Question

Problem 12-17 Accounting for debt and equity investments (L012-1, 12-4, 12-5, 12-9) Fenerty, Inc., accounts for its investments under IFRS No 9 and purchased the following investments during December 2018 1. Fifty of Donald Company's $1,000 bonds. The bonds pay semiannual interest, return principal in eight years, and include no other cash flows or other features. Feherty plans to hold 10 of the bonds to collect contractual cash flows over the ufe of the investment and to hold 40 both to collect contractual cash flows but also to sell them if the price appreciates sufficiently. Subsequent to Feherty's purchase of the bonds, but prior to December 31, the fair value of the bonds increased to $1040 per bond, and Feherty sold 10 of the 40 bonds. Feherty also sold 5 of the 10 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 $1040 as of December 31, 2018 2.525,000 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 (FVOCISubsequent to Feherty purchase of the stock, the fair value of the stock investment increased to $30,000 as of December 31, 2018 Required: 1. Indicate how Feherty would account for its investments when it acquired the Donald bonds and Watson shock 2. Calculate the effect of realized and unrealized gains and losses associated with the Donald bonds and the Watson stock on Feherty's net income, other comprehensive income, and comprehensive income for the year ended December 31, 2018. Ignore interest revenue and taxes Complete this question by entering your answers in the tabs below. Required 1 Required 2 Indicate how Feherty would account for its investments when it acquired the Donald bonds and Watson stock The Donald Company 10 bands held to collect contractual cash flows The Donald Company 40 bonds hold for trading purposes The Watson Company stock would be accounted for Required 2 >

Answer 1

As per IFRS 9, Financial Asset (Securities, bonds, investments, etc) should be classified and measured based on an entity’s business model for managing the investments and their contractual cash flow characteristics.

A financial asset held to collect contractual cash flows is to be classified at the Amortized Cost, as per the Business model test.

A financial asset held to collect contractual cash flows and for sale(Hold to collect and sell) is to be classified at the Fair Value through Other Comprehensive Income (FVOCI).

A residual category of financial assets that cannot be classified as either Amortized Cost or FVOCI, would be classified as the Fair Value through Profit or Loss (FVPL)

1. Accounting for Donald Bonds and Watson Stocks.

Fehetry Inc. planning to hold the 10 of the bonds to collect contractual cash flows for the life of the bonds, i.e. as held to maturity, therefore it would be accounted for at the Amortized Cost.

Fehetry Inc. planning to hold the 40 of the remaining bonds to collect contractual cash flows and also to sell if the price increases, i.e. as held to collect and sale, therefore it would be accounted for at the FVOCI Fair Value through Other Comprehensive Income.

Fehetry Inc. planning to purchase $ 25,000 of Watson's Stock, which doesn't give Fehetry Inc. the ability to influence the operations or decision of Watson,i.e. with no votings rights, therefore it would be accounted for at the FVOCI Fair Value through Other Comprehensive Income.

2. Effect of Realized and Unrealized Gains & Losses.

(i) On 10 Bonds held at Amortized Cost.

5 of such bonds were sold on price appreciation and there was a realized gain of $ 200 {($1040-$1000)*5}. This Gain would be recognized in the net income and would be declared in the comprehensive income as well.

There is no unrealized gain as the asset is held at Amortized Cost.

(ii) On 40 Bonds held at FVOCI.

10 of such bonds were sold on price appreciation and there was a realized gain of $ 400 {($1040-$1000)*10}. This Gain would be recognized in the net income, and would be declared in the comprehensive income as well.

There is an unrealized gain of $ 1,200 {($1040-$1000)*30} and since the asset is held at FVOI, the unrealized gain would be accounted for as Other Comprehensive Income, and therefore would be declared in Comprehensive Income also.

(ii) On $ 25,000 of Watson Stock held at FVOCI.

There is an unrealized gain of $ 5,000 {$30,000 - $25,000} and since the asset is held at FVOI, the unrealized gain would be accounted for as Other Comprehensive Income and therefore would be declared in Comprehensive Income also.