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Problem 12-17 Accounting for debt and equity investments (L012-1, 12-4, 12-5, 12-9) Fenerty, Inc., accounts for its investmen

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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.
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