 50,000 Mar 23, 14 Payable 50,000 Temporary Investment in bonds (HFT) 200 Holding gain (NI) 200 Settlement date accounting Mar 20, 14 No entry Mar 23, 14 Temporary Investment in bonds (HFT) 50,200 Holding gain (NI) 200 Question 4 Refer to question 1. Assume that the bonds have a fair value of $306,000 on December 31, 2014, the year end for Phantom Corp. Prepare the journal entries to record receipt of interest and any necessary adjustment for bond value for Parts 1, 2 and 3. Part 1: HTM (Amortized cost) Dec 31, 14 Cash 13,500 Investment in bonds (HTM) 1,175 Interest revenue 14,675 No adjustment for fair value Part 2: AFS (FVOCI) Dec 31, 14 Cash 13,500 Investment in bonds (AFS) 1,233 Interest revenue 12,267 Investment in bonds (AFS) 555 Holding gain on inv in bonds (OCI) 555 Holding gain on inv in bonds (OCI) 555 Reserves (or AOCI) , Dr. Harjinder Deol Page 5

6 Part 3: HFT (FVTPL) Dec 31, 14 Cash 13,500 Interest revenue 13,500 Temporary Investment in bonds (HFT) 6,000 Holding gain (NI) 6,000 Question 5 Refer to question 2. The year-end fair values per share were as follows: Noranda $30; Orange $55. Prepare the journal entries to record any necessary fair value adjustment under the FVTPL and FVOCI models. FVTPL (HFT) # Shares Mkt price Fair Value Cost FV Adj Noranda 6, , ,000 (21,000) Orange 5, , ,000 15,000 (6,000) Dec 31, 14 Investment income/loss (or Holding loss - NI) 6,000 Trading securities (HFT) 6,000 FVOCI (AFS) Dec 31, 14 Holding loss (OCII) 21,480 Investment in Noranda Corp (AFS) 21,480 (302, ,740) - (6,000*$30) Investment in Orange Corp (AFS) 14,000 (5,000*55-261,000) Holding gain (OCI) 14, , Dr. Harjinder Deol Page 6

7 Question 6 On January 1, 2011, Jacob Corp accepted a $500,000 6% note from Job Inc payable on January 1, Job Inc s credit rating would have enabled it to borrow money at 10%. Job Inc. paid interest regularly for the years 2011 through However, in January 2014, Job Inc was faced with financial distress, and started talks with Jacob Corp to restructure the loan. Assess whether the loan should be classified as non-performing or impaired under the following circumstances: (a) Job Inc. says that it cannot pay any interest, but will repay the principal amount of $500,000 on January When the loan was made originally, it would have been recorded at a discount: FV PMT N I/Y PV 500,000 30, ,184 Note amortization schedule: Date Cash Interest Amortization Carrying Value Jan 01, ,184 Jan 01, 12 30,000 42,418 (12,418) 436,602 Jan 01, 13 30,000 43,660 (13,660) 450,262 Jan 01, 14 30,000 45,026 (15,026) 465,288 Jan 01, 15 30,000 46,529 (16,529) 481,817 Jan 01, 16 30,000 48,183 (18,183) 500,000 Book Value on Jan 1, ,288 Calculation on note fair value FV PMT N I/Y PV 500, ,223 Book Value of note > Fair Value so note is impaired (b) Job Inc. asks for a reduction in the coupon rate to 4%, an extension of the repayment date to January 1, Calculation on note fair value FV PMT N I/Y PV 500,000 20, ,904 Book Value of note > Fair Value so note is impaired Note if Book Value was less than fair value, then loan would be classified as non-performing 2014, Dr. Harjinder Deol Page 7

May 1, 2017 payment: May 1, 2017 Rent Expense 14,500 Cash 14,500. (c) The entry would be the same under ASPE.

May 1, 2017 payment: May 1, 2017 Rent Expense 14,500 Cash 14,500. (c) The entry would be the same under ASPE. Buad 273 Chapter 20 Assignment Solutions Page 1 of 5 BRIEF EXERCISE 20-1 IFRS 16: For right-of-use assets, the lessee uses the rate implicit in the lease whenever it can be reasonably determined; otherwise