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Chapter 13: Q1IFRS (page 658)
Where can authoritative IFRS be found related to investments?
It is found in IFRS 9.
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Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.
EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its
investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common
stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company
preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.
In 2018, Parnevik completed the following securities transactions.
1. On January 15, sold 3,000 shares of Anderson’s common stock at \(22 per share less fees of \)2,150.
2. On April 17, purchased 1,000 shares of Castle’s common stock at \(33.50 per share plus fees of \)1,980.
On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the
accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik
will not actively trade these securities because the top management intends to hold them for more than one year.
Instructions
(a) Prepare the entry for the security sale on January 15, 2018.
(b) Prepare the journal entry to record the security purchase on April 17, 2018.
(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.
(d) How should the unrealized gains or losses be reported on Parnevik’s income statement and balance sheet?
(Fair Value Measurement Issues) Assume the same information as in E17-19 for Lilly Company. In addition,
assume that the investment in the Woods Inc. stock was sold during 2018 for \(195,000. On December 31, 2018, the following
information relates to its two remaining investments of common stock.
Cost Fair Value
(at purchase date) (at December 31)
Investment in Arroyo Company stock \)100,000 \(140,000
Investment in Lee Corporation stock 250,000 310,000
Total \)350,000 \(450,000
Net income before any security gains and losses for 2018 was \)905,000.
Instructions
(a) Compute the amount of net income or net loss that Lilly should report for 2018, taking into consideration Lilly’s securitytransactions for 2018.
(b) Prepare the journal entry to record unrealized gain or loss related to the investment in Arroyo Company stock atDecember 31, 2018.
(Fair Value and Equity Methods) Brooks Corp. is a medium-sized corporation specializing in quarrying stonefor building construction. The company has long dominated the market, at one time achieving a 70% market penetration. Duringprosperous years, the company’s profits, coupled with a conservative dividend policy, resulted in funds available for outside
investment. Over the years, Brooks has had a policy of investing idle cash in equity securities. In particular, Brooks has made periodicinvestments in the company’s principal supplier, Norton Industries. Although the firm currently owns 12% of the outstandingcommon stock of Norton Industries, Brooks does not have significant influence over the operations of Norton Industries.
Cheryl Thomas has recently joined Brooks as assistant controller, and her first assignment is to prepare the 2017 year-endadjusting entries for the accounts that are valued by the “fair value” rule for financial reporting purposes. Thomas has gatheredthe following information about Brooks’ pertinent accounts.
1. Brooks has equity securities related to Delaney Motors and Patrick Electric. During 2017, Brooks purchased 100,000 shares of
Delaney Motors for \(1,400,000; these shares currently have a fair value of \)1,600,000. Brooks’ investment in Patrick Electrichas not been profitable; the company acquired 50,000 shares of Patrick in April 2017 at \(20 per share, a purchase that currentlyhas a value of \)720,000.
2. Prior to 2017, Brooks invested \(22,500,000 in Norton Industries and has not changed its holdings this year. This investmentin Norton Industries was valued at \)21,500,000 on December 31, 2016. Brooks’ 12% ownership of Norton Industries has acurrent fair value of \(22,225,000 on December 2017.
Instructions
(a) Prepare the appropriate adjusting entries for Brooks as of December 31, 2017, to reflect the application of the “fairvalue” rule for the securities described above.
(b) For the securities presented above, describe how the results of the valuation adjustments made in (a) would be reflectedin the body of Brooks’ 2017 financial statements.
(c) Prepare the entries for the Norton investment, assuming that Brooks owns 25% of Norton’s shares. Norton reportedincome of \)500,000 in 2017 and paid cash dividends of $100,000.
Assume the same information as in IFRS 17-12 except that Roosevelt has an active trading strategy for these bonds.
The fair value of the bonds at December 31 of each end-year is as follows.
2017 \(534,200 2020 \)517,000
2018 \(515,000 2021 \)500,000
2019 $513,000
Instructions
(a) Pepare the journal entry at the date of the bond purchase.
(b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2017.
(c) prepare the journal entry to record the recognition of fair value for 2018.
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