Question

Core Transport Incorporated has been growing quickly over the past several years due to its perfect record in safely and quickly moving goods across the country. In order to finance its recent growth it became a publicly listed company, and, as a result it must apply IFRS. The company has a December 31 year end. On January 1, 2017, Core purchased 20% of a company in Newport, Nova Scotia that manufactures packing crates, ABC Inc., for a price of $300,000. Core Transport considers this a significant influence investment, and has requested your help in accounting for it. At the time of purchase, the carrying amount and fair values of the packing company assets and liabilities are as follows.

	Carrying Amount	Fair Value
Cash	$ 50,000	$ 50,000
Accounts receivable	100,000	100,000
Land	200,000	250,000
Building (10-year life remaining; no residual value)	350,000	500,000
Notes payable	(125,000)	(125,000)
	$575,000	$775,000

During the year, ABC reported income of $200,000, and paid a dividend to its common shareholders of $100,000. The fair value of the investment in ABC shares at December 31, 2017 was $315,000.

Instructions

1. Prepare the journal entries for Core for 2017, assuming that Core cannot exercise significant influence over ABC. The securities are accounted for using the fair value through net income (FV-NI) model.

2. Prepare the journal entries for Core for 2017, assuming that Core can exercise significant influence over ABC.

3. Prepare the journal entries for Core for 2017, assuming that Core cannot exercise significant influence over ABC and that the securities are eligible for the special election to be accounted for using the fair value through other comprehensive income (FV-OCI) model.

Answer 1

Investor who Purchases the Investment , Investee whose Sales the Investment.

Answer:

A.

Concept:

Accounting for Fair Value Through Net Income Model (FVTNI)

Original investment is recorded at Cost (Purchase Price).

1. Measure Investment at Fair Value on Balance sheet & Record Any Gain / Loss (whether realized or not realized*) in Income Statement.

* Realized Gain/Loss - Any Actual Gain/Loss realized in case of Sale / Transfer of Investment.

*Unrealized Gain/Loss - Any Gain due to change in Market Value of Investment. In this case NO ACTUAL gain/loss is realized. That's why it is called Unrealized Gain/loss.

2. Dividend Income included in Earning (Income Statement)

3. No % Earning is recorded.

Journal Entries :

1.

At time Purchase of Investment dated January 1 2017.

Debit: Investment in ABC inc A/C $ 300,000.

Credit: Cash A/C $ 300,000.

(Being Recording of Purchase of 20% Shares of ABC Inc at $ 300,000).

2.

Increase in Fair Value of Investment as on December 31 2017.

Debit: Investment in ABC Inc A/C $ 15,000.

Credit: Unrealized Gain on Investment in ABC Inc A/C $ 15,000.

(Being Recording of Unrealized Gain of $ 15,000 in income statement for Investment in ABC Inc.)

3.

Dividend Received during the year.

Debit: Cash A/C $ 20,000.**

Credit: Dividend Income A/C $ 20,000.**

(Being Recording of Share of Dividend Received for Investment in ABC Inc.)

** Dividend Received = $ 100,000 (Total Dividend Paid) × 20% (Holding Percentage).

$ 20,000.

B.

Concept:

Accounting for Equity Method. (When investor has Significant influence)

Original investment is recorded at Cost (Purchase Price)

1. Record % of investee's earning as 'Equity in Earning' on Income Statement of Investor by increasing value of Investment.

2. Dividend Received is reduced from Investment account & is NOT treated as income on Income Statement.

3. No Realized*** or Unrealized Gain/Loss*** is recorded in books of accounts.

*** Realized Gain/Loss - Any Actual Gain/Loss realized in case of Sale / Transfer of Investment.

Unrealized Gain/Loss - Any gain/loss due to change in Market value of Investment. In this case NO ACTUAL gain/loss is realized that's why it is called as Unrealized Gain/loss.

Journal Entries:

1.

At time of Purchase of Investment dated January 1 2017.

Debit: Investment in ABC Inc A/C $ 300,000.

Credit: Cash A/C $ 300,000.

(Being Recording of Purchase of 20% Shares of ABC Inc for $ 300,000).

2.

Investee Earning.

Debit: Investment in ABC Inc A/C $ 40,000. ($ 200,000 Net Income × 20%)

Credit: Equity in Earning A/C $ 40,000. ($ 200,000 Net Income × 20%).

(Being Recording of Share of Investee's earning for Investment in ABC Inc.)

3.

Dividend Received during the year.

Debit: Cash A/C $ 20,000 ($ 100,000 × 20%)

Credit: Investment in ABC Inc A/C $ 20,000. ($ 100,000 × 20%).

(Being Recording of Share of Dividend Received from Investment in ABC Inc.).

C.

Concept:

Accounting for Fair Value Through Other Comprehensive Income Model. (FV - OCI).

Original investment is recorded at Cost (Purchase Price).

1. Measure Investment at Fair Value Balance Sheet & Record Any Gain/Loss (whether Realized or Unrealized****) as Other Comprehensive Income (on Comprehensive Income Statement) & Accumulated Other Comprehensive Income (on Balance sheet).

**** Realized Gain/Loss - Any Actual Gain/Loss realized in case of Sale/Transfer of Investment.

Unrealized Gain/Loss - Any gain/loss due to change in market value of Investment. in this case NO ACTUAL gain/loss is realized that's why it is called as Unrealized Gain/Loss.

2. Dividend Income included in Earning (Income Statement).

3. No % Earning is recorded.

Journal Entries:

1.

At time of Purchase of Investment dated January 1 2017.

Debit: Investment in ABC Inc A/C $300,000.

Credit: Cash A/C $ 300,000.

(Being Recording of Purchase of 20% Shares of ABC Inc for $ 300,000).

2.

Increase in Fair Value of Investment as on December 31 2017.

Debit: Investment in ABC Inc A/C $ 15,000.

Credit: Unrealized Gain - Other Comprehensive Income A/C $ 15,000.

(Being Recording of Unrealized Gain as Other Comprehensive Income of $ 15,000 for Investment in ABC Inc.)

3.

Dividend Received during the year.

Debit: Cash A/C $ 20,000 ($ 100,000 × 20%).

Credit: Dividend Income A/C.$ 20,000 ($100,000 × 20%).

(Being Recording of Share of Dividend Received from Investment in ABC Inc.)