Question

Feherty, 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 life of the investment and to hold 40,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 $1,040 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 $1,040 as of December 31, 2018.
2. $25,000 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 (FVOCI). Subsequent to Feherty’s 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 stock.
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.

Answer 1

1)
The Donald Company 10 bonds held to collect contractual cash flow	Amortized cost
The Donald Company 40 bonds held for trading purposes	FVOCI
The Watson Company stock would be accounted for	FVOCI
2)
Net Income
Realized gain on 5 bonds (5 Bonds x ($1040 - $1000)	$             200.00
Realized gain on 10 bonds (10 Bonds x ($1040 - $1000)	$             400.00
Total effect on net income		$     600.00
Other comprehensive income (OCI)
Unrealized gain on 30 bonds (40 - 10 bondsx ($1040 -$1000)	$          1,200.00
Unrealized gain on Watson equity (30000-25000)	$          5,000.00
Total effect on other comprehensive income		$  6,200.00
Comprehensive income		$  6,800.00