SM Chapter 12

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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 12
Reporting and Analyzing Investments
ASSIGNMENT CLASSIFICATION TABLE

Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP
1. Identify reasons to 1, 2, 3 1 1, 2 1, 2, 6
invest, and classify
investments.
2. Account for non- 4, 5, 6, 7, 2, 3, 4, 5, 3, 4, 5, 6, 1, 2, 3, 4, 1, 2, 3, 4, 2, 4, 5

strategic 8, 18 8 8 5, 6, 7, 8 5, 6, 7, 8
investments.
3. Account for strategic 9, 10, 11, 6, 7, 8 6, 7, 8 5, 6, 7, 8 5, 6, 7, 2, 3, 4,

investments. 16 8 5, 7
4. Indicate how 3, 4, 12, 8, 9, 10, 2, 5, 8, 9 1, 2, 3, 4, 1, 2, 3, 4, 1, 2, 3,

investments are 13, 14, 15, 11, 12 5, 6, 7, 8 5, 6, 7, 8 4, 5, 7
reported in the 16
financial statements.
*5. Compare the 17, 18, 19 13 10 9, 10 9, 10

accounting for a
bond investment
and a bond payable
(Appendix 12A).
Solutions Manual 12-1 Chapter 12

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ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Record trading investments; show statement Moderate 30-40

presentation.

presentation.

presentation.
4A Determine valuation of investments; indicate Moderate 30-40

statement presentation.
5A Identify impact of investment transactions. Moderate 20-30
6A Record strategic investment. Moderate 30-40
7A Record investments; indicate statement presentation. Moderate 30-40
8A Analyze strategic investment. Moderate 30-40
*9A Record bond investment; show statement Complex 30-40

presentation.
*10A Record bonds for investor and investee. Complex 30-40
1B Record trading investments; show statement Moderate 30-40

presentation.

presentation.

presentation.
4B Determine valuation of investments; indicate Complex 30-40

statement presentation.
5B Identify impact of investment transactions. Moderate 20-30
6B Record strategic equity investment. Moderate 30-40
7B Record investment; indicate statement presentation. Moderate 30-40
8B Analyze strategic investment. Moderate 30-40

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem Difficulty Time
Number Description Level Allotted (min.)
*9B Record bond investment; show statement Complex 30-40
presentation.
*10B Record bonds for investor and investee. Complex 30-40

ANSWERS TO QUESTIONS
1. Companies invest primarily for two reasons: to earn investment income such as
interest, dividends, and the appreciation in the value of an investment or to influence
or control other companies through the acquisition of large amounts of common
shares.
2. A non-strategic investment is made for the purposes of generating investment

income. A strategic investment is purchased to influence or control the operations of
another company in some way.
3. (a) This equity investment should be classified as a non-strategic investment as

the company intends to sell its Suncor Energy shares if the need for cash
arises.
(b) The investment would most likely be classified as a current asset (although
judgement must be exercised here) as it was not purchased with the intent of
holding it for a long period of time.
4. (a) Common shares in a publicly traded company that will be sold within a year
are valued at fair value.
(b) Bond investments that will be held until maturity are valued at amortized cost.
(c) Shares in a private company that do not have a determinable fair value are
valued at cost.
5. Realized gains/losses are the differences between fair values and the carrying
amounts when the investments are actually sold. Unrealized gains/losses are the
differences between the fair values and carrying amounts of investments still held or
owned by the investor.
6. (a) The $10 million difference between the carrying amount of $245 million and
the fair value of $255 million should be recorded as an unrealized gain and
reported in the other revenues and expenses section in the income statement.
(b) Yes, the answer would be different if the fair value could not be determined.
No unrealized gain would be reported and the investment would be valued at
cost.

Answers to Questions (Continued)

7. (a) The bonds would be shown at their fair value of $1,050,000.
(b) The interest revenue earned on the bonds would be reported as other revenue
under other revenue and expenses section of the statement of income.
8. The carrying amount of the investment ($130,000) would be compared to the

proceeds ($125,000). The $5,000 difference is a realized loss. The realized loss
would be reported on the 2015 income statement in other revenues and expenses.
The journal entries to record these transactions (not required) follow:
Dec. 31, 2014 Trading Investments 15,000

Unrealized Gain on Trading Investments 15,000
2015 Cash 125,000

Realized Loss on Trading Investments 5,000
Trading Investments 130,000
9. Significant influence over an investee may result from representation on the board
of directors, participation in policy-making processes, material inter-company
transactions, interchange of managerial personnel, or technological dependency.
An investment (direct or indirect) of 20% or more of the voting shares of an investee
constitutes significant influence, unless there exists evidence to the contrary.
However, companies are required to use judgement rather than to blindly follow the
20% guideline. For example, 25% ownership in a company that is 75% controlled
by another company would not necessarily indicate significant influence.
10. Under the cost model, the carrying amount of the company’s investment is recorded
at cost. The investment account is not affected by the earnings of the entity into
which the investment is made. The investing company records any dividends
received as investment revenue, leaving the carrying amount (usually cost) of the
investment intact.
Under the equity method, the investment is also recorded at cost on the day the
investment is made. However, the investment account is increased or decreased by
the investor’s share of the investee company’s profit or loss for the period
respectively. The investing company would reduce the carrying amount of its
investment by any dividends received from the investee, since the value of the
latter’s net assets decreases as it declares dividends.


11. (a) Under the cost model, the investor has little to no influence over the investee,
due to its relatively small ownership interest. Therefore, the only entry the
investor would make relative to this investment is to record any cash dividends
it receives from the investee as investment revenue.
(b) The equity method is used when the investor exercises significant influence
over the investee. Consequently, the investor has played a role in the
determination of any profit or loss experienced by the investee. As the investee
earns profit, its value will increase. Thus the investor’s carrying amount of its
investment in the investee should reflect this reality. Consequently, the
investor records investment revenue (loss) when the investee reports profit (or
loss) and does not wait for the distribution of profit by way of dividends. The
investment is reduced by the amount of dividends received rather than the
dividends being recorded as revenue as is the case with the cost model.
12. (a) Trading investments are classified as a current assets under the assumption
that management intends to trade them actively, thereby implying that they will
be sold fairly soon.
(b) Investment in associates is classified as long-term investments under the

assumption that if an investor has gone to the trouble of obtaining a large
enough block of shares to significantly influence the investee, they would want
to hold onto the investment for more than one year.
(c) Debt investments held to maturity are classified as long-term investments

except in the year of maturity when the securities would be classified as a
current asset.
13.
Account Financial Statement Classification
(a) Unrealized Gain on Income Statement Other revenues and

Trading Investments expenses
(b) Realized Loss on Trading Income Statement Other revenues and

Investments expenses
(c) Revenue from Investment Income Statement Other revenues and

in Associates expenses
(d) Investment in Associate Statement of Financial Non-current assets

Position

14. Comprehensive income includes all changes to shareholders’ equity during a period
except changes resulting from investments by shareholders and dividends declared.
Profit is one component of comprehensive income. The other component is other
comprehensive income, which includes the current period’s unrealized gains/losses
on securities accounted for using the fair value through other comprehensive
income model and certain other unrealized gains/losses such as revaluation gains
under the revaluation model for property, plant, and equipment that was covered in
chapter 9. Profit and other comprehensive income can be reported separately in two
statements although the preferred approach is to report both in a single statement
known as the statement of comprehensive income.
Accumulated other comprehensive income is the cumulative total of each period’s

other comprehensive income/loss. Just as profit is closed out to retained earnings at
the end of the year, other comprehensive income is closed out to accumulated other
comprehensive income at the end of the year. The changes to accumulated other
comprehensive income are reported in the statement of changes in equity, and the
ending balance of accumulated other comprehensive income is reported in the
shareholders’ equity section of the statement of financial position.
15. Profit reported on the income statement is a component of comprehensive income.

Profit along with other comprehensive income is reported in the statement of
comprehensive income (if the company chooses to report both under a single
statement). Profit (loss) increases (decreases) retained earnings. Other
comprehensive income (loss) increases (decreases) accumulated other
comprehensive income, which like retained earnings is an equity account. Changes
in both retained earnings and accumulated other comprehensive income are
reported in the statement of changes in equity. Total shareholders’ equity is
reported in the statement of financial position (assets = liabilities + shareholders’
equity).
16. (a) Since George Weston Ltd. owns 63% of the common shares of Loblaw
Compaines Ltd., it must use the equity method to account for its investment.
Furthermore, George Weston must consolidate its results with those of Loblaw
by preparing consolidated financial statements.
(b) George Weston is the parent since it owns 63% of the voting shares of Loblaw.
Therefore, Loblaw is a subsidiary of George Weston.
(c) Consolidated financial statements should be prepared. When consolidated

financial statements are prepared, George Weston will eliminate its investment
account from its own records and replace this with the specific assets and
liabilities of Loblaw. The consolidated financial statements would include all of

George Weston’s assets and liabilities at their carrying amount in addition to

the assets and liabilities of Loblaw.
*17. The accounting treatment for an investment in bonds is essentially the inverse of
the recording required for a bond liability. In both cases, the investment is recorded
at its issue price, with any premium or discount netted with the bond account. The
premium or discount is amortized using the effective interest method, unless the
bond is held for trading. Debt investments in bonds that are held for trading are re-
valued to fair value at year-end, whereas bond liabilities are not because it is
extremely rare for them to have been issued for the purposes of trading (because
they are liabilities not investments).
*18. Premiums and discounts must be amortized when using the amortized cost model
because the amortization of the discount or premium provides the proper matching
of interest revenue to the periods the investment is held and reflects the effective
interest rate in the financial statements. When using the fair value model for debt
securities, the investment is held for a short time and any misstatement of interest
caused from not amortizing the discount/premium is not considered material.
*19. When the bonds are sold by the investor on the open market, the investor must
record the sale. The investee is not affected by the sale as an independent third
party purchases the bonds on the market, and as such, that transaction is occurring
between two investors and has nothing to do with the company that originally issued
the debt. The liability has not been settled, but rather, the amount of the bonds
owing is simply payable to a different investor.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 12-1
(a) (b) (c)

Debt or Equity Non-Strategic or Reason for Making
Investment? Strategic the Investment?
Investment?
1. 120-day treasury bill Debt Non-Strategic Interest revenue for
120 days.
2. A few common shares of Equity Non-Strategic Share price
a small oil company appreciation (capital
purchased with a gain) and dividend
temporary surplus of revenue.
cash
3. 30% of the common Equity Strategic Influence the
shares of a company operations of the
purchased in order to other company.
obtain a position on the
board of directors
4. Bonds purchased with a Debt Non-Strategic Interest revenue.
temporary cash surplus
5. 100% of the common Equity Strategic Control the
shares of a company operations of the
purchased to other company.
amalgamate its
operations with those of
the investor
6. Five-year bonds intended Debt Non-Strategic Interest revenue
to be held for the entire over the long term.
term of the bonds

BRIEF EXERCISE 12-2
(a)
Jan. 1 Trading Investments ............................................... 200,000
Cash .............................................................. 200,000
(b)
July 1 Cash ....................................................................... 10,000
Interest Revenue ($200,000 × 10% × 6/12) ... 10,000
(c)
Dec. 31 Interest Receivable ................................................. 10,000
Interest Revenue ($200,000 × 10% × 6/12) .. 10,000
Dec. 31 Unrealized Loss on Trading Investments ................ 6,000

Trading Investments ..................................... 6,000
($200,000 – [$200,000 × 97%])
BRIEF EXERCISE 12-3

2016
Jan. 2
Cash ....................................................................... 194,000
Trading Investments ...................................... 194,000
The investment is already carried at fair value so no gain or loss will result on this sale.
BRIEF EXERCISE 12-4
(a)
Aug. 1 Trading Investments. .............................................. 45,000
Cash .............................................................. 45,000
(b)
Dec. 31 Trading Investments ............................................... 4,000
Unrealized Gain on Trading Investments ....... 4,000
BRIEF EXERCISE 12-5
Feb. 1 Cash ........................................................................... 47,000

Realized Loss on Trading Investments ………... ........ 2,000
Trading Investments .......................................... 49,000

BRIEF EXERCISE 12-6

Jan. 1 Investment in Associates .............................................. 400,000
Cash..................................................................... 400,000
Dec. 31 Cash (25% × $32,000) ................................................. 8,000

Investment in Associates ..................................... 8,000
31 Investment in Associates (25% × $800,000) ................ 200,000

Revenue from Investment in Associates ............ 200,000
Rook would report $200,000 of revenue from its investment in Hook for the year.
BRIEF EXERCISE 12-7

Jan. 1 Investment in Associates .............................................. 400,000
Cash..................................................................... 400,000
Dec. 31 Cash (25% × $32,000) ................................................. 8,000

Dividend Revenue ................................................ 8,000
Since Rook uses the cost model to account for its investment, the only revenue that Rook
should report is its pro-rata share of any dividends declared by Hook, which amounts to
$8,000 (25% × $32,000). This is different from the equity method which records a pro-rata
share of profit from Hook and records receipt of dividends as a reduction of the
investment account on the statement of financial position.
BRIEF EXERCISE 12-8
(a) Significant influence – The balance in the equity investment account at December
31, would be $287,000. The investment would be reported as an investment in
associates in long-term investments.
Cost of investment $225,000

Add: Share of Dong’s profit (20% × $350,000) 70,000
Less: Dividends received from Dong (20% × $40,000) (8,000)
$287,000
(b) Without significant influence, the investment would be reported at the fair value of
$275,000 in long-term investments.
(c) Under the cost model, the investment would be reported at its purchase price of
$225,000. It would be reported as an investment in associates in long-term

investments.

BRIEF EXERCISE 12-9
Financial Statement Classification
A bond investment that will mature Statement of financial Current assets

next year position
Dividend revenue from a trading Income statement Other revenues and
investment expenses
Investment in associate Statement of financial Long-term
position investments
Investment of a few hundred Statement of financial Current assets
common shares in a large publicly position
traded company that is held for
trading purposes
A bond investment that management Statement of financial Long-term
intends to hold for 10 years position investments
Realized gain on a trading Income statement Other revenues and
investment expenses
Unrealized gain on a trading Income statement Other revenues and
investment expenses
Dividends received from a strategic Statement of financial Long-term
investment accounted for using the position investments
equity method
Interest earned on a trading Income statement Other revenues and
investment expenses
BRIEF EXERCISE 12-10
Include in profit
Item or OCI?
Realized gain on long-term investments Profit

Unrealized loss on trading investments Profit
Revenue from investment in associates Profit
For investments that are non-strategic and not held for trading, the company can elect to
report unrealized gains and losses in other comprehensive income.


SABRE CORPORATION
Statement of Financial Position (Partial)
December 31, 2015
Assets
Current assets
Trading investments……………… ............................................ $ 29,000
Long-term investments
Long-term investments.............................................................. 435,000 *
Investment in associates ........................................................... 116,800 **
* $435,000 = $275,000 (equity investment in Epee at fair value) + $160,000 (bond

investment held to maturity at amortized cost)
** $116,800 = $110,000 + ($25,000 × 40%) – ($8,000 × 40%)
Brookfield’s purchase of investment in associates should be reported on the company’s

statement of cash flows as a cash outflow in investing activities. The amount would also
be included in the statement of financial position in long-term investments as an
investment in associates.
Brookfield’s share of profit from associates would be reported on their income statement
in the other revenues and expenses section. The amount would also cause an increase in
the investment in associates account in the long-term investments section in the
statement of financial position.
Dividends received from associates would be reported on the company’s statement of

cash flows as a cash inflow as an operating activity or an investing activity. The amount
would also reduce the investment in associates account on the statement of financial
position.
The year-end balance of investment in associates would be reported in the statement of

financial position in long-term investments.

*BRIEF EXERCISE 12-13
(a) Investor
June 30 Long-Term Investments .......................................... 138,960

Cash .............................................................. 138,960
Dec. 31 Cash ($150,000 × 10% × 6/12) ............................... 7,500

Long-Term Investments .......................................... 838
(b) Investee
June 30 Cash ....................................................................... 138,960

Bonds Payable ............................................... 138,960
Dec. 31 Interest Expense ($138,960 × 12% × 6/12) ............ 8,338

Cash .............................................................. 7,500
Bonds Payable ............................................... 838

SOLUTIONS TO EXERCISES
EXERCISE 12-1
(a) (b)
Debt or Equity Non-Strategic or
Investment? Strategic Investment?
1. Equity Strategic
2. Debt Non-Strategic
3. Equity Strategic
4. Debt Non-Strategic
5. Equity Non-Strategic
EXERCISE 12-2
(a) (b) (c)

1. 10-year BCE bonds Non- Held until Non-current
Strategic maturity
2. 10-year GE bonds Non- Trading Current
Strategic
3. 5-year Government of Non- Trading Current
Canada bonds Strategic
4. 180-day treasury bill Non- Trading Current
Strategic
5. Bank of Montreal Non- Neither Non-current
preferred shares* Strategic trading or
held to
maturity
6. TMX common shares Non- Trading Current
Strategic
* Note that if Kroshka is a public company, it has the choice and can elect to value this
asset using the fair value through other comprehensive income model. If Kroshka reports
under ASPE, the investment would be carried using the fair value through profit or loss
model.

EXERCISE 12-3
(a)
July 1 Trading Investments ($700,000 × 106.5%) ............. 745,500
Cash .............................................................. 745,500
(b)
Dec. 31 Interest Receivable ................................................. 35,000
Adjustment to fair value:

Dec. 31 Trading Investments ............................................... 3,500
Unrealized Gain on Trading Investments ....... 3,500
($700,000 × 107%) – $745,500
EXERCISE 12-4
Jan. 01 Trading Investments .................................................... 210,000

Cash....................................................................... 210,000
Apr. 1 Cash (2,000 × $5 ÷ 4) .................................................. 2,500

Dividend Revenue .................................................. 2,500
July 1 Cash (2,000 × $5 ÷ 4) .................................................. 2,500

02 Cash ............................................................................ 57,000

Realized Gain on Trading Investments ................. 4,500
Trading Investments.............................................. 52,500
[($210,000 ÷ 2,000) × 500]
Oct. 1 Cash (1,500 × $5 ÷ 4) .................................................. 1,875

(b)
Dec. 31 Dividends Receivable .................................................. 1,875
31 Trading Investments .................................................... 15,000

Unrealized Gain on Trading Investments ............... 15,000
(1,500 × $115) – ($210,000 – $52,500)
(c)
Feb. 15 Cash (500 × $117)....................................................... 58,500
Realized Gain on Trading Investments .................. 1,000
Trading Investments............................................... 57,500
(Carrying amount = $115 × 500)

EXERCISE 12-5
(a)
Dec. 31 Trading Investments ........................................... 2,000

Unrealized Gain on Trading Investments ...... 2,000
($54,000 – $52,000)
(b)
YANIK INC.
December 31, 2015
Current assets
Trading investments ............................................................... $54,000
YANIK INC.
Income Statement (Partial)
Year Ended December 31, 2015
Other revenues and expenses

Unrealized gain on trading investments .................................. $2,000
(c)
Mar. 22 Cash ................................................................... 22,000
Realized Gain on Trading Investments.......... 1,000

EXERCISE 12-6
Jan. 1 Investment in Associates .................................... 192,000
Cash (30,000 × 40% × $16) ......................... 192,000
Mar. 18 Long-Term Investments ....................................... 840,000

Cash (200,000 × 15% × $28) ........................ 840,000
June 15 Cash ($70,000 × 40%) ......................................... 28,000

Investment in Associates ............................. 28,000
June 30 Cash ($150,000 × 15%) ....................................... 22,500

Dividend Revenue ......................................... 22,500
Dec. 31 Investment in Associates .................................... 60,000

Revenue from Investment in Associates...... 60,000
($150,000 × 40%)
Dec. 31 Unrealized Loss on Long-Term Investments

[($840,000 – (30,000 × $26)] ............................... 60,000
Long-Term Investments ................................ 60,000
When the equity method is used to account for investment in associates, the investment
account is not adjusted to fair value.

EXERCISE 12-7
(a)
Oct. 1 Investment in Associates .................................. 500,000
Cash (200,000 × $2.50) ............................... 500,000
Dec. 29 Cash ($80,000 × 20%) ...................................... 16,000

31 Investment in Associates .................................. 40,000

Revenue from Investment in Associates
($200,000 × 20%) ........................................ 40,000
(b)
Oct. 1 Long-Term Investments .................................... 500,000
Cash (200,000 × $2.50) ............................... 500,000
Dec. 29 Cash ($80,000 × 20%*) ..................................... 16,000

Dividend Revenue ....................................... 16,000
31 No entry
* 200,000 shares / 1,000,000 shares

EXERCISE 12-8
Trading Investment
(a)Account Investments in Associates
Balance, beginning of year $100,000 $300,000

Purchases of investments during the year 30,000 40,000
Carrying amount of investments sold
during the year (43,000)* (42,000)**
Dividends received (8,000)
Share of associates’ profit 43,000
Fair value adjustment
derived($94,000−$100,000 + $30,000
−$43,000) 7,000
Balance, end of year $94,000 $333,000
* $55,000 less gain of $12,000
** $32,000 plus loss of $10,000
(b) Trading Investments
Trading Investments ............................................... 30,000

Cash .............................................................. 30,000
Cash ....................................................................... 55,000

Realized Gain on Trading Investments .......... 12,000
Cash ....................................................................... 3,000

Dividend Revenue......................................... 3,000
Trading Investments ............................................... 7,000

Unrealized Gain on Trading Investments ...... 7,000
Investment in Associates
Investment in Associates ........................................ 40,000

Cash ............................................................. 40,000
Cash ....................................................................... 32,000

Realized Loss on Investment in Associates ............ 10,000
Investment in Associates ............................... 42,000
Cash ....................................................................... 8,000

Investment in Associates .............................. 8,000

EXERCISE 12-8 (Continued)

(b) Continued
Investment in Associates ........................................ 43,000

Revenue from Investment in Associates ....... 43,000
(c)
Trading Investment
Investments in Associates
Statement of Financial Position:
Trading Investments $94,000
Investment in Associates $333,000
Income Statement:
Realized gain on trading investments $12,000
Unrealized gain on trading investments 7,000
Dividend revenue 3,000
Revenue from investment in associates $43,000

Realized loss from investment in associates 10,000
EXERCISE 12-9
(a) 100% Cameco Europe – equity method but then investment is eliminated when the
subsidiary accounts are consolidated together with those of the parent company
23.3% UEX – equity method
24% GE-Hitachi Global – equity method
All three investments exceed 20% ownership in each corporation. Control is exerted
over Cameco Europe and significant influence over the other two investees’
operations by Cameco is assumed. Other factors should be examined to determine
if significant influence does exist regardless of the percentage of ownership. If there
is significant influence, the equity method would be used.
(b) Cameco Europe should be consolidated with Cameco’s operations because

Cameco is the parent company of a fully owned subsidiary, Cameco Europe.

*EXERCISE 12-10
(a) Key inputs: Future value (FV) = $500,000
Market interest rate (i) = 3% (6% × 6/12)
Interest payment (PMT) = $12,500 ($500,000 × 5% × 6/12)
Number of semi-annual periods (n) = 20 (10 years × 2)
Using present value tables

Semi-annual interest payments $500,000 × 2.5% $ 12,500
Present value factor for annuity, 3% for 20 periods × 14.87747
Present value of interest payments 185,968
Present value of $500,000, in 20 periods at 3%
$500,000 × 0.55368 276,840
Issue price of the bonds $462,808
Note to the instructor: Rounding discrepancies may arise depending on whether present
value tables, calculators, or a spreadsheet program is used to determine the present
value.
(b) Investor
2015
June 30 Long-Term Investments .......................................... 462,808
Cash .............................................................. 462,808
Dec. 31 Cash ($500,000 × 5% × 6/12) ................................. 12,500

Long-Term Investments .......................................... 1,384
Interest Revenue ($462,808 × 6% × 6/12) ..... 13,884
2016
June 30 Cash ($500,000 × 5% × 6/12) ................................. 12,500
Long-Term Investments .......................................... 1,426
Interest Revenue (($462,808 + $1,384) × 6% × 6/12) 13,926

*EXERCISE 12-10 (Continued)
(c) Investee
2016
June 30 Cash ....................................................................... 462,808
Bonds Payable ............................................... 462,808
Dec. 31 Interest Expense ($462,808 × 6% × 6/12) .............. 13,884

Cash .............................................................. 12,500
Bonds Payable ............................................... 1,384
2016
June 30 Interest Expense (($462,808 + $1,384) × 6% × 6/12) 13,926
Cash .............................................................. 12,500
Bonds Payable ............................................... 1,426
(d) The response to (a) would differ in that the bond purchase would be recorded in a
trading investment account. The discount would not be amortized; the $12,500 cash
receipt of interest would be recorded as interest revenue. The bonds carrying amount
would be adjusted to the fair value of $465,000 ($500,000 × 93%) at December 31,
2015. An unrealized gain of $2,192 would be reported on the income statement.
[$465,000 (fair value) – $462,808 (carrying amount) = $2,192].
There would be no changes to how the investee recorded the bonds or interest.

SOLUTIONS TO PROBLEMS
PROBLEM 12-1A
(a) Feb. 1 Trading Investments ...................................... 104,000

Cash ($100,000 × 1.04) ......................... 104,000
Aug. 1 Cash ($100,000 × 9% × 6/12) ........................ 4,500

Interest Revenue ................................... 4,500
2 Cash ($40,000 × 1.02) ................................... 40,800

Realized Loss on Trading Investments .......... 800
Trading Investments ($104,000 × 40%). 41,600
Dec. 31 Interest Receivable

($60,000 × 9% × 5/12) ................................... 2,250
31 Unrealized Loss on Trading Investments

($104,000 – $41,600) – $60,000 .................... 2,400
Trading Investments .............................. 2,400
(b)
GIVARZ CORPORATION
December 31, 2015
Current assets
Interest receivable ............................................................................ $ 2,250
Trading investments ......................................................................... 60,000
(c)
GIVARZ CORPORATION

Interest revenue ($4,500 + $2,250) .................................................. $6,750
Unrealized loss on trading investments ................................. $2,400
Realized loss on trading investments ...................................... 800 3,200
$3,550

PROBLEM 12-2A
(a) Feb. 1 Trading Investments ................................................. 36,000

Cash ............................................................... 36,000
Mar. 1 Trading Investments ................................................. 24,000

Cash ................................................................ 24,000
Apr. 1 Trading Investments ................................................. 60,000

Cash ............................................................... 60,000
July 1 Cash ($3 × 600) ....................................................... 1,800

Dividend Revenue ........................................... 1,800
Aug. 1 Cash ($58 × 200) .................................................... 11,600

Realized Loss on Trading Investments .................... 400
Trading Investments ........................................ 12,000
[($36,000 ÷ 600) × 200]
Sept. 1 Cash ($1.50 × 800) .................................................. 1,200

Oct. 1 Cash ($60,000 × 7% × 6/12) .................................... 2,100

Interest Revenue ............................................. 2,100
1 Cash ......................................................................... 62,000

Realized Gain on Trading Investments
($62,000 – $60,000) ........................................ 2,000

PROBLEM 12-2A (Continued)
(a) (Continued)
Dec. 31 Unrealized Loss on Trading Investments

(see below $48,000 – $46,800).......................... 1,200
Trading Investments .................................. 1,200
Security Cost Fair Value

CBF common $24,000* $22,000 (400 × $55)
RSD common 24,000 24,800 (800 × $31)
$48,000 $46,800
*$36,000 − $12,000 = $24,000
(b) KAKISA FINANCIAL CORPORATION

December 31, 2015
Current assets
Trading investments .................................................................... $46,800
(c) KAKISA FINANCIAL CORPORATION


Dividend revenue ($1,800 + $1,200) ................................................ $3,000
Interest revenue ............................................................................... 2,100
Realized gain on trading investments ............................................... 2,000
7,100
Unrealized loss on trading investments ................................. $1,200
Realized loss on trading investments ...................................... 400 1,600
$5,500
Please note that it would not be wrong to combine realized gains and losses for a specific
category of investments for presentation purposes.

PROBLEM 12-3A
(a)
Mar. 1 Cash ......................................................................... 23,600
Realized Gain on Trading Investments ............ 1,600
June 1 Trading Investments ................................................. 28,000

Cash ................................................................ 28,000
Sept. 1 Cash ($1.50 × 800) .................................................. 1,200

Oct. 1 Cash ........................................................................ 12,500

Realized Gain on Trading Investments ............ 100
Trading Investments (400 × $31) ..................... 12,400
Dec. 31 Unrealized Loss on Trading Investments ................. 5,200

Trading Investments ($40,400 – $35,200) ....... 5,200
Security Carrying Amount Fair Value
RSD common $12,400* $13,200 (400 × $33)

KEF common 28,000 22,000 (2,000 × $11)
$40,400 $35,200
*$24,800 – $12,400 = $12,400

(b) KAKISA FINANCIAL CORPORATION

December 31, 2016
Current assets
(c) KAKISA FINANCIAL CORPORATION

Other revenue
Realized gain on trading investments ($1,600 + $100) .................... $1,700
Dividend revenue ........................................................................... 1,200
2,900
Other expense
Unrealized loss on trading investments ............................................ 5,200

PROBLEM 12-4A
(a)
Cost Fair Value

Debt Securities Quantity Unit Total Unit Total
Dominion bonds 2,000 $100 $200,000 $ 97 $194,000
Government of Canada
bonds 1,000 100 100,000 135 135,000
Sub-total 300,000 329,000
Cost Fair Value

Equity Securities Quantity Unit Total Unit Total
Bank of Calgary 2,000 $55 $110,000 $61 $122,000
Matco Inc. 5,000 29 145,000 32 160,000
Argenta Corp. 5,000 36 180,000 40 200,000
Sub-total 435,000 482,000
Total $735,000 $811,000
(b) If Val d’Or’s entire portfolio is comprised of trading investments, they would be
carried at their fair value of $811,000. An unrealized gain of $76,000 ($811,000 –
$735,000) would appear under other revenues and expenses on the company’s
income statement.
(c) If Val d’Or’s intends to hold the debt securities to maturity, this portion of the portfolio
should be reported at amortized cost on the statement of financial position. The
premium or discount would be amortized and the carrying amount of the bonds
would be adjusted. If the bonds were purchased at par, they would be carried at their
cost of $300,000. The portfolio of debt securities would be classified as a long-term
investment. No unrealized gains or losses would be recognized for the debt portfolio
on the income statement.
The equity securities would be carried at fair value of $482,000. The portfolio of
equity securities would be classified as a current asset. An unrealized gain of
$47,000 ($482,000 – $435,000) would appear under other revenues and expenses
on the company’s income statement.
(d) If Val d’Or cannot obtain fair value information relating to the securities in its portfolio,
the portfolio should be reported at cost on the statement of financial position. No
unrealized gains or losses would be recognized on the income statement.

PROBLEM 12-5A
(a)
Statement of Financial Position Income Statement
Shareholders’ Revenues Expenses
Assets Liabilities Equity and Gains and Losses Profit
1. NE
NE NE NE NE NE
(+/-)
2. + NE + + NE +
3. NE
NE NE NE NE NE
(+/-)
4. + NE + + NE +
5. -
NE - NE + -
(+/-)
6. NE
NE NE NE NE NE
(+/-)
7. - NE - NE + -
8. NE
NE NE NE NE NE
(+/-)
9. - NE - NE + -
10. NE NE NE NE NE NE
(b) Under IFRS, Lai could have accounted for the bonds using the fair value through
profit or loss model and the following transaction would change:

10. + NE + + NE +
(c) Under ASPE, using the cost model to account for investment in associates is an
allowed alternative if the fair value of the investment is not known. Under these
circumstances, the following transactions would change:

8. + NE + + NE +

PROBLEM 12-6A
(a) No significant influence
Jan. 1 Long-Term Investments ....................................... 1,800,000

Cash ............................................................... 1,800,000
Mar. 15 Cash (100,000 × $0.50) ....................................... 50,000

Dividend Revenue .......................................... 50,000
June 15 Cash (100,000 × $0.50) ....................................... 50,000

Sept. 15 Cash (100,000 × $0.50) ....................................... 50,000

Dec. 15 Cash (100,000 × $0.50) ....................................... 50,000

31 Unrealized Loss on Long-Term Investments

[$1,800,000 – (100,000 × $17)] ............................ 100,000
Long-Term Investments .................................. 100,000
(b) Significant influence
Jan. 1 Investment in Associates ..................................... 1,800,000

Cash ............................................................... 1,800,000
Mar. 15 Cash (100,000 × $0.50) ....................................... 50,000

Investment in Associates ................................ 50,000
June 15 Cash (100,000 × $0.50) ....................................... 50,000

Sept. 15 Cash (100,000 × $0.50) ....................................... 50,000

Dec. 15 Cash (100,000 × $0.50) ....................................... 50,000

31 Investment in Associates ..................................... 275,000

($1,100,000 × 25%) ..................................... 275,000

(c) Several factors should be examined to determine whether one company can
exercise significant influence over another. Although an ownership interest of 20%
or more implies significant influence, this is just a rule of thumb. Other factors
should be taken into consideration. One factor would be the presence of a member
of the investor’s management on the investee’s board of directors. A second factor
to be considered would be whether or not the investor influences the investee’s
policy-making process. Third, the presence of material transactions between the
investor and investee might indicate significant influence. Fourth, there is an
exchange of managerial personnel. Fifth, the investor is providing key technical
information to the investee. Another consideration is the distribution of the
investee’s common shares. That is, are the investee’s shares widely held or owned
by relatively few shareholders? If someone owns 20% of the outstanding shares
and none of the shareholders holding the other 80% owns more than 1% of the
shares there is probably significant influence, but if there is only one other
shareholder who owns 80%, there may not be significant influence.
(d) Cost model
Jan. 1 Long-Term Investments ....................................... 1,800,000

Cash ............................................................... 1,800,000
Mar. 15 Cash (100,000 × $0.50) ....................................... 50,000

June 15 Cash (100,000 × $0.50) ....................................... 50,000

Sept. 15 Cash (100,000 × $0.50) ....................................... 50,000

Dec. 15 Cash (100,000 × $0.50) ....................................... 50,000


(e) ASPE is a set of standards developed for use primarily by private companies.
Private companies are more likely to invest in other private companies and the
shares of such companies do not trade actively on public stock exchanges. It is
therefore more common for private companies to have difficulty reporting
investments at fair value because such values are not readily obtained. So, if fair
value cannot be determined, ASPE allows the use of the cost method. Under ASPE,
companies can choose to use the cost model rather than the equity method to
account for investments subject to significant influence if the fair value of the shares
is not known. Private companies often have few users and the information provided
by the equity method may not relevant.
(f)
No Significant Significant
Influence Influence Cost Model
Long-term investments:
Purchase price $1,800,000 $1,800,000 $1,800,000
Receipt of dividends
($50,000 × 4) 0 (200,000) 0
Investee’s profit 0 275,000 0
Fair value adjustment (100,000) 0 0
Carrying amount $1,700,000 $1,875,000 $1,800,000
Income Statement:
Dividend revenue $200,000 $0 $200,000
Revenue from Investment in
Associates 0 275,000 0
Unrealized loss on long-
term investments (100,000) 0 0

PROBLEM 12-7A
(a) Under situation 1, it is unlikely that significant influence has been achieved as the
percentage of Hat’s total shares outstanding that is held by CT Inc. is too low at
12.5%. (25,000 ÷ 200,000 = 12.5% ownership)
2014
Oct. 3 Long-Term Investments .................................... 1,250,000
Cash (25,000 × $50) .................................... 1,250,000
2015
Sept. 30 Cash ($0.25 × 25,000) ...................................... 6,250
Dividend Revenue ....................................... 6,250
30 Long-Term Investments .................................... 75,000

Unrealized Gain on Long-Term
Investments ([$53 – $50] × 25,000) .......... 75,000
Situation 1
Beginning balance $ 0
Purchase price 1,250,000
Fair value adjustment 75,000
Carrying amount end of year $1,325,000
Income Statement:
Dividend revenue $ 6,250
Unrealized gain on long-term investments 75,000
(b) Under situation 2, it is likely that significant influence has been achieved as the
percentage of Hat’s total shares outstanding that is held by CT Inc. is 35%. (70,000
÷ 200,000 = 35% ownership)
2014
Oct. 3 Investment in Associates .................................. 3,500,000
Cash (70,000 × $50) .................................... 3,500,000
2015
Sept. 30 Cash ($0.25 × 70,000) ...................................... 17,500
30 Investment in Associates .................................. 201,250

($575,000 × 35%) ........................................ 201,250

(b) Continued Situation 2

Investments in Associates:
Receipt of dividends (17,500)
Investee’s profit 201,250
Income Statement:
Dividend revenue $ 0
Revenue from investment in associates 201,250
Unrealized gain on long-term investments 0
(c) Under IFRS, CT Inc. has no option but to account for its investment in Hat using the
equity method when significant influence has been achieved. On the other hand,
under ASPE, CT Inc. has options. If the fair value of the shares of the investee is
known, CT Inc. can account for the investment using the equity method or fair value
through profit or loss. If fair value is not known, CT Inc. can choose the equity
method or the cost model.
(d) In Situation 3, under IFRS, consolidated financial statements are required for
financial reporting purposes because CT Inc. owns 100% of Hat. Under IFRS, CT
Inc. has no option but to prepare consolidated financial statements. Under ASPE,
CT Inc. can choose not to consolidate its subsidiary and instead use the equity
method or the cost model unless the fair value of Hat’s shares is available, in which
case the fair value through profit or loss method would be used rather than the cost
model.
(e) Consolidated financial statements show the combined assets and liabilities of both the
parent and subsidiary companies. In order to avoid duplication, the investment account
is eliminated. The (parent) investor’s name: CT Inc. will appear on the consolidated
financial statements.
(f) For situation 1, because the fair value of the Hat shares is unknown, CT Inc. would
only be able to use the cost model. For situation 2, CT Inc. can choose the equity
method or the cost model. Under situation 3, CT Inc. can choose not to consolidate
its subsidiary and instead use the equity method or the cost model.

PROBLEM 12-8A
(a) Kang purchased 30,000 shares [($1,320,000 – $120,000) ÷ $40]
(b) Kang owns 25% (30,000 ÷ 120,000) of Sandhu shares.
(c) The cash dividend per share was $3.00 ($90,000 ÷ 30,000 shares)
(d) The fair value per share was $44 ($1,320,000 ÷ 30,000)
(e) Because Kang can exercise significant influence over the Sandhu Travel Agency,
the equity method will be used to account for the long-term investment. Accordingly,
the investment account will be increased for the acquisition of shares and for Kang‘s
share of Sandhu’s profits for the year that it held the investment in Sandhu. The
investment account will be decreased when Sandhu pays dividends. Accordingly
the investment account contains the following:
Investment in Sandhu Travel Agency

(30,000 shares × $40) $1,200,000
Less: cash dividends received (90,000)
1,110,000
Plus: 25% of Sandhu Travel Agency’s earnings for the
year that the investment was owned - derived
( 1,400,000 – 1,110,000) 290,000
Balance of investment, December 31, 2015 $1,400,000
If $290,000 is 25% of Sandhu’s income for the year, then the Sandhu Travel
Agency must have earned $1,160,000 throughout the year ($290,000 ÷ 25%).
(f) Under the equity method, Kang would report its share of Sandhu Travel Agency’s
profits as follows:
KANG INC.

Revenue from investment in associates .................................... $290,000

(g) Under the cost model, Kang would report only the dividends received as revenues
as follows:
KANG INC.

Dividend revenue....................................................................... $90,000

*PROBLEM 12-9A
(a)
Jan. 1 Long-Term Investments .................................... 1,658,157
Cash ............................................................ 1,658,157
(b) Bond Amortization Schedule
Interest Interest
Semi-Annual Received Revenue Premium Amortized
Interest Period 3.5% 3.25% Amortization Cost
Issue Date $1,658,157

1 $56,000 $53,890 $2,110 1,656,047
2 56,000 53,822 2,178 1,653,869
3 56,000 53,751 2,249 1,651,620
4 56,000 53,678 2,322 1,649,298
5 56,000 53,602 2,398 1,646,900
6 56,000 53,524 2,476 1,644,424
7 56,000 53,444 2,556 1,641,868
8 56,000 53,361 2,639 1,639,229
9 56,000 53,275 2,725 1,636,504
10 56,000 53,186 2,814 1,633,690
11 56,000 53,095 2,905 1,630,785
12 56,000 53,001 2,999 1,627,786
13 56,000 52,903 3,097 1,624,689
14 56,000 52,802 3,198 1,621,491
15 56,000 52,698 3,302 1,618,189
16 56,000 52,591 3,409 1,614,780
17 56,000 52,480 3,520 1,611,260
18 56,000 52,366 3,634 1,607,626
19 56,000 52,248 3,752 1,603,874
20 56,000 52,126 3,874 1,600,000
* Note: Rounding adjustments have been made as required in the above schedule.

*PROBLEM 12-9A (Continued)
(c)
July 1 Cash ................................................................. 56,000
Long-Term Investments ............................... 2,110
Interest Revenue ........................................ 53,890
(d)
Sept. 30 Interest Receivable ($56,000 × 3/6) .................. 28,000
Interest Revenue ($53,822 × 3/6) ............... 26,911
(e)
2025
Jan. 1 Cash.................................................................. 1,600,000
Long-Term Investments ............................... 1,600,000
(f)
JACKSON CORP.
September 30, 2015
Current assets
Interest receivable ........................................................ $ 28,000
Long term investments .......................................................... 1,654,958

($1,658,157– $2,110 – $1,089)

*PROBLEM 12-10A
(a) Feb. 1 Long-Term Investments ............................... 2,940,000

Cash ($3,000,000 × 98%) ...................... 2,940,000
Aug. 1 Cash ($3,000,000 × 8% × 6/12) ................... 120,000

Interest Revenue
($2,940,000 × 8.5% × 6/12) .................... 124,950
1 Cash ($3,000,000 × 99%) ............................ 2,970,000

Long-Term Investments
($2,940,000 + $4,950) ........................... 2,944,950
Realized Gain on Long-Term
Investments ......................................... 25,050
(b) Feb. 1 Trading Investments .................................... 2,940,000

Cash ($3,000,000 × 98%) ...................... 2,940,000
Aug. 1 Cash ($3,000,000 × 8% × 6/12) ................... 120,000

Interest Revenue .................................... 120,000
1 Cash ($3,000,000 × 99%) ............................ 2,970,000

Long-Term Investments.......................... 2,940,000
Realized Gain on Trading
Investments ......................................... 30,000
(c) Feb. 1 Cash ............................................................ 9,800,000

Bonds Payable ($10,000,000 × 98%) ..... 9,800,000
Aug. 1 Interest Expense

($9,800,000 × 8.5% × 6/12) ......................... 416,500
Bonds Payable ....................................... 16,500
Cash ($10,000,000 × 8% × 6/12) ........... 400,000
1 Bonds Payable* ........................................... 2,944,950

Loss on Redemption of Bonds ..................... 25,050
Cash ($3,000,000 × 99%) ...................... 2,970,000
* $2,944,950 = ($9,800,000 + $16,500) × ($3,000,000 / $10,000,000)

*PROBLEM 12-10A (Continued)
(d) When the bonds are purchased with the intention of holding them to maturity, the
recording of the bonds for the investor and investee are mirror images. The bonds
have the same proportionate carrying amount. This is not the case if the bonds
were purchased by Otutye on the open market. The purchase price would reflect a
different effective rate than the rate that existed at issuance of the bond and would
be different than the selling price obtained by UHL when the bond was issued.
There are also differences in accounting for the investor and investee when the
bonds are purchased for trading purposes. Any premium or discount is not
amortized by the investor even though the company issuing the bonds would
continue to amortize any discount or premium. If the bonds are held at year-end,
their carrying amount would be adjusted to fair value on the investor’s books while
the issuer would carrying the liability at amortized cost. If Otutye had sold its bonds
on the open market, the issuer, UHL, would not have been affected by this
transaction because it took place between Otutye and another company.

PROBLEM 12-1B
(a) Jan. 1 Trading Investments ............................................ 96,000

Cash ($100,000 × .96) ................................. 96,000
July 1 Cash ($100,000 × 8% × 6/12) .............................. 4,000

Interest Revenue ......................................... 4,000
2 Cash .................................................................... 25,000

Trading Investments ($96,000 ÷ 4) .............. 24,000
Realized Gain on Trading Investments........ 1,000
Dec. 31 Interest Receivable ($75,000 × 8% × 6/12) .......... 3,000

Interest Revenue ......................................... 3,000
31 Trading Investments
([$75,000 × 1.01] – $72,000*) .............................. 3,750
Unrealized Gain on Trading Investments .... 3,750
*$96,000 – $24,000 = $72,000
(b)
LIU CORPORATION
December 31, 2015
Current assets
Interest receivable ............................................................ $ 3,000
Trading investments ........................................................ 75,750
LIU CORPORATION

Interest revenue ($4,000 + $3,000) ................................... $7,000
Realized gain on trading investments ................................ 1,000
Unrealized gain on trading investments............................. 3,750

PROBLEM 12-2B
(a) Feb. 1 Trading Investments ................................................. 30,000

Cash ................................................................ 30,000
Mar. 1 Trading Investments ................................................. 29,000

Cash ................................................................ 29,000
Apr. 1 Trading Investments ................................................. 90,000

Cash ............................................................... 90,000
July 1 Cash ($2 × 1,000) .................................................... 2,000

Aug. 1 Cash (350 × $33) ..................................................... 11,550

Trading Investments
[($30,000 ÷ 1,000) × 350] ............................... 10,500
Sept. 1 Cash ($1.50 × 500) .................................................. 750

Dividend Revenue ........................................... 750
Oct. 1 Cash ($90,000 × 6% × 6/12) .................................... 2,700

Interest Revenue ............................................. 2,700
1 Cash ........................................................................ 86,000

Realized Loss on Trading Investments .................... 4,000

PROBLEM 12-2B (Continued)
Dec. 31 Trading Investments................................................. 700

Unrealized Gain on Trading Investments .........
($49,200 – $48,500) ......................................... 700
Security Cost Fair Value

IBF Common $19,500* $18,200 (650 × $28)
RST Common 29,000 31,000 (500 × $62)
$48,500 $49,200
*$30,000 – $10,500 = $19,500
(b) CHEQUE MART LTD.

December 31, 2015
Current assets
(c) CHEQUE MART LTD.

Other revenue
Dividend revenue ($2,000 + $750) ................................................... $2,750
Unrealized gain on trading investments............................................ 700
7,200
Other expense
Realized loss on trading investments ............................................... 4,000

PROBLEM 12-3B
(a)
Mar. 1 Cash ......................................................................... 22,100
June 1 Trading Investments ................................................. 18,000

Cash ................................................................ 18,000
Sept. 1 Cash ($1.50 × 500) .................................................. 750

Dividend Revenue ........................................... 750
Oct. 1 Cash ........................................................................ 14,250

Realized Loss on Trading Investments .................... 1,250
(250 × $62)
Dec. 31 Trading Investments ................................................. 4,500

Unrealized Gain on Trading Investments ......... 4,500
(See below: $38,000 – $33,500)
Security Carrying Amount Fair Value

RST Common $15,500* $14,000 (250 × $56)
DEF Common 18,000 24,000 (2,000 × $12)
$33,500 $38,000
*$31,000 – $15,500 = $15,500 which is the same as 250 × $62

(b) CHEQUE MART LTD.

December 31, 2016
Current assets
(c) CHEQUE MART LTD.

Other revenue
Unrealized gain on trading investments............................................ $4,500
Dividend revenue ........................................................................... 750
9,150
Other expense
Realized loss on trading investments ............................................... 1,250

PROBLEM 12-4B
(a)
Security Quantity Cost
Ajax Ltd. shares 4,700 $ 50,2001

Beta Corp. shares 2,500 18,0002
Citrus Inc. bonds 300 30,0003
$98,200
1
(1,500 × $12) + (1,200 × $11) + (1,000 × $9) + (1,000 × $10) = $50,200
2
(2,000 × $7) + (500 × $8) = $18,000
3
(300 × $100) = $30,000
Security Quantity Fair Value
Ajax Ltd. shares 4,700 $28,2001

Beta Corp. shares 2,500 22,5002
Citrus Inc. bonds 300 32,1003
$82,800
1
4,700 × $6 = $28,200
2
2,500 × $9 = $22,500
3
300 × $100 × 1.07 = $32,100
(b) If Sturge’s entire portfolio is comprised of trading investments, they would be carried
at their fair value of $82,800. An unrealized loss of $15,400 ($98,200 – $82,800)
would be reported under other revenues and expenses on the company’s income
statement.
(c) If Sturge’s intends to hold the Citrus bonds to maturity, this portion of the portfolio
should be reported at amortized cost on the statement of financial position. The
premium or discount would be amortized and the carrying amount of the bonds
would be adjusted. If the bonds were purchased at par, they would be carried at their
cost of $30,000. The portfolio of debt securities would be classified as a long-term
investment. No unrealized gains or losses would be recognized for the Citrus bonds
on the income statement. Only on the equity portion of the investment would an
unrealized loss be recorded of $17,500 [($50,200 + $18,000) – ($28,200 + $22,500)]
under other revenues and expenses on the income statement.
The equity securities would be carried at fair value of $50,700 ($82,800 – $32,100)
or ($28,200 + $22,500) and would be classified as a current investment.
(d) If Sturge cannot obtain fair value information relating to the securities in its portfolio,
the portfolio should be reported at cost on the statement of financial position. No
unrealized gains or losses would be recognized on the income statement.

PROBLEM 12-5B
(a)

1. NE
NE NE NE NE NE
(+/-)
2. + NE + + NE +
3. NE
NE NE NE NE NE
(+/-)
4. + NE + + NE +
5. +
NE + + NE +
(+/-)
6. NE
NE NE NE NE NE
(+/-)
7. + NE + + NE +
8. NE
NE NE NE NE NE
(+/-)
9. + NE + + NE +
(b) Under IFRS, Olsztyn could have accounted for the bonds using the fair value
through profit or loss model and the following transaction would change:

10. - NE - NE + -
(c) Under ASPE, using the cost model to account for the investment in associates is an
allowed alternative if the fair value of the investment is not known. Under these
circumstances, the following transactions would change:


8. + NE + + NE +
PROBLEM 12-6B
(a) No significant influence

Jan. 1 Long-Term Investments ................................. 3,000,000
Cash ...................................................... 3,000,000
June 30 Cash (100,000 × $0.50) ................................. 50,000

Dividend Revenue ................................. 50,000
Dec. 31 Cash (100,000 × $0.50) ................................. 50,000

31 Long-Term Investments
($31 × 100,000) – $3,000,000 ........................ 100,000
Investments ....................................... 100,000
(b) Significant influence

Jan. 1 Investment in Associates ............................... 3,000,000
Cash ...................................................... 3,000,000
June 30 Cash (100,000 × $0.50) ................................. 50,000

Investment in Associates ....................... 50,000
Dec. 31 Cash (100,000 × $0.50) ................................. 50,000

Investment in Associates ....................... 50,000
31 Investment in Associates ............................... 336,000

($1,680,000 × 20%) ............................... 336,000

(c) Several factors should be examined to determine whether one company can
exercise significant influence over another. Although an ownership interest of 20%
or more implies significant influence, this is just a rule of thumb. Other factors
should be taken into consideration. One factor would be the presence of a member
of the investor’s management on the investee’s board of directors. A second factor
to be considered would be whether or not the investor influences the investee’s
policy-making process. Third, the presence of material transactions between the
investor and investee might indicate significant influence. Fourth, there is an
exchange of managerial personnel. Fifth, the investor is providing key technical
information to the investee. Another consideration is the distribution of the
investee’s common shares. That is, are the investee’s shares widely held or owned
by relatively few shareholders? If someone owns 20% of the outstanding shares
and none of the shareholders holding the other 80% owns more than 1% of the
shares there is probably significant influence, but if there is only one other
shareholder who owns 80%, there may not be significant influence.
(d) Cost model
Jan. 1 Long-Term Investments ................................. 3,000,000

Cash ...................................................... 3,000,000
June 30 Cash (100,000 × $0.50) ................................. 50,000

Dec. 31 Cash (100,000 × $0.50) ................................. 50,000

(e) ASPE is a set of standards developed for use primarily by private companies.
Private companies are more likely to invest in other private companies and the
shares of such companies do not trade actively on public stock exchanges. It is
therefore more common for private companies to have difficulty reporting
investments at fair value because such values are not readily obtained. So if fair
value cannot be determined, ASPE allows the use of the cost method. Under ASPE,
companies can choose to use the cost model rather than the equity method to
account for investments subject to significant influence if the fair value of the shares
is not known. Private companies often have few users and the information provided
by the equity method may not relevant.

(f)
No Significant Significant Cost
Influence Influence Model
Purchase price $3,000,000 $3,000,000 $3,000,000
Receipt of dividends
($50,000 × 2) 0 (100,000) 0
Investee’s profit 0 336,000 0
Fair value adjustment 100,000 0 0
Carrying amount $3,100,000 $3,236,000 $3,000,000
Income Statement:
Dividend revenue $100,000 $0 $100,000
Revenue from investment in
associates 0 336,000 0
Unrealized gain on long-
term investments 100,000 0 0

PROBLEM 12-7B
(a) Under situation 1, it is unlikely that significant influence has been achieved as the
percentage of Sub’s total shares outstanding that is held by Partridge is too low at
12%. (60,000 ÷ 500,000 = 12% ownership)
2015
Jan. 2 Long-Term Investments ............................... 600,000
Cash (60,000 × $10) ........................... 600,000
Dec. 31 Cash (60,000 × $0.50) ................................. 30,000

Dividend Revenue .............................. 30,000
31 Long-Term Investments ............................... 120,000

Investments ($12 – $10) × 60,000 120,000
Situation 1
Purchase price 600,000
Fair value adjustment 120,000
Carrying amount end of year $720,000
Income Statement:
Dividend revenue $ 30,000
Unrealized gain on long-term investments 120,000
(b) Under situation 2, it is likely that significant influence has been achieved as the
percentage of Sub’s total shares outstanding that is held by Partridge is 25%.
(125,000 ÷ 500,000 = 25% ownership)
2015
Jan. 2 Investment in Associates ............................. 1,250,000
Cash (125,000 × $10) ....................... 1,250,000
Dec. 31 Cash (125,000 × $0.50) ............................... 62,500

Investment in Associates .................. 62,500
31 Investment in Associates ............................. 87,500

Revenue from Investment in
Associates ($350,000 × 25%) ...... 87,500

(b) Continued Situation 2

Investments in Associates:
Receipt of dividends (62,500)
Investee’s profit 87,500
Income Statement:
Dividend revenue $ 0
Revenue from investment in associates 87,500
Unrealized gain on long-term investments 0
(c) Under IFRS, Partridge has no option but to account for its investment in Sub using
the equity method when significant influence has been achieved. On the other hand,
under ASPE, Partridge has options. If fair value of the shares of the investee is
known, Partridge can account for the investment using either the equity method or
fair value through profit or loss. If fair value is not known, Partridge can choose the
equity method or the cost model.
(d) In Situation 3, under IFRS, consolidated financial statements are required for
financial reporting purposes because Partridge owns 100% of Sub. Under IFRS,
Partridge has no option but to prepare consolidated financial statements. Under
ASPE, Partridge can choose not to consolidate its subsidiary and instead use the
equity method or the cost model unless the fair value of Sub’s shares is available, in
which case the fair value through profit or loss method would be used rather than
the cost model.
(e) Consolidated financial statements show the combined assets and liabilities of both
the parent and subsidiary companies. In order to avoid duplication, the investment
account is eliminated. The (parent) investor’s name: Partridge Inc. will appear on
the consolidated financial statements.
(f) For situation 1, because the fair value of the Sub shares is unknown, Partridge
would only be able to use the cost model. For situation 2, Partridge can choose the
equity method or the cost model. Under situation 3, Partridge can choose not to
consolidate its subsidiary and instead use the equity method or the cost model.

PROBLEM 12-8B
(a) Hadley’s accountant used the equity method to account for the investment which
resulted in Hadley recognizing 20% of Letourneau’s income as revenue ($200,000
÷ $1,000,000). Therefore, Hadley Inc. must own 20% of the common shares of
Letourneau Cycles Corp.
(b) Hadley would have received 20% of any dividends declared by Letourneau, or
$40,000 ($200,000 × 20%).
(c) Hadley purchased 80,000 common shares of Letourneau Cycles Corp. This
amount could be calculated as follows:
Balance in long-term investment account, Dec. 31 $960,000

Less: Hadley’s share of Letourneau’s earnings (200,000)
Add: Hadley’s share of Letourneau’s dividends 1 40,000
Investment account (at cost) $800,000*
*Since the cost of the investment was $800,000 and the issue price of
Letourneau’s shares was $10 per share, it follows that 80,000 shares were
purchased.
1
Part (b) above
(d) Among the questions that should be considered in determining an investor’s

influence are whether:
• the investor has representation on the investee’s board of directors’
• the investor participates in the investee’s policy-making process
• there are material transactions between the investor and the investee
• the investor and investee are exchanging managerial personnel
• the investor is providing key technical information to the investee
In addition to the above, we should also consider whether the common shares held
by other shareholders are concentrated or dispersed. Companies are required to
use judgement in determining if significant influence exists instead of blindly
following the guideline of 20% or greater ownership.

(e) If significant influence does not exist Hadley should use the fair value method to
account for the investment in Letourneau Cycles Corp. Under the fair value method,
Hadley would report the investment in Letourneau Cycles Corp. as follows:
HADLEY INC.
December 31, 2015
Investments
Long-term investments ............................................................... $950,000
HADLEY INC.
Other revenue
Dividend revenue ........................................................................ $ 40,000
Unrealized gain on long-term investments.................................. 150,000
($950,000 – $800,000)
(f) Under the cost model, Hadley would report the investment at cost of $800,000 on
the statement of financial position and only the dividends received of $40,000 as
Other revenue on the income statement.

*PROBLEM 12-9B
(a)
Jan. 1 Long-Term Investments .................................... 770,921

Cash ............................................................ 770,921
(b) Bond Amortization Schedule
Interest Interest
Semi-Annual Received Revenue Discount Amortized
Interest Period 3% 3.25% Amortization Cost
Issue Date $770,921

1 $24,000 $25,055 $1,055 771,976
2 24,000 25,089 1,089 773,065
3 24,000 25,125 1,125 774,190
4 24,000 25,161 1,161 775,351
5 24,000 25,199 1,199 776,550
6 24,000 25,238 1,238 777,788
7 24,000 25,278 1,278 779,066
8 24,000 25,320 1,320 780,386
9 24,000 25,363 1,363 781,749
10 24,000 25,407 1,407 783,156
11 24,000 25,453 1,453 784,609
12 24,000 25,500 1,500 786,109
13 24,000 25,549 1,549 787,658
14 24,000 25,599 1,599 789,257
15 24,000 25,651 1,651 790,908
16 24,000 25,705 1,705 792,613
17 24,000 25,760 1,760 794,373
18 24,000 25,817 1,817 796,190
19 24,000 25,876 1,876 798,066
20 24,000 25,934 1,934 800,000
* Note: Rounding adjustments have been made as required in the above schedule.

*PROBLEM 12-9B (Continued)
(c)
July 1 Cash ................................................................. 24,000
Long-Term Investments .................................... 1,055
(d)
Oct. 31 Interest Receivable ($24,000 × 4/6) .................. 16,000
Long-Term Investments ($1,089 × 4/6) ............. 726
(e)
2025
Jan. 1 Cash.................................................................. 800,000
(f)
MORRISETTE INC.
October 31, 2015
Current assets
Interest receivable ............................................................ $ 16,000
Long-term investments ............................................................ 772,702

($770,921 + $1,055 + $726)

*PROBLEM 12-10B
(a) Densmore Consulting — Trading
Jan. 1 Trading Investments .................................... 204,000

Cash ($200,000 × 1.02).......................... 204,000
June 30 Cash ($200,000 × 8% × 6/12) ...................... 8,000

July 1 Cash ($200,000 × 1.03) ............................... 206,000

Realized Gain on Trading Investments .. 2,000
Trading Investments ............................... 204,000
(b) Densmore Consulting — Hold to Maturity
Jan. 1 Long-Term Investments ............................... 204,000

Cash ....................................................... 204,000
June 30 Cash ($200,000 × 8% × 6/12) ...................... 8,000

Long-Term Investments.......................... 146
Interest Revenue .................................... 7,854
($204,000 × 7.7% × 6/12)
July 1 Cash ($200,000 × 1.03) ............................... 206,000

Long-Term Investments
($204,000 – $146) ................................. 203,854
Realized Gain on Long-Term
Investments ......................................... 2,146

*PROBLEM 12-10B (Continued)

(c) CASB
Jan. 1 Cash ($1,000,000 × 1.02) ............................ 1,020,000

Bonds Payable ....................................... 1,020,000
June 30 Interest Expense

($1,020,000 × 7.7% × 6/12) ......................... 39,270
Bonds Payable............................................. 730
Cash ($1,000,000 × 8% × 6/12) ............. 40,000
Dec. 31 Interest Expense ..........................................

([$1,020,000 – $730] × 7.7% × 6/12) ...... 39,242
Bonds Payable............................................. 758
Cash ($1,000,000 × 8% × 6/12) ............. 40,000
(d) When the bonds are purchased with the intention of holding them to maturity, the
recording of the bonds for the investor and investee are mirror images. The bonds
have the same proportionate carrying amount. This would not be the case if the
bonds were purchased by Densmore on the open market. The purchase price
would reflect a different effective rate than the rate that existed at issuance of the
bond and would be different than the selling price received by CASB when the
bonds were issued.
There are also differences in accounting for the investor and investee when the
bonds are purchased for trading purposes. Any premium or discount is not
amortized by the investor even though the company issuing the bonds would
continue to amortize any discount or premium. If the bonds are held at year-end,
their carrying amount would be adjusted to fair value on the investor’s books while
the issuer would carrying the liability at amortized cost. When Densmore sold its
bonds on the open market, the issuer, CASB, was not affected by this transaction
because it took place between Densmore and another company.

BYP 12-1 FINANCIAL REPORTING
(a) Shoppers does not have trading securities but does have investment property
classified as non-current assets.
(b) Shoppers does not report any income from investments on its income statement or
on its statement of comprehensive income.
(c) The companies mentioned in note 29 are subsidiaries of Shoppers Drug Mart. The
balances in the investment accounts for these companies have been eliminated
when the financial statements of these subsidiaries were consolidated along with
their parent company. This is why the financial statement titles include the word
“consolidated”.
(d) The investing activities in the statement of cash flows would report purchases and
sales of investments. Shoppers used cash in 2012 to purchase the assets of
Paragon Pharmacies.

BYP 12-2 COMPARATIVE ANALYSIS
(a) Shoppers has investments in subsidiaries, as does Jean Coutu. These investments
are eliminated upon consolidating the financial statements. Shoppers does not have
trading securities but Jean Coutu does and calls them temporary investments. As
well Jean Coutu has a large investment in Rite Aid, and a small amount of
investment in associates and a joint venture.
Because of the large investment in Rite Aid, Jean Coutu’s statement of financial
position indicates a larger amount of investments than Shoppers. However, we have
to remember that Shoppers has a number of subsidiaries that are consolidated and
when this happens, the investment account relating to those subsidiaries is
eliminated and replaced with specific assets and liabilities of those subsidiaries.
The most common type of investment appearing on the statement of financial

position is an investment in associates, over which the investor has significant
influence.
(b) Any income earned from investments in subsidiaries is embedded within the specific
revenue and expense accounts of the consolidated financial statements and is not
shown on a separate line. Jean Coutu, on the other hand, does not consolidate its
investment in Rite Aid and therefore shows separate amounts for this investment,
which included a substantial unrealized gain that doubled its income. Jean Coutu
also had realized gains arising from a partial sale of its investment in Rite Aid.
(c) As with all of its subsidiaries, Loblaw Companies Ltd. will consolidate the financial
statement of Shoppers Drug Mart, once the shares are acquired.

BYP 12-3 COMPARING IFRS AND ASPE
(a) 1. ARP’s investment in CPS is strategic, but ARP is not exercising significant
influence even though it owns 20% of the outstanding voting shares. ARP does not
have representation on CPS’s board of directors, and Adam and Robert have not
been involved in any decisions related to CPS’s operations. Long-term investments
that do not involve significant influence must be accounted for using the fair value
method if the value of the shares trade in an active market.
Under ASPE, if the investment was subject to significant influence, ARP would
have the choice between two accounting methods, the equity method and the fair
value model if the shares trade in an active market. If the shares did not trade in an
active market, ASPE allows a choice of the equity method or the cost model. The
cost model is therefore not an acceptable method under ASPE for this investment
because the shares do trade actively.
2. Recording the investment using the cost model means that the carrying amount of
the investment remains at its original cost of $100,000. Revenues are derived from
dividends received from CPS. Since no dividends were received during the year,
no revenue has been reported on ARP’s income statement. The cost model does
not record unrealized gains or losses from fair value adjustments at year end. Had
ARP applied the fair value method, the income statement would report an
unrealized loss of $10,000 ([fair value of $4.50/ share × 20,000 shares] – cost of
$100,000).
If ARP had applied the equity method, the income statement would report a loss
from its associate of $6,000 (20% × loss of $30,000). This loss would reduce profit.
Robert would prefer the cost model to keep profit higher by $10,000 for 2015
because the financial statements will be presented to the bank to obtain financing
for expansion. The bank would likely find out about the unrecorded unrealized loss
by inquiring about the status of the investment.
(b) If ARP reported its financial results under IFRS, it would apply the fair value
method and would be prohibited from using the cost method because the shares
trade in an active market.

BYP 12-4 CRITICAL THINKING
(a) The three investments held by Bering Limited fall into three categories:
1.Debt investment with the intention to be held to maturity — for the
Government of Alberta bonds.
2.Non-strategic trading investments purchased with the expectation of active
trading of the security — for the Atlas Inc. common shares.
3.Strategic investment in an associate where Bering exercises significant
influence over the investee — for the CH Resources Inc. common shares.
Because each investment has a different purpose and management has a different
intention in holding the investment, IFRS provides some alternatives in how to
account for each of the three investments.
Debt securities such as the Government of Alberta bond will normally be

accounted for using amortized cost model. The option exists under IFRS to
account for the bonds using fair value through profit or loss. Since the board of
directors wishes to choose the model that will maximize Bering’s financial position
and profitability, the amortized cost model is chosen because the bonds fair value
at December 31, 2015 falls below the amortized cost. Using the amortized cost
model will avoid recording an unrealized loss on long-term investments in the
amount of $10,000.
Non-strategic trading investments must be reported at their fair value. A choice is

available under IFRS to report any unrealized gains or losses in the income
statement or in other comprehensive income in the statement of comprehensive
income. The fair value though profit and loss is recommended because the board
of directors wishes to choose the model that will maximize Bering’s financial
position and profitability. An unrealized gain on the trading investments in the
amount of $5,000 is therefore recognized as other revenue on the income
statement.
The investment in the CH Resources Ltd. is a strategic investment in an associate

and Bering under IFRS must account for the investment using the equity method
because it holds 40% of common shares and exercises significant influence over
CH Resources. Bering will recognize revenue from investment in associates and
an in increase in its investment in this associate in the amount of its share of the
profits reported by CH Resources Inc. for the fiscal year of $4,000 (40% ×
$10,000). The investment in associates account will be reduced by the amount
dividends received from CH Resources during the year in the amount of $800
(40% × $2,000) and cash will be increased. Consequently, the balance of the
investment in associate account reported on the statement of financial position will
be in the amount of $103,200 ($100,000 + $4,000 – $800).

BYP12-4 (Continued)
(a) (Continued)
If it can be demonstrated that Bering does not have significant influence over CH
Resources Ltd. then the investment should be reported at fair value. An unrealized
gain of $11,000 would be recorded as an unrealized gain on long-term investments
on the income statement or an unrealized gain reported as other comprehensive
income on the statement of comprehensive income if Bering elected to use this
model. The dividend received in the amount of $800 would be reported as other
revenue on the income statement. Since the board of directors wishes to choose
the model that will maximize Bering’s financial position and profitability, they may
argue that Bering does not have a significant influence position over CH Resources
and would not elect to show unrealized gains and losses as other comprehensive
income. The facts of the relationship between the investor and investee would
need to be supported by evidence in order to use the fair value model for this
investment. The recommendation is to account for CH Resources Inc. using the
equity method.
Based on the above, the financial statements will show the following:
BERING LIMITED
December 31, 2015
Current assets
Non-current assets
Long-term investments................................................................ 100,000
Investment in associates ............................................................. 103,200
BERING LIMITED
Other revenue
Revenue from investment in associates ........................................... $4,000
Unrealized gain on trading investments............................................ 5,000
12,000
The choices among the different models will not affect the statement of cash flows.

BYP12-4 (Continued)
(b) Under ASPE, the accounting for the three investments would be done using the
following models and methods:
1.Debt investment with the intention to be held to maturity — for the

Government of Alberta bonds will be accounted for using the amortized cost
model. However, an option does exist as under IFRS to value this
investment at fair value, but it must be fair value through profit or loss. This
option would most likely not be taken as it would result in the recording of an
unrealized loss.
2.Non-strategic trading investments purchased with the expectation of active

trading of the security — for the Atlas Inc. common shares will be reported
using the fair value through profit and loss because the shares market value
is available (as under IFRS), but Bering cannot report their investments
using the fair value through other comprehensive income model.
3.Strategic investment in an associate where Bering exercises significant

influence over the investee — for the CH Resources Inc. common shares is
accounted for using the equity method (as under IFRS). Bering also has the
choice to account for this investment using the cost model if the shares had
not been traded actively or fair value if the shares are traded actively and
fair value can be obtained.
Based on the information given, the financial statements would show the same
amounts and classifications as was recommended in part (a) under IFRS.

BYP 12-5 ETHICS CASE
(a) Lemke’s position would show unrealized gains, dividend revenue and interest
revenue on the income statement, but would not report unrealized losses. Her
position would mask unrealized losses by overstating the carrying amount of certain
investments that had declined in value. Her approach does not reflect the nature of
the investments as strategic or non-strategic. Her approach would also result in
financial results that are not comparable because as investments fluctuate from
increasing in value to decreasing in value, the model used would need to change.
She understands the implications of using different models for financial statement
presentation purposes, but she is not applying the models in the correct manner.
(b) Greenwood’s position does not show any unrealized gains or losses, but reports
revenue from associates where significant influence does not exist. Her position
would also mask unrealized losses by overstating the carrying amount of certain
investments that had declined in value. Her approach also does not reflect the
nature of the investments as strategic, or non-strategic. Her approach would also
result in financial results that are not comparable, because as equity investments
fluctuate from increasing in value to decreasing in value, the model used would need
to change. She understands the implications of using different models for financial
statement presentation purposes, but she is not applying the models in the correct
manner.
(c) By selling its trading investments that had risen in value just prior to year end, Kreiter
Financial Services would report realized gains on its income statement. The trading
investments that decline in value would be reported at fair value with the unrealized
losses also reported on the income statement. When the declining investments are
sold immediately after year end, a realized gain or loss is reported based on the
difference between the selling price and the year end carrying amount of the
investment, which in this case would probably be insignificant as the sale occurs so
soon after year end. Had Kreiter sold these investments just prior to year end, a
realized loss equal to the reported unrealized loss would be reported on the
company’s income statement. By properly classifying its trading portfolio, decisions
as to the timing of selling these investments will not allow management to
manipulate profit because investments are reported at fair value.
Note to instructors: All of the material supplementing this group activity, including a suggested
solution, can be found in the Collaborative Learning section of the Instructor Resource site
accompanying this textbook as well as in the Prepare and Present section of WileyPLUS.

BYP 12-6 “ALL ABOUT YOU” ACTIVITY
The following solution provides information from the ING website in September
2013. Rates and other information are obviously subject to change.
(a) Rates at Ing Direct:

Tax-Free Investment Savings account: 1.4%
2 year GIC: 1.75%
(b) Using the Ing Direct Investment Savings Calculator

$5,000 at 1.4% for 2 years = $5,141.89
Using the Ing Direct GIC Calculator
$5,000 at 1.75% for 2 years = $5,177.97
(c) Using http://www.ingdirect.ca/en/tools/calcs/TFSA_ISA_Calculator.html

A contribution of $416.67 monthly for 40 years at the TFSA rate of 1.4 % will yield
$268,420.38 and with GIC rates of 1.75% will yield $290,004.11.
In order to reach a goal of $1,000,000 with contributions of $416.67 per month for
40 years, the annual yield rate would need to be 6.68%
Using a financial calculator:

PV $0
I/Y ? Yields .5566% per month or 6.68% annually
N 480
PMT $ (416.67)
FV $1,000,000.00
Type 0
Excel formula =RATE(nper,pmt,pv,fv,type)

BYP 12-7 SERIAL CASE
(a) If Biscuits succeeds in purchasing all of the shares of Koebel’s Family Bakery,
Biscuits would record the investment in its accounting records using the equity
method. However, there would be a requirement to consolidate the Bakery’s
accounts into Biscuits financial statements using consolidation techniques that
would remove the investment account and replace it with the assets and liabilities of
the Koebel’s Family Bakery. Koebel’s would be a subsidiary company and Biscuits
would be the parent company.
The purchase of the shares would not necessarily require a change in Koebel’s
accounting records, but some parent companies do require their subsidiaries to
make changes to their accounting policies or systems and processes to improve
consistency with those used by the parent and facilitate consolidation of the financial
statements. Another change that might be required is to make Koebel’s fiscal year
end match that of its’ parent.
(b) If Coffee Beans succeeds in purchasing 50% of the shares of Koebel’s Family
Bakery, but control is retained by Natalie and Daniel, Coffee Beans would account
for the investment using the equity method. This reflects Coffee Beans’ significant
influence over the operations of Koebel’s Family Bakery.
The purchase of the shares would likely not require a change in Koebel’s accounting
records since the relationship between Coffee Beans and Koebel’s is one of
significant influence and not control.
(c) Offer from Biscuits:
The offer from Biscuits may result in reduced hours of work for Natalie and Daniel.
This could be a significant advantage because of the work involved in running the
business. In addition, the sale of the shares will provide them with a substantial
amount of cash which, if invested wisely, could yield benefits for many years. The
transition of Natalie and Daniel from shareholders to employees would also result in
some disadvantages, such as loss of control. Biscuits will exercise control over
Koebel’s operations and will not likely be willing to let Natalie and Daniel participate
in the decision making process. Their employment contract is also limited to 2 years,
leaving uncertainty about their relationship with Biscuits at the end of the
employment period. The nature of the income received would also change. Natalie
and Daniel currently can receive dividends as well as a salary as shareholders and
management of Koebel’s. This income fluctuates based on the financial results of
the company. As employees, the income that they receive will be more stable, but
they will no longer participate in the profits of the business.

BYP12-7 (Continued)
(c) (Continued)
Offer from Coffee Beans:
The offer from Coffee Beans will keep Natalie and Daniel in control of the operations
of Koebel’s. It will also allow them to participate in their share of the profits of the
business since they retain 50% ownership of the company. The company could also
benefit from integration of services and opportunities through the relationship with
Coffee Beans, as well as taking advantage of the expertise of the Coffee Beans
management team. The offer would not result in reduced hours of work for Natalie
and Daniel, as they would be responsible for running the bakery. In addition, they
would be subject to the significant influence of Coffee Beans rather than dealing with
Janet and Brian. They would also not receive a large cash payment for the sale of
their shares as would Janet and Brian. Finally, if the business relationship with
Coffee Beans did not work out, it may be difficult to find another investor to purchase
the shares held by Natalie and Daniel.

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Copyright
Copyright © 2014 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved.
The data contained in these files are protected by copyright. This manual is furnished under
licence and may be used only in accordance with the terms of such licence.
The material provided herein may not be downloaded, reproduced, stored in a retrieval system,
modified, made available on a network, used to create derivative works, or transmitted in any form
or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without
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Reporting and Analyzing Investments

ASSIGNMENT CLASSIFICATION TABLE

2. Account for non- 4, 5, 6, 7, 2, 3, 4, 5, 3, 4, 5, 6, 1, 2, 3, 4, 1, 2, 3, 4, 2, 4, 5

3. Account for strategic 9, 10, 11, 6, 7, 8 6, 7, 8 5, 6, 7, 8 5, 6, 7, 2, 3, 4,

4. Indicate how 3, 4, 12, 8, 9, 10, 2, 5, 8, 9 1, 2, 3, 4, 1, 2, 3, 4, 1, 2, 3,

*5. Compare the 17, 18, 19 13 10 9, 10 9, 10

Solutions Manual 12-1 Chapter 12

ASSIGNMENT CHARACTERISTICS TABLE

Problem Difficulty Time

1A Record trading investments; show statement Moderate 30-40

2A Record trading investments; show statement Moderate 30-40

3A Record trading investments; show statement Moderate 30-40

4A Determine valuation of investments; indicate Moderate 30-40

5A Identify impact of investment transactions. Moderate 20-30

6A Record strategic investment. Moderate 30-40

7A Record investments; indicate statement presentation. Moderate 30-40

8A Analyze strategic investment. Moderate 30-40

*9A Record bond investment; show statement Complex 30-40

*10A Record bonds for investor and investee. Complex 30-40

1B Record trading investments; show statement Moderate 30-40

2B Record trading investments; show statement Moderate 30-40

3B Record trading investments; show statement Moderate 30-40

4B Determine valuation of investments; indicate Complex 30-40

5B Identify impact of investment transactions. Moderate 20-30

6B Record strategic equity investment. Moderate 30-40

7B Record investment; indicate statement presentation. Moderate 30-40

8B Analyze strategic investment. Moderate 30-40

Solutions Manual 12-2 Chapter 12

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

*10B Record bonds for investor and investee. Complex 30-40

Solutions Manual 12-3 Chapter 12

2. A non-strategic investment is made for the purposes of generating investment

3. (a) This equity investment should be classified as a non-strategic investment as

Solutions Manual 12-4 Chapter 12

Answers to Questions (Continued)

8. The carrying amount of the investment ($130,000) would be compared to the

The journal entries to record these transactions (not required) follow:

Dec. 31, 2014 Trading Investments 15,000

2015 Cash 125,000

Solutions Manual 12-5 Chapter 12

Answers to Questions (Continued)

(b) Investment in associates is classified as long-term investments under the

(c) Debt investments held to maturity are classified as long-term investments

(a) Unrealized Gain on Income Statement Other revenues and

(b) Realized Loss on Trading Income Statement Other revenues and

(c) Revenue from Investment Income Statement Other revenues and

(d) Investment in Associate Statement of Financial Non-current assets

Solutions Manual 12-6 Chapter 12

Answers to Questions (Continued)

Accumulated other comprehensive income is the cumulative total of each period’s

15. Profit reported on the income statement is a component of comprehensive income.

(c) Consolidated financial statements should be prepared. When consolidated

Solutions Manual 12-7 Chapter 12

George Weston’s assets and liabilities at their carrying amount in addition to

Solutions Manual 12-8 Chapter 12

SOLUTIONS TO BRIEF EXERCISES

(a) (b) (c)

Solutions Manual 12-9 Chapter 12

BRIEF EXERCISE 12-2

Dec. 31 Unrealized Loss on Trading Investments ................ 6,000

BRIEF EXERCISE 12-3

BRIEF EXERCISE 12-4

BRIEF EXERCISE 12-5