Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition CHAPTER 12 Reporting and Analyzing Investments ASSIGNMENT CLASSIFICATION TABLE Study Objectives Brief Questions Exercises Exercises A Problems B Problems BYP Identify reasons to invest, and classify investments 1, 2, 1, 2 Account for nonstrategic investments 4, 5, 6, 7, 8, 18 2, 3, 4, 5, 3, 4, 5, 6, 1, 2, 3, 4, 5, 6, 7, 1, 2, 3, 4, 5, 6, 7, 2, 4, Account for strategic 9, 10, 11, 6, 7, investments 16 6, 7, 5, 6, 7, 5, 6, 7, 2, 3, 4, 5, Indicate how 3, 4, 12, 8, 9, 10, investments are 13, 14, 15, 11, 12 reported in the 16 financial statements 2, 5, 8, 1, 2, 3, 4, 5, 6, 7, 1, 2, 3, 4, 5, 6, 7, 1, 2, 3, 4, 5, 10 9, 10 9, 10 *5 Compare the 17, 18, 19 13 accounting for a bond investment and a bond payable (Appendix 12A) 1, 2, Solutions Manual 12-1 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ASSIGNMENT CHARACTERISTICS TABLE Problem Number Description Difficulty Level Time Allotted (min.) 1A Record trading investments; show statement presentation Moderate 30-40 2A Record trading investments; show statement presentation Moderate 30-40 3A Record trading investments; show statement presentation Moderate 30-40 4A Determine valuation of investments; indicate statement presentation Moderate 30-40 5A Identify impact of investment transactions Moderate 20-30 6A Record strategic investment Moderate 30-40 7A Record investments; indicate statement presentation Moderate 30-40 8A Analyze strategic investment Moderate 30-40 *9A Record bond investment; show statement presentation Complex 30-40 *10A Record bonds for investor and investee Complex 30-40 1B Record trading investments; show statement presentation Moderate 30-40 2B Record trading investments; show statement presentation Moderate 30-40 3B Record trading investments; show statement presentation Moderate 30-40 4B Determine valuation of investments; indicate statement presentation Complex 30-40 5B Identify impact of investment transactions Moderate 20-30 6B Record strategic equity investment Moderate 30-40 7B Record investment; indicate statement presentation Moderate 30-40 8B Analyze strategic investment Moderate 30-40 Solutions Manual 12-2 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ASSIGNMENT CHARACTERISTICS TABLE (Continued) Problem Number Description *9B Record bond investment; show statement presentation *10B Record bonds for investor and investee Difficulty Level Complex Time Allotted (min.) 30-40 Complex 30-40 Solutions Manual 12-3 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition ANSWERS TO QUESTIONS Companies invest primarily for two reasons: to earn investment income such as interest, dividends, and the appreciation in the value of an investment or to influence or control other companies through the acquisition of large amounts of common shares A non-strategic investment is made for the purposes of generating investment income A strategic investment is purchased to influence or control the operations of another company in some way (a) This equity investment should be classified as a non-strategic investment as the company intends to sell its Suncor Energy shares if the need for cash arises (b) The investment would most likely be classified as a current asset (although judgement must be exercised here) as it was not purchased with the intent of holding it for a long period of time (a) Common shares in a publicly traded company that will be sold within a year are valued at fair value (b) Bond investments that will be held until maturity are valued at amortized cost (c) Shares in a private company that not have a determinable fair value are valued at cost Realized gains/losses are the differences between fair values and the carrying amounts when the investments are actually sold Unrealized gains/losses are the differences between the fair values and carrying amounts of investments still held or owned by the investor (a) The $10 million difference between the carrying amount of $245 million and the fair value of $255 million should be recorded as an unrealized gain and reported in the other revenues and expenses section in the income statement (b) Yes, the answer would be different if the fair value could not be determined No unrealized gain would be reported and the investment would be valued at cost Solutions Manual 12-4 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) (a) The bonds would be shown at their fair value of $1,050,000 (b) The interest revenue earned on the bonds would be reported as other revenue under other revenue and expenses section of the statement of income The carrying amount of the investment ($130,000) would be compared to the proceeds ($125,000) The $5,000 difference is a realized loss The realized loss would be reported on the 2015 income statement in other revenues and expenses The journal entries to record these transactions (not required) follow: Dec 31, 2014 2015 Trading Investments Unrealized Gain on Trading Investments Cash Realized Loss on Trading Investments Trading Investments 15,000 15,000 125,000 5,000 130,000 Significant influence over an investee may result from representation on the board of directors, participation in policy-making processes, material inter-company transactions, interchange of managerial personnel, or technological dependency An investment (direct or indirect) of 20% or more of the voting shares of an investee constitutes significant influence, unless there exists evidence to the contrary However, companies are required to use judgement rather than to blindly follow the 20% guideline For example, 25% ownership in a company that is 75% controlled by another company would not necessarily indicate significant influence 10 Under the cost model, the carrying amount of the company’s investment is recorded at cost The investment account is not affected by the earnings of the entity into which the investment is made The investing company records any dividends received as investment revenue, leaving the carrying amount (usually cost) of the investment intact Under the equity method, the investment is also recorded at cost on the day the investment is made However, the investment account is increased or decreased by the investor’s share of the investee company’s profit or loss for the period respectively The investing company would reduce the carrying amount of its investment by any dividends received from the investee, since the value of the latter’s net assets decreases as it declares dividends Solutions Manual 12-5 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 11 (a) Under the cost model, the investor has little to no influence over the investee, due to its relatively small ownership interest Therefore, the only entry the investor would make relative to this investment is to record any cash dividends it receives from the investee as investment revenue (b) The equity method is used when the investor exercises significant influence over the investee Consequently, the investor has played a role in the determination of any profit or loss experienced by the investee As the investee earns profit, its value will increase Thus the investor’s carrying amount of its investment in the investee should reflect this reality Consequently, the investor records investment revenue (loss) when the investee reports profit (or loss) and does not wait for the distribution of profit by way of dividends The investment is reduced by the amount of dividends received rather than the dividends being recorded as revenue as is the case with the cost model 12 (a) Trading investments are classified as a current assets under the assumption that management intends to trade them actively, thereby implying that they will be sold fairly soon (b) Investment in associates is classified as long-term investments under the assumption that if an investor has gone to the trouble of obtaining a large enough block of shares to significantly influence the investee, they would want to hold onto the investment for more than one year (c) Debt investments held to maturity are classified as long-term investments except in the year of maturity when the securities would be classified as a current asset 13 Account Financial Statement Classification (a) Unrealized Gain on Trading Investments Income Statement Other revenues and expenses (b) Realized Loss on Trading Investments Income Statement Other revenues and expenses (c) Revenue from Investment in Associates Income Statement Other revenues and expenses (d) Investment in Associate Statement of Financial Position Non-current assets Solutions Manual 12-6 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Answers to Questions (Continued) 14 Comprehensive income includes all changes to shareholders’ equity during a period except changes resulting from investments by shareholders and dividends declared Profit is one component of comprehensive income The other component is other comprehensive income, which includes the current period’s unrealized gains/losses on securities accounted for using the fair value through other comprehensive income model and certain other unrealized gains/losses such as revaluation gains under the revaluation model for property, plant, and equipment that was covered in chapter Profit and other comprehensive income can be reported separately in two statements although the preferred approach is to report both in a single statement known as the statement of comprehensive income Accumulated other comprehensive income is the cumulative total of each period’s other comprehensive income/loss Just as profit is closed out to retained earnings at the end of the year, other comprehensive income is closed out to accumulated other comprehensive income at the end of the year The changes to accumulated other comprehensive income are reported in the statement of changes in equity, and the ending balance of accumulated other comprehensive income is reported in the shareholders’ equity section of the statement of financial position 15 Profit reported on the income statement is a component of comprehensive income Profit along with other comprehensive income is reported in the statement of comprehensive income (if the company chooses to report both under a single statement) Profit (loss) increases (decreases) retained earnings Other comprehensive income (loss) increases (decreases) accumulated other comprehensive income, which like retained earnings is an equity account Changes in both retained earnings and accumulated other comprehensive income are reported in the statement of changes in equity Total shareholders’ equity is reported in the statement of financial position (assets = liabilities + shareholders’ equity) 16 (a) Since George Weston Ltd owns 63% of the common shares of Loblaw Compaines Ltd., it must use the equity method to account for its investment Furthermore, George Weston must consolidate its results with those of Loblaw by preparing consolidated financial statements (b) George Weston is the parent since it owns 63% of the voting shares of Loblaw Therefore, Loblaw is a subsidiary of George Weston (c) Consolidated financial statements should be prepared When consolidated financial statements are prepared, George Weston will eliminate its investment account from its own records and replace this with the specific assets and liabilities of Loblaw The consolidated financial statements would include all of Solutions Manual 12-7 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition George Weston’s assets and liabilities at their carrying amount in addition to the assets and liabilities of Loblaw Answers to Questions (Continued) *17 The accounting treatment for an investment in bonds is essentially the inverse of the recording required for a bond liability In both cases, the investment is recorded at its issue price, with any premium or discount netted with the bond account The premium or discount is amortized using the effective interest method, unless the bond is held for trading Debt investments in bonds that are held for trading are revalued to fair value at year-end, whereas bond liabilities are not because it is extremely rare for them to have been issued for the purposes of trading (because they are liabilities not investments) *18 Premiums and discounts must be amortized when using the amortized cost model because the amortization of the discount or premium provides the proper matching of interest revenue to the periods the investment is held and reflects the effective interest rate in the financial statements When using the fair value model for debt securities, the investment is held for a short time and any misstatement of interest caused from not amortizing the discount/premium is not considered material *19 When the bonds are sold by the investor on the open market, the investor must record the sale The investee is not affected by the sale as an independent third party purchases the bonds on the market, and as such, that transaction is occurring between two investors and has nothing to with the company that originally issued the debt The liability has not been settled, but rather, the amount of the bonds owing is simply payable to a different investor Solutions Manual 12-8 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 (a) Debt or Equity Investment? 120-day treasury bill Debt (b) Non-Strategic or Strategic Investment? Non-Strategic A few common shares of a small oil company purchased with a temporary surplus of cash 30% of the common shares of a company purchased in order to obtain a position on the board of directors Bonds purchased with a temporary cash surplus 100% of the common shares of a company purchased to amalgamate its operations with those of the investor Five-year bonds intended to be held for the entire term of the bonds Equity Non-Strategic Equity Strategic Influence the operations of the other company Debt Non-Strategic Interest revenue Equity Strategic Control the operations of the other company Debt Non-Strategic Interest revenue over the long term (c) Reason for Making the Investment? Interest revenue for 120 days Share price appreciation (capital gain) and dividend revenue Solutions Manual 12-9 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BRIEF EXERCISE 12-2 (a) Jan (b) July (c) Dec Dec 1 31 31 Trading Investments Cash 200,000 Cash Interest Revenue ($200,000 × 10% × 6/12) 10,000 Interest Receivable Interest Revenue ($200,000 × 10% × 6/12) 10,000 Unrealized Loss on Trading Investments Trading Investments ($200,000 – [$200,000 × 97%]) 6,000 200,000 10,000 10,000 6,000 BRIEF EXERCISE 12-3 2016 Jan Cash 194,000 Trading Investments 194,000 The investment is already carried at fair value so no gain or loss will result on this sale BRIEF EXERCISE 12-4 (a) Aug (b) Dec 31 Trading Investments Cash 45,000 Trading Investments Unrealized Gain on Trading Investments 4,000 45,000 4,000 BRIEF EXERCISE 12-5 Feb Cash Realized Loss on Trading Investments ……… Trading Investments 47,000 2,000 49,000 Solutions Manual 12-10 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition *PROBLEM 12-9B (a) Jan (b) Long-Term Investments Cash 770,921 770,921 Bond Amortization Schedule Semi-Annual Interest Period Issue Date 10 11 12 13 14 15 16 17 18 19 20 Interest Received 3% $24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 24,000 Interest Revenue 3.25% $25,055 25,089 25,125 25,161 25,199 25,238 25,278 25,320 25,363 25,407 25,453 25,500 25,549 25,599 25,651 25,705 25,760 25,817 25,876 25,934 Discount Amortization $1,055 1,089 1,125 1,161 1,199 1,238 1,278 1,320 1,363 1,407 1,453 1,500 1,549 1,599 1,651 1,705 1,760 1,817 1,876 1,934 Amortized Cost $770,921 771,976 773,065 774,190 775,351 776,550 777,788 779,066 780,386 781,749 783,156 784,609 786,109 787,658 789,257 790,908 792,613 794,373 796,190 798,066 800,000 * Note: Rounding adjustments have been made as required in the above schedule Solutions Manual 12-57 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition *PROBLEM 12-9B (Continued) (c) July (d) Oct 31 (e) 2025 Jan Cash Long-Term Investments Interest Revenue 24,000 1,055 Interest Receivable ($24,000 × 4/6) Long-Term Investments ($1,089 × 4/6) Interest Revenue 16,000 726 Cash Long-Term Investments 800,000 25,055 16,726 800,000 (f) MORRISETTE INC Statement of Financial Position (Partial) October 31, 2015 Current assets Interest receivable $ 16,000 Long-term investments 772,702 ($770,921 + $1,055 + $726) Solutions Manual 12-58 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition *PROBLEM 12-10B (a) Densmore Consulting — Trading Jan June July (b) 30 Trading Investments Cash ($200,000 × 1.02) 204,000 Cash ($200,000 × 8% × 6/12) Interest Revenue 8,000 Cash ($200,000 × 1.03) Realized Gain on Trading Investments Trading Investments 206,000 2,000 204,000 8,000 204,000 Densmore Consulting — Hold to Maturity Jan June July 30 Long-Term Investments Cash 204,000 Cash ($200,000 × 8% × 6/12) Long-Term Investments Interest Revenue ($204,000 × 7.7% × 6/12) 8,000 Cash ($200,000 × 1.03) Long-Term Investments ($204,000 – $146) Realized Gain on Long-Term Investments 206,000 204,000 146 7,854 203,854 2,146 Solutions Manual 12-59 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition *PROBLEM 12-10B (Continued) (c) CASB Jan June Dec (d) 30 31 Cash ($1,000,000 × 1.02) Bonds Payable 1,020,000 1,020,000 Interest Expense ($1,020,000 × 7.7% × 6/12) Bonds Payable Cash ($1,000,000 × 8% × 6/12) 39,270 730 Interest Expense ([$1,020,000 – $730] × 7.7% × 6/12) Bonds Payable Cash ($1,000,000 × 8% × 6/12) 39,242 758 40,000 40,000 When the bonds are purchased with the intention of holding them to maturity, the recording of the bonds for the investor and investee are mirror images The bonds have the same proportionate carrying amount This would not be the case if the bonds were purchased by Densmore on the open market The purchase price would reflect a different effective rate than the rate that existed at issuance of the bond and would be different than the selling price received by CASB when the bonds were issued There are also differences in accounting for the investor and investee when the bonds are purchased for trading purposes Any premium or discount is not amortized by the investor even though the company issuing the bonds would continue to amortize any discount or premium If the bonds are held at year-end, their carrying amount would be adjusted to fair value on the investor’s books while the issuer would carrying the liability at amortized cost When Densmore sold its bonds on the open market, the issuer, CASB, was not affected by this transaction because it took place between Densmore and another company Solutions Manual 12-60 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 12-1 FINANCIAL REPORTING (a) Shoppers does not have trading securities but does have investment property classified as non-current assets (b) Shoppers does not report any income from investments on its income statement or on its statement of comprehensive income (c) The companies mentioned in note 29 are subsidiaries of Shoppers Drug Mart The balances in the investment accounts for these companies have been eliminated when the financial statements of these subsidiaries were consolidated along with their parent company This is why the financial statement titles include the word “consolidated” (d) The investing activities in the statement of cash flows would report purchases and sales of investments Shoppers used cash in 2012 to purchase the assets of Paragon Pharmacies Solutions Manual 12-61 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 12-2 COMPARATIVE ANALYSIS (a) Shoppers has investments in subsidiaries, as does Jean Coutu These investments are eliminated upon consolidating the financial statements Shoppers does not have trading securities but Jean Coutu does and calls them temporary investments As well Jean Coutu has a large investment in Rite Aid, and a small amount of investment in associates and a joint venture Because of the large investment in Rite Aid, Jean Coutu’s statement of financial position indicates a larger amount of investments than Shoppers However, we have to remember that Shoppers has a number of subsidiaries that are consolidated and when this happens, the investment account relating to those subsidiaries is eliminated and replaced with specific assets and liabilities of those subsidiaries The most common type of investment appearing on the statement of financial position is an investment in associates, over which the investor has significant influence (b) Any income earned from investments in subsidiaries is embedded within the specific revenue and expense accounts of the consolidated financial statements and is not shown on a separate line Jean Coutu, on the other hand, does not consolidate its investment in Rite Aid and therefore shows separate amounts for this investment, which included a substantial unrealized gain that doubled its income Jean Coutu also had realized gains arising from a partial sale of its investment in Rite Aid (c) As with all of its subsidiaries, Loblaw Companies Ltd will consolidate the financial statement of Shoppers Drug Mart, once the shares are acquired Solutions Manual 12-62 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 12-3 COMPARING IFRS AND ASPE (a) ARP’s investment in CPS is strategic, but ARP is not exercising significant influence even though it owns 20% of the outstanding voting shares ARP does not have representation on CPS’s board of directors, and Adam and Robert have not been involved in any decisions related to CPS’s operations Long-term investments that not involve significant influence must be accounted for using the fair value method if the value of the shares trade in an active market Under ASPE, if the investment was subject to significant influence, ARP would have the choice between two accounting methods, the equity method and the fair value model if the shares trade in an active market If the shares did not trade in an active market, ASPE allows a choice of the equity method or the cost model The cost model is therefore not an acceptable method under ASPE for this investment because the shares trade actively Recording the investment using the cost model means that the carrying amount of the investment remains at its original cost of $100,000 Revenues are derived from dividends received from CPS Since no dividends were received during the year, no revenue has been reported on ARP’s income statement The cost model does not record unrealized gains or losses from fair value adjustments at year end Had ARP applied the fair value method, the income statement would report an unrealized loss of $10,000 ([fair value of $4.50/ share × 20,000 shares] – cost of $100,000) If ARP had applied the equity method, the income statement would report a loss from its associate of $6,000 (20% × loss of $30,000) This loss would reduce profit Robert would prefer the cost model to keep profit higher by $10,000 for 2015 because the financial statements will be presented to the bank to obtain financing for expansion The bank would likely find out about the unrecorded unrealized loss by inquiring about the status of the investment (b) If ARP reported its financial results under IFRS, it would apply the fair value method and would be prohibited from using the cost method because the shares trade in an active market Solutions Manual 12-63 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine BYP 12-4 (a) Financial Accounting, Sixth Canadian Edition CRITICAL THINKING The three investments held by Bering Limited fall into three categories: 1.Debt investment with the intention to be held to maturity — for the Government of Alberta bonds 2.Non-strategic trading investments purchased with the expectation of active trading of the security — for the Atlas Inc common shares 3.Strategic investment in an associate where Bering exercises significant influence over the investee — for the CH Resources Inc common shares Because each investment has a different purpose and management has a different intention in holding the investment, IFRS provides some alternatives in how to account for each of the three investments Debt securities such as the Government of Alberta bond will normally be accounted for using amortized cost model The option exists under IFRS to account for the bonds using fair value through profit or loss Since the board of directors wishes to choose the model that will maximize Bering’s financial position and profitability, the amortized cost model is chosen because the bonds fair value at December 31, 2015 falls below the amortized cost Using the amortized cost model will avoid recording an unrealized loss on long-term investments in the amount of $10,000 Non-strategic trading investments must be reported at their fair value A choice is available under IFRS to report any unrealized gains or losses in the income statement or in other comprehensive income in the statement of comprehensive income The fair value though profit and loss is recommended because the board of directors wishes to choose the model that will maximize Bering’s financial position and profitability An unrealized gain on the trading investments in the amount of $5,000 is therefore recognized as other revenue on the income statement The investment in the CH Resources Ltd is a strategic investment in an associate and Bering under IFRS must account for the investment using the equity method because it holds 40% of common shares and exercises significant influence over CH Resources Bering will recognize revenue from investment in associates and an in increase in its investment in this associate in the amount of its share of the profits reported by CH Resources Inc for the fiscal year of $4,000 (40% × $10,000) The investment in associates account will be reduced by the amount dividends received from CH Resources during the year in the amount of $800 (40% × $2,000) and cash will be increased Consequently, the balance of the investment in associate account reported on the statement of financial position will be in the amount of $103,200 ($100,000 + $4,000 – $800) Solutions Manual 12-64 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP12-4 (Continued) (a) (Continued) If it can be demonstrated that Bering does not have significant influence over CH Resources Ltd then the investment should be reported at fair value An unrealized gain of $11,000 would be recorded as an unrealized gain on long-term investments on the income statement or an unrealized gain reported as other comprehensive income on the statement of comprehensive income if Bering elected to use this model The dividend received in the amount of $800 would be reported as other revenue on the income statement Since the board of directors wishes to choose the model that will maximize Bering’s financial position and profitability, they may argue that Bering does not have a significant influence position over CH Resources and would not elect to show unrealized gains and losses as other comprehensive income The facts of the relationship between the investor and investee would need to be supported by evidence in order to use the fair value model for this investment The recommendation is to account for CH Resources Inc using the equity method Based on the above, the financial statements will show the following: BERING LIMITED Statement of Financial Position (Partial) December 31, 2015 Current assets Trading investments $105,000 Non-current assets Long-term investments Investment in associates 100,000 103,200 BERING LIMITED Income Statement (Partial) Year Ended December 31, 2015 Other revenue Revenue from investment in associates Interest revenue Unrealized gain on trading investments $4,000 3,000 5,000 12,000 The choices among the different models will not affect the statement of cash flows Solutions Manual 12-65 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP12-4 (Continued) (b) Under ASPE, the accounting for the three investments would be done using the following models and methods: 1.Debt investment with the intention to be held to maturity — for the Government of Alberta bonds will be accounted for using the amortized cost model However, an option does exist as under IFRS to value this investment at fair value, but it must be fair value through profit or loss This option would most likely not be taken as it would result in the recording of an unrealized loss 2.Non-strategic trading investments purchased with the expectation of active trading of the security — for the Atlas Inc common shares will be reported using the fair value through profit and loss because the shares market value is available (as under IFRS), but Bering cannot report their investments using the fair value through other comprehensive income model 3.Strategic investment in an associate where Bering exercises significant influence over the investee — for the CH Resources Inc common shares is accounted for using the equity method (as under IFRS) Bering also has the choice to account for this investment using the cost model if the shares had not been traded actively or fair value if the shares are traded actively and fair value can be obtained Based on the information given, the financial statements would show the same amounts and classifications as was recommended in part (a) under IFRS Solutions Manual 12-66 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine BYP 12-5 Financial Accounting, Sixth Canadian Edition ETHICS CASE (a) Lemke’s position would show unrealized gains, dividend revenue and interest revenue on the income statement, but would not report unrealized losses Her position would mask unrealized losses by overstating the carrying amount of certain investments that had declined in value Her approach does not reflect the nature of the investments as strategic or non-strategic Her approach would also result in financial results that are not comparable because as investments fluctuate from increasing in value to decreasing in value, the model used would need to change She understands the implications of using different models for financial statement presentation purposes, but she is not applying the models in the correct manner (b) Greenwood’s position does not show any unrealized gains or losses, but reports revenue from associates where significant influence does not exist Her position would also mask unrealized losses by overstating the carrying amount of certain investments that had declined in value Her approach also does not reflect the nature of the investments as strategic, or non-strategic Her approach would also result in financial results that are not comparable, because as equity investments fluctuate from increasing in value to decreasing in value, the model used would need to change She understands the implications of using different models for financial statement presentation purposes, but she is not applying the models in the correct manner (c) By selling its trading investments that had risen in value just prior to year end, Kreiter Financial Services would report realized gains on its income statement The trading investments that decline in value would be reported at fair value with the unrealized losses also reported on the income statement When the declining investments are sold immediately after year end, a realized gain or loss is reported based on the difference between the selling price and the year end carrying amount of the investment, which in this case would probably be insignificant as the sale occurs so soon after year end Had Kreiter sold these investments just prior to year end, a realized loss equal to the reported unrealized loss would be reported on the company’s income statement By properly classifying its trading portfolio, decisions as to the timing of selling these investments will not allow management to manipulate profit because investments are reported at fair value Note to instructors: All of the material supplementing this group activity, including a suggested solution, can be found in the Collaborative Learning section of the Instructor Resource site accompanying this textbook as well as in the Prepare and Present section of WileyPLUS Solutions Manual 12-67 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 12-6 “ALL ABOUT YOU” ACTIVITY The following solution provides information from the ING website in September 2013 Rates and other information are obviously subject to change (a) Rates at Ing Direct: Tax-Free Investment Savings account: 1.4% year GIC: 1.75% (b) Using the Ing Direct Investment Savings Calculator $5,000 at 1.4% for years = $5,141.89 Using the Ing Direct GIC Calculator $5,000 at 1.75% for years = $5,177.97 (c) Using http://www.ingdirect.ca/en/tools/calcs/TFSA_ISA_Calculator.html A contribution of $416.67 monthly for 40 years at the TFSA rate of 1.4 % will yield $268,420.38 and with GIC rates of 1.75% will yield $290,004.11 In order to reach a goal of $1,000,000 with contributions of $416.67 per month for 40 years, the annual yield rate would need to be 6.68% Using a financial calculator: PV $0 I/Y ? N PMT FV Yields 5566% per month or 6.68% annually 480 $ (416.67) $1,000,000.00 Type Excel formula =RATE(nper,pmt,pv,fv,type) Solutions Manual 12-68 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP 12-7 SERIAL CASE (a) If Biscuits succeeds in purchasing all of the shares of Koebel’s Family Bakery, Biscuits would record the investment in its accounting records using the equity method However, there would be a requirement to consolidate the Bakery’s accounts into Biscuits financial statements using consolidation techniques that would remove the investment account and replace it with the assets and liabilities of the Koebel’s Family Bakery Koebel’s would be a subsidiary company and Biscuits would be the parent company The purchase of the shares would not necessarily require a change in Koebel’s accounting records, but some parent companies require their subsidiaries to make changes to their accounting policies or systems and processes to improve consistency with those used by the parent and facilitate consolidation of the financial statements Another change that might be required is to make Koebel’s fiscal year end match that of its’ parent (b) If Coffee Beans succeeds in purchasing 50% of the shares of Koebel’s Family Bakery, but control is retained by Natalie and Daniel, Coffee Beans would account for the investment using the equity method This reflects Coffee Beans’ significant influence over the operations of Koebel’s Family Bakery The purchase of the shares would likely not require a change in Koebel’s accounting records since the relationship between Coffee Beans and Koebel’s is one of significant influence and not control (c) Offer from Biscuits: The offer from Biscuits may result in reduced hours of work for Natalie and Daniel This could be a significant advantage because of the work involved in running the business In addition, the sale of the shares will provide them with a substantial amount of cash which, if invested wisely, could yield benefits for many years The transition of Natalie and Daniel from shareholders to employees would also result in some disadvantages, such as loss of control Biscuits will exercise control over Koebel’s operations and will not likely be willing to let Natalie and Daniel participate in the decision making process Their employment contract is also limited to years, leaving uncertainty about their relationship with Biscuits at the end of the employment period The nature of the income received would also change Natalie and Daniel currently can receive dividends as well as a salary as shareholders and management of Koebel’s This income fluctuates based on the financial results of the company As employees, the income that they receive will be more stable, but they will no longer participate in the profits of the business Solutions Manual 12-69 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition BYP12-7 (Continued) (c) (Continued) Offer from Coffee Beans: The offer from Coffee Beans will keep Natalie and Daniel in control of the operations of Koebel’s It will also allow them to participate in their share of the profits of the business since they retain 50% ownership of the company The company could also benefit from integration of services and opportunities through the relationship with Coffee Beans, as well as taking advantage of the expertise of the Coffee Beans management team The offer would not result in reduced hours of work for Natalie and Daniel, as they would be responsible for running the bakery In addition, they would be subject to the significant influence of Coffee Beans rather than dealing with Janet and Brian They would also not receive a large cash payment for the sale of their shares as would Janet and Brian Finally, if the business relationship with Coffee Beans did not work out, it may be difficult to find another investor to purchase the shares held by Natalie and Daniel Solutions Manual 12-70 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition Legal Notice Copyright Copyright © 2014 by John Wiley & Sons Canada, Ltd or related companies All rights reserved The data contained in these files are protected by copyright This manual is furnished under licence and may be used only in accordance with the terms of such licence The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd Solutions Manual 12-71 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized copying, distribution, or transmission of this page is strictly prohibited ... long term (c) Reason for Making the Investment? Interest revenue for 120 days Share price appreciation (capital gain) and dividend revenue Solutions Manual 12- 9 Chapter 12 Copyright © 2014 John... prohibited Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition investments Solutions Manual 12- 12 Chapter 12 Copyright © 2014 John Wiley & Sons Canada, Ltd Unauthorized... 1,600 22,000 28,000 1,200 100 12, 400 5,200 Fair Value $13,200 22,000 $35,200 (400 × $33) (2,000 × $11) *$24,800 – $12, 400 = $12, 400 Solutions Manual 12- 28 Chapter 12 Copyright © 2014 John Wiley