Solution Manual chapter 9 PDF

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Solution Manual chapter 9...

Description

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

CHAPTER 9 INVESTMENTS ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Topics 1.

Understanding investments

1, 2

2.

Debt/equity securities: (a) cost/amortized cost model - equity securities

14

-

Exercises

Problems

1, 24

1, 8, 9, 11, 12, 15, 16

3

16, 18

5, 11

4, 5, 6, 7

2, 3, 4, 6

3, 6, 10, 16

(b) fair value through net income (FV-NI) model - equity securities

8

7, 9, 10, 11, 16, 1, 2, 10, 11, 13, 18, 20 14, 16

-

9, 10

5, 6, 8, 18

2, 3, 6, 10, 16

(c) fair value through other comprehensive income (FV-OCI) model

11, 12, 13

10, 11, 12, 13, 14, 15, 16, 19, 22

4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16

3.

Impairments

15, 16, 17, 18, 19

17, 18, 19, 21, 23, 25

4.

Investments in associates (a) equity method

20, 21, 23

20, 21, 22, 23, 24, 25, 26

11, 13, 14, 16

22

20

11, 4

debt securities

debt securities

(b) other 5.

Investments in subsidiaries

Solutions Manual

23

9-1

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

ASSIGNMENT CLASSIFICATION TABLE (CONTINUED) Brief Exercises

Topics 6.

Analysis, disclosures, reporting and statement presentation

7.

IFRS and ASPE comparison

Solutions Manual

14, 24

9-2

Exercises 14, 24, 26

Problems 1, 4, 5, 9, 11, 12, 13, 14, 15, 16

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE Item E9-1 E9-2 E9-3 E9-4 E9-5 E9-6 E9-7 E9-8 E9-9 E9-10 E9-11 E9-12 E9-13 E9-14 E9-15 E9-16 E9-17 E9-18 E9-19 E9-20 E9-21 E9-22 E9-23

Solutions Manual

Level of Time Difficulty (minutes)

Description Investment classifications. Entries for cost/amortized cost investments. Entries for cost/amortized cost investments. Entries for cost/amortized cost investments. Entries for fair value through net income investments in bonds; separate interest. Investments in debt instruments accounted for using fair value through net income; also at amortized cost. Fair value through net income investment model entries. Investments in debt instruments accounted for using fair value through net income; interest not reported separately Entries for fair value through net income investments in shares; transaction costs. Entries for fair value through net income and fair value through other comprehensive income equity investments. Equity securities entries – FV-NI and FV-OCI. Debt Investment entries – FV-OCI – bond amortization Debt Investment entries – FV-OCI – fair value adjustments FV-OCI investment entries, financial statement presentation. FV-OCI equity entries; determine AOCI balance Cost, FV-NI, FV-OCI entries, effects and comparison Impairment of debt investment and recovery of value under ASPE, IFRS 9 (amortized cost) Impairment of debt investment and recovery of value under FV-NI; also ASPE, IFRS 9, if amortized cost Impairment entries for equity investments using IAS 9 2 different situations and under ASPE for one situation ASPE with and without significant influence Equity method Fair value and equity method compared. Long-term equity investments and impairment

9-3

Difficult Simple Simple Simple Simple

30-40 10-15 25-30 20-25 20-25

Moderate

35-40

Simple

10-15

Moderate

25-30

Simple

15-20

Simple

10-15

Moderate Simple

25-35 15-20

Simple

15-20

Simple

25-30

Simple

15-20

Moderate

30-35

Moderate

20-25

Moderate

30-35

Difficult

35-40

Simple Simple Simple Moderate

20-25 10-15 15-20 25-35

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item E9-24 E9-25 E9-26

P9-1 P9-2 P9-3 P9-4 P9-5 P9-6 P9-7 P9-8 P9-9 P9-10 P9-11

P9-12 P9-13 P9-14 P9-15 P9-16

Solutions Manual

Level of Difficulty

Time (minutes)

Determine proper income reporting. Equity method with cost in excess of carrying amount; impairment Equity method with cost in excess of carrying amount.

Simple Moderate

10-15 25-30

Moderate

25-30

FV-NI entries and reporting for equity investment. FV-NI entries for equity and debt investments FV-NI and amortized cost bond investment entries. Purchase and sale of FV-OCI equity investments, and presentation. FV-OCI entries and reporting, comparison to cost method. Amortized cost and FV-NI entries for bond investment FV-OCI debt securities – bond amortization and fair value adjustments FV-OCI debt securities – fair value adjustments Entries for amortized cost and FV-OCI Entries for amortized cost, FV-NI, and FV-OCI investments; calculate interest between interest dates. Fair value adjustments and presentation of FV-NI, FV-OCI, and equity method investments; choice under ASPE if significant influence. Financial statement presentation of FV-OCI investments. Entries for FV-NI and FV-OCI investments, as well as equity method investments. FV-OCI and equity method entries under IFRS, choices and entries under ASPE Deduce financial statements from limited information using FV-OCI; compare to FV-NI FV-NI, amortized cost, FV-OCI and equity method entries and preparation of partial financial statements

Moderate

20-25

Moderate Moderate

40-45 40-45

Moderate

35-40

Moderate

50-60

Moderate

30-35

Simple

30-40

Simple

15-20

Simple Moderate

25-35 35-40

Moderate

35-40

Moderate

25-35

Complex

35-40

Moderate

35-45

Complex

25-30

Moderate

50-60

Description

9-4

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 9-1 (a) The investment in Company A is an investment in a debt security, and the investment in Company B is in an equity security. (b) Bali Corp. is a creditor of Company A because A has a contractual obligation or liability to repay the $10,000 borrowed, as well as interest on the borrowed funds. Therefore, Bali has invested in another company’s debt. Company B, on the other hand, does not have an obligation (and therefore does not have a liability) to repay the funds Bali invested, nor to provide a return to Bali on those funds. Instead, Bali has taken on the risk of a residual shareholder by profiting if Company B does well and losing if B does not do well. This is an equity interest in Company B.

BRIEF EXERCISE 9-2 (a) It would not be unusual for all of these companies to have some level of investments on their statements of financial position, but those most likely to report a significant proportion of their assets as investments are the university, the insurance company and the pension plan. In each case, knowing the business model of the type of organization is useful in making this determination. An old established university is very likely to have built up considerable endowment funds over a period of many years. These donations and bequests are invested, and the university uses the income to pay for scholarships, for example.

Solutions Manual

9-5

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 9-2 (CONTINUED) (a) (continued) The insurance company collects insurance premiums in advance from its policyholders, and it invests the monies received to increase the funds it has available to pay out when claims have to be paid as a result of insured losses. The pension plan usually receives cash from employers and employees as the employees provide services to an organization—many years ahead of when the employees retire and pensions have to be paid out. To increase the funds available for payout in the future, pension plans invest the contributions as they are received. (b) All three of these organizations typically invest in a mix of debt and equity securities with the proportion of each depending on the level of risk each is required or willing to take on. Some pension funds, for example, are so large that they have been expanding into mortgages and other assetbacked securities, real estate investments, shopping centres, toll roads, etc. looking to diversify their holdings and to increase the rate of return they earn.

Solutions Manual

9-6

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 9-3 (a) Other Investments .......................................... Cash........................................................ [$13,200 + ($13,200 X 0.01)] (b) Cash ................................................................ Dividend Revenue.................................. (400 shares X $1.50)

13,332 13,332

600 600

(c) Cash ................................................................ Gain on Sale of Investments ................. Other Investments ................................ $15,100 – ($15,100 X 0.01) = $14,949

Solutions Manual

9-7

14,949 1,617 13,332

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 9-4 (a)

Bond Discount Amortization Table 8% Bonds Sold to Yield a 10% Return Date

Cash Received (8%)

Interest Income (10%)

Bond Discount Amortization

Amortized Cost of Bond

Day 1

$ 95.03

End Year 1

$8.00

$9.50*

$1.50

96.53

End Year 2

8.00

9.65

1.65

98.18

End Year 3

8.00

9.82

1.82

100.00

$24.00

$28.97

$4.97

*$95.03 X .10 (b) Bond Investment at Amortized Cost………... Cash………………………………………….

95.03 95.03

End of Year 1 Cash……………………………………………….. Bond Investment at Amortized Cost………… Interest Income…………………………….

8.00 1.50

End of Year 2 Cash……………………………………………….. Bond Investment at Amortized Cost………… Interest Income…………………………….

8.00 1.65

9.00

9.65

End of Year 3 Cash……………………………………………….. 8.00 Bond Investment at Amortized Cost………… 1.82 Interest Income……………………………. 9.82 Cash………………………………………………. 100.00 Bond Investment at Amortized Cost…… 100.00

Solutions Manual

9-8

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 9-4 (CONTINUED) (c) Discount on bond when purchased: $100.00 – $95.03 = $4.97 Straight line discount amortization each year: $4.97 ÷ 3 years = $1.66 each year (d)

Bond Investment at Amortized Cost……… Cash………………………………………….

95.03 95.03

End of Year 1 Cash………………………………………………... Bond Investment at Amortized Cost………… Interest Income…………………………….

8.00 1.66

End of Year 2 Cash………………………………………………... Bond Investment at Amortized Cost………… Interest Income…………………………….

8.00 1.66

9.66

9.66

End of Year 3 Cash………………………………………………... 8.00 Bond Investment at Amortized Cost………… 1.65 Interest Income……………………………. 9.65 Cash………………………………………………. 100.00 Bond Investment at Amortized Cost…… 100.00 (e) Total interest income: Effective interest method $9.50 + $9.65 + $9.82 = $28.97 Straight line method $9.66 + $9.66 + $9.65 = $28.97 That is, they are the same in total.

Solutions Manual

9-9

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 9-5 (a)

Bond Premium Amortization Table 6% Bonds Sold to Yield a 4% Return Date

Cash Received (6%)

Interest Income (4%)

Bond Amortized Premium Cost of Amortization Bond

Day 1

$ 105.55

End Year 1

$6.00

$4.22*

$1.78

103.77

End Year 2

6.00

4.15

1.85

101.92

End Year 3

6.00

4.08

1.92

100.00

$18.00

$12.45

$5.55

*$105.55 X .04

(b) Bond Investment at Amortized Cost………... 105.55 Cash…………………………………………. 105.55 End of Year 1 Cash……………………………………………….. 6.00 Bond Investment at Amortized Cost………… 1.78 Interest Income……………………………. 4.22 End of Year 2 Cash……………………………………………….. 6.00 Bond Investment at Amortized Cost………… 1.85 Interest Income……………………………. 4.15 End of Year 3 Cash……………………………………………….. 6.00 Bond Investment at Amortized Cost………… 1.92 Interest Income……………………………. 4.08 Cash………………………………………………. 100.00 Bond Investment at Amortized Cost…… 100.00 (c) Premium on bond when purchased: $105.55 – $100.00 = $5.55 Straight line premium amortization each year: $5.55 ÷ 3 years = $1.85 each year Solutions Manual

9-10

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 9-5 (CONTINUED) (d) Bond Investment at Amortized Cost………... 105.55 Cash…………………………………………. 105.55 End of Year 1 Cash………………………………………………... Bond Investment at Amortized Cost……

6.00 1.85

Interest Income……………………………. End of Year 2 Cash………………………………………………... Bond Investment at Amortized Cost…… Interest Income…………………………….

4.15

6.00 1.85 4.15

End of Year 3 Cash………………………………………………... 6.00 Bond Investment at Amortized Cost…… 1.85 Interest Income……………………………. 4.15 Cash………………………………………………. 100.00 Bond Investment at Amortized Cost…… 100.00 (e) Total interest income: Effective interest method $4.22 + $4.15 + $4.08 = $12.45 Straight line method $4.15 + $4.15 + $4.15 = $12.45 That is, they are the same in total.

Solutions Manual

9-11

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 9-6 (a) Bond Investment at Amortized Cost ............. 55,133 Cash ......................................................... Cash ($60,000 X 6% X 6/12) ............................ Bond Investment at Amortized Cost ............. Interest Income ....................................... ($55,133 X 8% X 6/12 = $2,205)

1,800 405

Cash ($60,000 X 6% X 6/12) ............................ Bond Investment at Amortized Cost ............. Interest Income ....................................... ([$55,133 + $405] X 8% X 6/12 = $2,222)

1,800 422

55,133

2,205

2,222

(b) Discount on bond when purchased: $60,000 - $55,133 = $4,867 Interest periods to maturity: 5 X 2 = 10 Amortization each interest period: $4,867 ÷ 10 = $487 Bond Investment at Amortized Cost ............. 55,133 Cash ......................................................... Cash ($60,000 X 6% X 6/12) ............................ Bond Investment at Amortized Cost ............. Interest Income .......................................

1,800 487

Cash ($60,000 X 6% X 6/12) ............................ Bond Investment at Amortized Cost ............. Interest Income .......................................

1,800 487

Solutions Manual

9-12

55,133

2,287

2,287

Chapter 9

Copyright © 2016 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy

Intermediate Accounting, Eleventh Canadian Edition

BRIEF EXERCISE 9-7 (a)

September 1

Bond Investment at Amortized Cost ........... Cash...................................................... (b)

2,400 316 2,716

March 1

Cash ($80,000 X 9% X 6/12) .......................... Bond Investment at Amortized Cost……….. Interest Receivable……………………... Interest Income .................................... ($74,086 X 11% X 2/12 = $1,358) (d)

74,086

December 31

Interest Receivable ($80,000 X 9% X 4/12) .............................................................. Bond Investment at Amortized Cost……….. Interest Income……………………... ($74,086 X 11% X 4/12 = $2,716) (c)

74,086