Question

Feherty, Inc., accounts for its investments under IFRS No. 9 and purchased the following investments during December 2021: 1. One hundred and ninety of Donald Company's $1,000 bonds. The bonds pay semiannual interest, return principal in 8 years, and Include no other cash flows or other features. Feherty plans to hold 60 of the bonds to collect contractual cash flows over the life of the investment and to hold 130, both to collect contractual cash flows but also to sell them if their price appreciates sufficiently. Subsequent to Feherty's purchase of the bonds, but prior to December 31, the fair value of the bonds increased to $1,020 per bond, and Feherty sold 60 of the 130 bonds. Feherty also sold 30 pf the 60 bonds it had planned to hold to collect contractual cash flows over the life of the investment. The fair value of the bonds remained at $1,020 as of December 31, 2021. 2. $26,400 of Watson Company common stock. Feherty does not have the ability to significantly Influence the operations of Watson. Feherty elected to account for this equity Investment at fair value through OCI (FVOCI). Subsequent to Feherty's purchase of the stock, the fair value of the stock investment increased to $32,800 as of December 31, 2021. Required: 1. Indicate how Feherty would account for its investments when it acquired the Donald bonds and Watson stock. 2. For each of the following categories of Feherty's investments, calculate the effect of realized and unrealized gains and losses on Feherty's net income, other comprehensive income, and comprehensive income for the year ended December 31, 2021: (a) any Donald bonds accounted for at amortized cost that were purchased and held at year end, (b) any Donald bonds accounted for at amortized cost that were purchased and sold, (c) any Donald bonds accounted for at FVOCI that were purchased and held at year end, (d) any Donald bonds accounted for at FVOCI that were purchased and sold, and (e) the Watson stock. Ignore interest revenue and taxes.

Answer 1

Dear Student ,

Please see below answer based on IFRS 9 details working and concept on AMC ( Amortized cost ) + FVOCI + Equity stock (movement also parked under FV OCI )

As per IFRS 9 - complete financial instrument based on Contract . We need to look into Contractual cash flow while doing AMC method. Movement of AMC method , transfer to PNL . In case of others movement of fair value parked under FV OCI + Equity Instrument movement .   

190-of Donald Companies ' Bond value $ 1000
The bonds pay semi annual interest , return and principal in 8 years
Feherty holds 60 bond ti collect contractual cash flow
Balance 130 bond
The fair value of the bonds remained $1020
As we are aware that as per IFRS 9 , Financial Instrument divided
into three parts - 1) AMC ( Amortized cost ) basis
2) FVTPL - Any change in Fair value transfer to P&L
2) FVOCI - any change in Fair value - transfer to OCI .
AMC ( Amortized cost ) method will be based on Contractual cash flow
and discounted rate to contractual cash flow to get present value
As per Question, 60 bonds are kept relates to collect contractual cash flow - cover under
AMC ( Amortized cost ) method- over the life of debt
Balance 130 bond - covering under FVOCI . These bonds are kept for Investment
purpose
Other case -
Value of $26400 of Watson company common stock.
Feherty does not have teh ability to significantly influence the operation
of watson.
In this scenario, Feherty adopted to account for Equity through FV OCI
As per IFRS 9 , Movement of equity routed through FV OCI - Irrecoverable
Second case -	Amnt($)
As per Question , out of 60 bonds, 30 bonds are sold out and accounted as per
Amortized cost basis . Gain or loss should be accounted accordingly
Reportable gain would be - 30 bonds *( $1020-$1000) -$	600
Other case out of 130 bonds , 60 bonds are going to sold . This sale will
represents Unrealised gain and parked uder " FV OCI "
so balance bond - 130 bonds - 60 bonds = 70 bonds *($1020-$1000)=70*$20	1,400
$ 1400 unrealized gain - parked under FVOCI
Also above case - 60 bonds sold and we realised gain
60 bonds * ( $1020-$1000)	1,200
The above realized gain is parked under FVOCI
Third part - Change in value ($32,800- $ 26400)	6,400
The above unrealized gain $ 6400 parked under FV OCI - this amount
relates to movement of Equity stock
Final
Net Income - As per Amortized cost - Gain - $ 600 + FV OCI $1200	1,800
Movement of OCI - as above $1400( Parked under FV OCI ) + $ 6400( parked under Equity)	7,800
Comprehensive Income -$1800+$7800	9,600