Ch 16 - Investments

Question 1

Debt instruments
Equity instruments
Alternative name for debt and equity instruments

Answer 1

debt - term deposits, treasury bills, bonds
equity - preferred and common shares of another comp

Debt and equity securities

Question 2

Money market instruments

Answer 2

Money-market funds, term deposits, treasury bills
Used when investing excess cash for short periods of time. Low risk, highly liquid.
Money market instruments do not change in fair value, value comes from interest they generate.

Question 3

What type of investment is the only one that allows investor right to vote at meetings? Only one that can result in influence or control?

Answer 3

Equity securities. normally common shares.

Question 4

An Amortized Cost (AC) investment under IFRS has to meet which 2 criteria?

What is Amortized cost used as for ASPE?

Answer 4

Company intends to hold and manage the investment with the objective of collecting contractual cash flows
Investment has contractual terms that give rise to cash flows that are solely principle and interest payments.

An investment in a debt security meets these criteria when management purchases it with the express purpose of holding it and earning interest.

ASPE - AC is used as a “catch all”. Used for any investment in debt securities that is not designated as a fair value investment by management.

Question 5

IFRS
Type of Instrument Purpose
A)Short-term debt Held to earn interest income
B)Long-term debt Held to earn interest income
C)Short or long debt Held for trading purposes

D) Equity Held for trading purposes
E) Equity Other purpose:short term
F) Equity Other purpose: long term

1) What statement sheet would these be put under?
For each letter, what would their classification be and valuation?

Answer 5

1) Balance Sheet

A) Current assets Amortized Cost
B) Non- current assets Amortized Cost
C) Current assets Fair value
D) Current assets Fair value
E) Current assets Fair value
F) Non-current Fair value

Question 6

What is the amortized cost?

Answer 6

Carrying value, carrying amount of a debt investment.

Maturity value - unamortized discount / + unamortized premium = Amortized cost of debt investment

Question 7

Research lim. purchases a $10,000, 150 day treasury bill for $9,756. The treasury bills are trading at a market interest rate of 6% annually. The entry to record the investment is:

Answer 7

Short-term investment at AC - Treasury Bill 9756
Cash 9756

(recorded at purchase price - had a discount of 244.)

Question 8

Investments in treasury bills of less than 90 days are usually classified as ?

Answer 8

Cash equivalents

Question 9

Sulphur Ltd. year end is Dec 31, so interest revenue of $146 is accrued for the months Oct, Nov, Dec (9756 x 6% x 3/12). Journalize
what amount would be recorded on the balance sheet and where would the interest revenue be reported?

Answer 9

Short term investment at AC - Treasury Bill 146
Interest revenue 146

the amortized cost of $9902 (9756+146)
Interest revenue would be reported under other revenues in the income statement

Question 10

Lionheart properties buys a 5 year, 6% $50,000 bond in Dion Inc. for $45,945. Semi annual interest payments of $1500.

Record Lionhearts transaction of the initial purchase

Answer 10

Long-term investments at AC- Bonds, Doan Inc. 45,945

Cash xxx

Question 11

lionheart receives a $1500 payment from Dion. There is a Discount amortization of 338. Record transaction

Answer 11

Cash 1500
Long-term investments at AC- Bonds, Doan Inc 338
Interest revenue 1838

Question 12

Lionheart sells its investments in the Dion Inc bonds on Jan 1, 2020 for $49,500. The amortized cost of the bonds on Jan 1, 2020 is $48,185. Assuming that interest revenue was correctly accrued on Dec 31, 2019, and interest received was correctly recorded on Jan 1, 2020, record the sale:

Answer 12

Cash 49,500
Long-term Investments at AC - Bonds, Doan Inc. 48,185
Gain on sale of bond investments 1,315

Bonds were sold at 4950 - more than the amortized cost.

Question 13

During 2017, Chai corp had the following transactions for debt investments purchased to earn interest
Jan 1 Purchased a 10 year, 5% jarvis Corp bonds with a face value of $30,000 for $27,768. Market interest rate is 6%. Interest is payable semiannually on July 1 and Jan 1
Apr 1 Purchased a $20,000, 120 day treasure bill for $19,600
July 1 Received semi annual interest on investment in the Jarvis bonds (amortized 83)
July 30 received cash for the maturity of the treasury bill.
Record transactions.
Prepare the adjusting entry for the accrual of interest on Dec, 31, Chais year end

Answer 13

Jan 1 Long-term inv. at AC - Bonds,Jarvis 27,768
Cash

Apr 1 Short-term investment at AC - treasury bill 19,600
Cash

July 1 Cash 750
Long-term inv at AC - Bonds, Jarvis 83
Interest revenue 833

Jul 30 Short-term inv at AC- Treasury bill 400
Interest revenue 400

Dec 31 Interest receivable 750
Long-term inv at AC - Bonds, jarvis 86
Interest revenue 836*
27768+83 = 27851 x 6% x 6/12 = 836

Question 14

What are the only two types of investments classified as AC? Amortized cost? Everything else is?

Answer 14

Short and long term debts that are held to earn interest income.

Everything else is Fair Value (amount asset could be sold for in the market)

Question 15

Two different types of fair value methods?

Answer 15

FVTPL - fair value through profit or loss. Anything not classified as AC or designated at FVTOCI, its FVTPL.
FVTOCI - fair value through other comprehensive income. These investments are any equity securities designated by management to this category.

Question 16

How often are investment accounts adjusted to reflect fair value?

Answer 16

The end of each reporting period fair value is determined and investment account is adjusted to reflect change.

Question 17

Where are fair value adjustments for both recorded?

Answer 17

FVTPL - recorded as gains/losses on the Statement of Comprehensive Income. To be included in the determination of profit and loss for a company.
FVTOCI - Statement of comprehensive income - other comprehensive income

Question 18

During 2017, Lang Corp had the following transactions:
Jan 2 - purchased an investment in Utility Corp. $20,000, 5 year, 4% bonds at part for the purpose of resale.
Mar 1 - purchased 5000 common shares of Park ave, for $10 each, which management designated as FVTOCI
July 1 - Received semi-annual interest on the utility corp bonds
July 2 - sold half of the utility corp bonds for $10,500
Sept 1 - purchased 1000 common shares of Electric ltd for $15 per share to be held for resale.
Nov 1 - received a $2 dividend on the electric Ltd shares
Dec 31 - the remaining utility cord bonds fair value was $9750. The Elect. Ltd common shares were trading at $14 per share and the Park ave common shares were trading at $12 per share.

A)Record above
B) prepare the adjusting JE required on Dec 31 year end

Answer 18

Jan 2 Short-term investment at FVTPL - Bonds, Utility
Corp 20,000
Cash 20,000

Mar 1 Long-term inv at FVTOCI - Equiy, park 50,000
Cash 50,000

July 1 Cash 400
Interest revenue 400

July 2 Cash 10,500
Short-term inv at FVTPL - bonds, utility 10,000
Gain on sale of FVTPL investment 500

Sept 1 Short-term inv. at FVTPL - Equity, Electric 15,000
Cash 15,000

Nov 1 Cash 2000
Dividend revenue 2000

Dec 31 Interest receivable (10,000 x 4%/2) 200
Interest revenue 200
31 Loss on fair value adj. - FVTPL - bond utlity 250
Short-term inv. at FVTPL - bonds utility 250
31 Long-term inv at FVTOCI-equity, Park 10,000
OCI - Gain on fair value adjustment 10,000
($12-10 = $2 x 5000)
31 Loss on fair value adjustment FVTPL 1000
Short term inv at FVTPL - equity, elect 1000

Question 19

Strategic investments are always long-term investments in equity securities. Describe the presumed influence and Financial reporting guidelines for the following percentage of Common Shares:
A) Less than 20%
B) 20-50%
C) Greater than 50%

Answer 19

A) Insignificant - fair value
B) Significant (known as associate) - equity method
C) Control - consolidation

Question 20

An investment asset is classified as current when:

Answer 20

• it is expected to be sold or realized within normal operating cycle or 12 months from balance sheet date
• help primarily for trading purposes
• is a cash equivalent. (ie treasury bills)