Assignment 03 Solution.docx

LESSON 3 Suggested solutionsQuestion 1 (20 marks)Multiple choice (2 marks each)a) 2)The brokerage fees are being expensed; therefore, this is a held-for-trading investment.b) 2)The first is recorded at the stated sale price; the second is recorded at its discounted present value.c) 4) 3,500 + 480 = 3,980This is a held-to maturity investment so brokerage costs are recorded as part of the cost of the investment; payment is made today, although from borrowed funds, so the purchase price is not discounted; interest costs are expensed.1)3,302 This is the PV of 3,500 in 1 year at 6% interest 3)3,710 This is the FV of 3,500 1 year at 6% interest d) 4)This is a lump-sum purchase scenario. Held-for-trading investments are carried at fair value. At Ahns Awnings December 31, 20X5 year-end the investment account would have been revalued to fair value. Thus, the balance in the account would be 247,000 (3,000 + 2,500 + 4,000) 26 per share. Thirty percent of the shares were sold; the investment account would be credited in the amount of 74,100 247,000 30%The amounts for distractors 1, 2, and 3 are calculated as follows:1) 62,700 (22 2,850)2) 67,450 (22 + 23 + 26) 3) * (3,000 + 2,500 + 4,000) 30% = (23.67 2,850)3)69,450 (66,000 + 57,500 + 108,000) 30%e) 1)Investments in associates are strategic investments in equity securities that are to be reported using the equity method of accounting.f) 4)It is not necessary that there be an active market in a security for it to be classified as a held-to-maturity investment.g) 3)Opponents of the fair value method of accounting for investments argue that the fair value method results in recognition of revenues prior to an actual exchange transaction. Opponents also argue that the fair value method violates the cost principle.h) 2)A debit to the account investment in associate records the investors share of the investees profits.i) 3)Revaluation to fair value is not required for assets classified as held-to-maturity. j) 3When an impairment loss is reversed the investment account cannot be written up to an amount greater than the account balance would have been had the impairment loss not been recorded.Question 2 (20 marks)Yangtze Consumer Supplies and ServicesClassify Investments March 31, 20X5InvestmentsStrategic or non-strategicCurrent or Long termAccounting method1Royal Bank of Shanghai bondsNon-strategicLong-termAmortized cost2Tiber Inc. ordinary shares equityNon-strategicCurrentFair value3Government of Independence bondsNon-strategicCurrentFair value4Gulf Investments ordinary shares equityStrategic significant influenceLong termEquity 5Educational Institute Incorporated bondsNonstrategicCurrentFair value6Continental Shipping Lines ordinary shares equity Non-strategicCurrentFair value7Texan Corp. ordinary shares equityNon-strategicLong termFair value8Government of China bondsNon-strategicCurrentAmortized cost9Commercial paper debtNon-strategic CurrentFair value10Ahbu Ltd. ordinary sharesStrategic controlLong termEquity Note: mark for each correct strategic / non-strategic classification; mark for each correct current / long-term classification; 1 mark for each correctly identified accounting method.Question 3 (10 marks)Stage A (5 marks)Hillside owns 10,000 of 65,000 shares, or 15.38%. In the absence of factors to the contrary this is not enough to give HRBC significant influence over BMS. HRBC indicates that it intends to hold the investment for the long-term; therefore, this investment does not fit the held-for-trading classification. Nor is it a loan or receivable. There is no fixed maturity date on equity shares; as such the investment cannot be classified as held-to-maturity. By default then, the investment will be classified as available for sale. (Marks: 1 for addressing each of the other 4 classifications; 1 for correct classification.)Stage B (2 marks)Hillside still owns 10,000 shares, but there are only 50,000 shares outstanding. Thus, Hillside now owns 20% of BMSs shares. In the absence of factors to the contrary, HRBC is presumed to have significant influence over BMS and would account for the investment as a strategic investment in an associate and use the equity method of accounting.Stage C (3 marks)For the year ended June 30, 20X7 HRBC will account for and report its investment as significant influence investment in an associate. However, given that Cray Industries has 50% of the shares as of July 1, it is unlikely that HRBC will continue to have significant influence over BMS. As part of its disclosure HRBC must advise of the change in circumstances and indicate that going forward it is unlikely that the investment in BMS will be accounted for as a significant influence strategic investment. This disclosure should be included in the financial statements for the year ended June 30, 20X7. (Marks: Award 1 for 20X7 year-end accounting as significant influence investment; 1 for recognition that HRBC unlikely to have significant influence when another investor has control; 1 mark for need to disclose.)Question 4 (20 marks)Requirement 1 (4 marks)(1)(4 marks: 2 for the Statement of Financial Position, 2 for the Statement of Income)Yee Publishing IncorporatedStatement of Financial Positionas at September 30, 20X1Equity Investments, at fair value133,915Yee Publishing IncorporatedStatement of Incomefor the year ended September 30, 20X1Unrealized Holding Loss (135,100 133,915) 1,185(2)(7 marks: 2 for the Statement of Financial Position, 5 for the Statement of Income)Yee Publishing IncorporatedStatement of Financial Positionas at September 30, 20X2Equity Investments, at fair value102,000Yee Publishing IncorporatedStatement of Incomefor the year ended September 30, 20X2Other income and expenseLoss on Sale of Equity Investment8,325Unrealized Holding Loss (153,950 102,000) 2,7752 + 1,185150,3601Prior security fair value adjustment balance.22,775 is the amount recycled out of the Unrealized holding loss account for the sale of Cannon. (37,925 35,150)不对！正确的应是Unrealized Holding Loss 47,990，计算如下：InvestmentQuantityBook valueFair ValueBarden Corp1,400 shares24,99023,100Barden Corp2,100 shares31,50034,650Gibb Company1,500 shares22,50020,250Windmill Ltd4,000 shares71,00024,000149,990102,000The entry made to recognize the loss on sale is as follows:Cash29,600Loss on Sale of Equity Investment in Cannon Inc. 8,325Equity Investments37,925(3,700 * 8.00 per share = 29,600) 37,925 = 8,325)(3)(7 marks: 2 for the Statement of Financial Position, 5 for the Statement of Income )Yee Publishing IncorporatedStatement of Financial Positionas at September 30, 20X3Equity Investments, at fair value105,125 Yee Publishing IncorporatedStatement of Incomefor the year ended September 30, 20X3Other income and expenseLoss on Sale of Equity Investment (7,700 + 3,000)10,700Unrealized Holding Loss 50,3603 (105,125 95,000) 7,050433,1853Prior securities fair value adjustment balance from last years Statement of Income47,050 is the amount recycled out of the unrealized gain account for the sale of Barden Corp. (23,100 + 34,650 19,950 31,500) and Gibb Company (20,250 22,500)/3不对！正确的应是Unrealized Holding Gain 67,625，计算如下：InvestmentQuantityBook valueFair ValueWindmill Ltd4,000 shares24,00095,000Gibb Company1,000 shares13,50010,12537,500105,125The entry made to record the sale of Barden Corp. shares was:Cash50,050Loss on Sale of Equity Investment7,700Equity Investments (23,100 + 34,650)57,750The entry made to record the sale of Gibb Company shares was:Cash3,750Loss on Sale of Equity Investment3,000Equity Investments (20,250 / 1,500 * 500) 6,750 (4)(2 marks)The entry made to record the sale of Barden Corp. shares if only 1,000 shares were sold at the same price per share as was received given in the information for 20X3:Cash14,300Loss on Sale of Equity Investment2,200Equity Investments 416,5004 Average price per share = 16.50 (23,100 + (34,650) / (1,400 + 2,100);Cost of 1,000 shares = 16,500Sale price per share = 50,050 / (1,400 + 2,100) = 14.30Question 5 (30 marks)Requirement 1 (20 marks)(a) (5 marks)Jan. 1, 20X1Investment in Treasuries International bonds955,141Cash955,141Record purchase of 8%, 6-year, 1,000,000 bonds of Treasuries International; to yield 9%. Intend to hold the bonds until maturity.PV of 1,000,000, n = 6, i= 9; 596,267PVA of 80,000, n = 6, i= 9; 358,874(596,267 + 358,874 = 955,141)(b) (10 marks)DateCash ReceivedInterest Revenue(8%)Discount Amortization (9%)Bond Carrying AmountJanuary 1, 20X1955,141December 31, 20X180,00085,9635,963961,104December 31, 20X2 80,00086,4996,499967,603December 31, 20X380,00087,0847,084974,687December 31, 20X480,00087,7227,722982,409December 31, 20X580,00088,4178,417990,826December 31, 20X680,00089,1749,1741,000,000480,000524,85944,859(c) (3 marks)Dec. 31, 20X1Cash80,000Investment in Treasuries International bonds5,963Interest revenue85,963(d) (2 marks)Dec. 31, 20X2Cash80,000Investment in Treasuries International bonds6,499Interest revenue86,499Note to Markers: The suggested solution includes a compound journal entry for each of parts (c) and (d). Students could do two separate entries for each of these parts, with the amortization of the discount booked separately