Exam 11: Financial Instruments: Investments in Bonds and Equity Securities

Masters Inc. acquired 30% of Continental Corp.'s voting shares on January 1, 2015 for $100,000. During 2015, Continental earned $40,000 and paid dividends of $25,000. Master's 30% interest in Continental gives Masters the ability to exercise significant influence over Continental's operating and financial policies. During 2016, Continental earned $50,000 and paid dividends of $15,000 on April 1 and $15,000 on October 1. On July 1, 2016, Masters sold half of its shares in Continental for $66,000 cash. Assume a December 31 year-end. Calculate the amount, before income taxes that Masters should include in its 2015 income statement as a result of the investment.

On January 1^st, 2011, ABC Inc. purchased 30% of the outstanding voting shares of DEF Inc, a company whose operations rely heavily on ABC's managerial involvement, for $600,000. On that date, DEF's net assets had a fair value equivalent to their book values. During 2011 and 2012, DEF Inc. earned income and paid dividends as follows: Income Dividends 2011 \ 120,000 \ 20,000 2012 \ 180,000 \ 30,000 -Assuming that ABC adheres to ASPE and opts to use the cost method, what effect (if any) would there be as on ABC's 2012 income as a result of this investment?

A parent corporation that uses the equity method of accounting for its investment in a 40 percent owned subsidiary, which earned $20,000 and paid $5,000 in dividends, made the following entries: Investment in Associate 8,000 Investment revenue 8,000 Cash 2,000 Dividend revenue 2,000 What effect will these entries have on the parent's balance sheet?

Over time, the total gain or loss flowing through income will be the same, regardless of whether an investment is designated as FVTPL or FVTOCI.

The equity method of accounting for long-term investments in equity securities is based on the presumption that the investor owns a sufficient number of the outstanding voting shares of another company to exercise significant influence over the operating and financing policies of the other company.

Unrealized holding gains flow through income or OCI for FVTOCI investments.

When two or more classes of equity securities are purchased for a lump sum, and the market value of neither security can be reliably determined, the lump sum payment should be allocated between the classes of securities based on the number of shares of each security purchased.

A bond that is not managed as part of an actively traded portfolio and not held solely to correct its contractual cash flows would be classified as FVTOCI under IFRS.

On 1-1-2014 Sea Inc. purchased 40% of Gull Corporation for $30,000. At that time, Gull's owners' equity was $4,000, and Gull had the following assets with market values exceeding book value by the following amounts: Land $20,000 Buildings 30,000 (10 years life remaining) Patent 10,000 (5 years life remaining) Gull earned $10,000 in 2014 and paid $20,000 dividends. We amortize all intangibles over 5 years. What is the 2014 ending balance in the Investment in Gull account?

Once an investment is designated as FVTOCI, this designation may be changed at will by management.

TBC purchased 10,000 shares in ETC for $12 per share. However, TBC's broker arranged for TBC to pay only $4 cash per share now with the remaining balance to be paid in monthly instalments. TBC should record the investment by:

There is no separate impairment test for FVTPL investments.

Under the equity method of accounting for Investments in Associates, the investor's investment account is decreased by all dividends received from the investee.

ABC Inc purchased shares of DEF Inc as follows: June 30^th, 2013 4,000 shares @ $3 per share $12,000 June 30^th, 2014 3,000 shares @ $4 per share $12,000 June 30^th, 2015 3,000 shares @ $6 per share $18,000 The shares are considered to be passive investments. ABC Inc. has a December 31^st, year-end. The market value of the DEF shares at each year-end was as follows: December 31^st, 2013 $3.50 per share December 31^st, 2014 $5.00 per share December 31^st, 2015 $5.50 per share On July 1^st, 2015, ABC sold half its shares in DEF Inc. for $6.50 per share. -The balance in the OCI account related to the Investment in DEF account immediately prior to the sale of the shares was:

FVTOCI is an investment classification that is prohibited for:

A corporation purchased as an FVTPL investment 200 shares of preferred of Y Corporation that cost $50 per share. In the same year, the preferred shares were exchanged for 400 shares of no-par common of Z Corporation. At the date of exchange, the preferred stock was selling at $37.50 per share. Give the entry to record this direct exchange of shares.

ABC Inc purchased shares of DEF Inc as follows: June 30^th, 2013 4,000 shares @ $3 per share $12,000 June 30^th, 2014 3,000 shares @ $4 per share $12,000 June 30^th, 2015 3,000 shares @ $6 per share $18,000 The shares are considered to be passive investments. ABC Inc. has a December 31^st, year-end. The market value of the DEF shares at each year-end was as follows: December 31^st, 2013 $3.50 per share December 31^st, 2014 $5.00 per share December 31^st, 2015 $5.50 per share On July 1^st, 2015, ABC sold half its shares in DEF Inc. for $6.50 per share. -The balance in the Investment in DEF account immediately following the sale of the shares was:

On January 1, 2014, XYC purchased 100 shares (1 percent) of AB common shares at $120 per share. XYC uses the cost method to account for the AB shares. Subsequent to purchase, the following transactions and events happened: June 1, 2001, received a 20 percent stock dividend on the AB shares; March 31, 2015, XY sold half of the AB shares at $108 per share. Calculate XYC's recognize a gain (loss) on the sale of the AB shares.

On January 1^st, ABC purchased 80% of the voting shares of DEF Inc. for $300,000. On that date, DEF's fair values approximated its book values with the exception of a Patent which was identified and estimated to have a value of $50,000, and DEF's inventories, which had an estimated fair value $20,000 higher than book value. ABC adheres to IFRS. The balance sheets of both companies immediately following the acquisition were as follows: ASSETS ABC DEF Cash \ 300,000 \ 120,000 Accounts Receivable \ 120,000 \ 40,000 Inventories \ 100,000 \ 20,000 Plant \& Equipment (net) \ 160,000 \ 40,000 Investment in DEF Inc \ 300,000 Patent \ 220,000 TOTAL ASSETS \ 1,200,000 \ 220,000 LIABILITIES \& EQUITY Current Liabilities \ 200,000 \ 80,000 Bonds Payable \ 800,000 \ 70,000 Common Shares \ 100,000 \ 20,000 Retained Earnings \ 100,000 \ 50,000 LIABILITIES \& EQUITY \ 1,200,000 \ 220,000 Required: Prepare ABC's consolidated balance sheet immediately following the acquisition. Ignore any income tax effects.

MNO Company purchased 10 $1,000, 9 percent bonds on February 28, 2012, at 105 plus $300 total accrued interest. MNO intends to sell the bonds to finance office remodelling in 2013. Interest is paid each April 30 and October 31. MNO paid $120 in broker's fees at the date of purchase. MNO's reporting year ends December 31. Calculate the amount MNO should report on its 2012 balance sheet for this investment.