2014, Dr.

Harjinder Deol Page 1

ACCT 434: Advanced Financial Accounting
Module 01 Activities


Question 1

Part 1:
On January 1, 2014, Phantom Corp. acquires $300,000 of Spider Inc. 9% bonds. The interest is payable each June
30 and December 31, and the bonds mature on December 31, 2016. The investment will provide Phantom Corp.
with a 10% yield. Phantom Corp. applies IFRS and accounts for this investment using the amortized cost model.

Required:
(a) Calculate the cost of the investment in the Spider Inc bonds

FV PMT N I/Y CPT PV
300,000 13,500 6 5 292,386



(b) Prepare a three year bond amortization schedule, rounding to the nearest dollar

Date Cash Interest Amortization Carrying Value
Jan 01, 14 292,386
Jun 30, 14 13,500 14,619 (1,119) 293,505
Dec 31, 14 13,500 14,675 (1,175) 294,680
Jun 30, 15 13,500 14,734 (1,234) 295,914
Dec 31, 15 13,500 14,796 (1,296) 297,210
Jun 30, 16 13,500 14,861 (1,361) 298,571
Dec 31, 16 13,500 14,929 (1,429) 300,000



(c) Record the purchase of the bonds and the receipt of interest on June 30, 2014

Jan 01, 14 Investment in bonds (HTM)

292,386


Cash

292,386


Jun 30, 14 Cash

13,500


Investment in bonds (HTM)

1,119


Interest revenue

14,619

2014, Dr. Harjinder Deol Page 2

Part 2:
On January 1, 2014, Phantom Corp. acquires $300,000 of Spider Inc. 9% bonds for $307,863. The interest is
payable each June 30 and December 31, and the bonds mature on December 31, 2016. Phantom Corp. applies
IFRS and accounts for this investment using the FVOCI model.

Required:
(a) Calculate the effective yield on the investment in the Spider Inc bonds

FV PMT N PV CPT I/Y
300,000 13,500 6 4 307,863

(b) Prepare a three year bond amortization schedule, rounding to the nearest dollar

Date Cash Interest Amortization Carrying Value
Jan 01, 14 307,863
Jun 30, 14 13,500 12,315 1,185 306,678
Dec 31, 14 13,500 12,267 1,233 305,445
Jun 30, 15 13,500 12,218 1,282 304,163
Dec 31, 15 13,500 12,167 1,333 302,830
Jun 30, 16 13,500 12,113 1,387 301,443
Dec 31, 16 13,500 12,057 1,443 300,000


(c) Record the purchase of the bonds and the receipt of interest on June 30, 2014

Jan 01, 14 Investment in bonds (AFS)

307,863


Cash

307,863

Jun 30, 14 Cash

13,500


Investment in bonds (AFS)

1,185

Interest revenue

12,315


Part 3:
On January 1, 2014, Phantom Corp. acquires $300,000 of Spider Inc. 9% bonds at par. The interest is payable
each June 30 and December 31, and the bonds mature on December 31, 2016. Phantom Corp. applies IFRS and
accounts for this investment using the FVTPL model.

Required:
(a) Record the purchase of the bonds and the receipt of interest on June 30, 2014

Jan 01, 14 Temporary Investment in bonds (HFT)

300,000


Cash

300,000

Jun 30, 14 Cash

13,500


Interest revenue

13,500


2014, Dr. Harjinder Deol Page 3

Question 2
Arabica Corporation, a public company, made the following purchases and sales of investments during 2014, the
first year in which Arabica invested in equity securities:
1. On January 15, purchased 9,000 shares of Noranda Corp.s common shares at $33.50 per share plus
commission of $720.
2. On April 1, purchased 5,000 shares of Orange Corp.s common shares at $52.00 per share plus commission of
$1,000.
3. On May 20, 2014, Arabica sold 3,000 of the Noranda common shares at a market price of $35 per share less
brokerage commissions of $600.

Arabica Corporation received a dividend of $1 per share from Noranda Corp on June 15, and $0.80 per share from
Orange Corp on October 1, 2014.

Required:
(a) Prepare journal entries to record the transactions related to these investments for the year 2014 under the
FVTPL model

Jan 15, 14 Trading securities (HFT)

301,500


Investment income/loss (or commission exp) 720


Cash

302,220
Apr 01, 14 Trading securities (HFT)

260,000


Investment income/loss (or commission exp) 1,000


Cash

261,000
May 20, 14 Cash (3,000*35 - 600)

104,400


Investment income/loss (or gain on sale) 3,900

Trading securities (HFT)

100,500
Jun 15, 14 Cash

6,000


Investment income/loss (or dividend income) 6,000
Oct 01, 14 Cash

4,000


Investment income/loss (or dividend income) 4,000


(b) Prepare journal entries to record the transactions related to these investments for the year 2014 under the
FVOCI model

Jan 15, 14 Investment in Noranda Corp (AFS)

302,220


Cash

302,220
Apr 01, 14 Investment in Orange Corp (AFS)

261,000


Cash

261,000
May 20, 14 Cash (3,000*35 - 600)

104,400


Gain on sale of Noranda Corp shares (AFS) 3,660

Investment in Noranda Corp (AFS) 100,740
Jun 15, 14 Cash

6,000


Dividend income

6,000
Oct 01, 14 Cash

4,000


Dividend income

4,000



2014, Dr. Harjinder Deol Page 4

Question 3
On March 20, 2014, Financial Corp. commits to an investment to acquire a $50,000 bond from insurance
company on March 23, 2014. March 20 is the purchase commitment date (purchase trade date) and March 23 is
the purchase delivery (settlement date). Due to market value changes, the fair value of the bond on March 23 is
$50,200.

Required:
Assuming the bonds are accounted for as FVOCI,
(a) Prepare the required journal entries for the investment in bonds on March 20 and March 23, following trade
date accounting,

Mar 20, 14 Investment in bonds (AFS)

50,000


Payable

50,000

Mar 23, 14 Payable

50,000


Cash

50,000

Investment in bonds (AFS)

200


Holding gain on investment in bonds (OCI) 200

(b) Prepare the required journal entries for the investment in bonds on March 20 and March 23, following
settlement date accounting.

Mar 20, 14 No entry


Mar 23, 14 Investment in bonds (AFS)

50,200


Cash

50,000

Holding gain on investment in bonds (OCI) 200



(c) Repeat parts (a) and (b), assuming the bonds are accounted for as amortized cost

Trade date accounting
Mar 20, 14 Investment in bonds (HTM)

50,000


Payable

50,000

Mar 23, 14 Payable

50,000


Cash

50,000

No adjustment for fair value change

Settlement date accounting

Mar 20, 14 No entry


Mar 23, 14 Investment in bonds (HTM)

50,200


Cash

50,000



No adjustment for fair value change

2014, Dr. Harjinder Deol Page 5





(d) Repeat parts (a) and (b), assuming the bonds are accounted for as FVTPL

Trade date accounting
Mar 20, 14 Temporary Investment in bonds (HFT) 50,000


Payable

50,000

Mar 23, 14 Payable

50,000


Cash

50,000

Temporary Investment in bonds (HFT) 200


Holding gain (NI) 200

Settlement date accounting
Mar 20, 14 No entry


Mar 23, 14 Temporary Investment in bonds (HFT)

50,200


Cash

50,000

Holding gain (NI) 200



Question 4
Refer to question 1. Assume that the bonds have a fair value of $306,000 on December 31, 2014, the year end for
Phantom Corp.

Required:
Prepare the journal entries to record receipt of interest and any necessary adjustment for bond value for Parts 1, 2
and 3.

Part 1: HTM (Amortized cost)
Dec 31, 14 Cash

13,500


Investment in bonds (HTM)

1,175


Interest revenue

14,675


No adjustment for fair value

Part 2: AFS (FVOCI)
Dec 31, 14 Cash

13,500


Investment in bonds (AFS)

1,233

Interest revenue

12,267


Investment in bonds (AFS)

555


Holding gain on inv in bonds (OCI)

555


Holding gain on inv in bonds (OCI) 555


Reserves (or AOCI)

555
2014, Dr. Harjinder Deol Page 6

Part 3: HFT (FVTPL)
Dec 31, 14 Cash

13,500


Interest revenue

13,500


Temporary Investment in bonds (HFT) 6,000


Holding gain (NI)

6,000



Question 5
Refer to question 2. The year-end fair values per share were as follows: Noranda $30; Orange $55.

Required:
Prepare the journal entries to record any necessary fair value adjustment under the FVTPL and FVOCI models.


FVTPL (HFT)

# Shares Mkt price Fair Value Cost FV Adj

Noranda 6,000 30 180,000 201,000 (21,000)

Orange 5,000 55 275,000 260,000 15,000

(6,000)

Dec 31, 14 Investment income/loss (or Holding loss - NI) 6,000


Trading securities (HFT)

6,000


FVOCI (AFS)
Dec 31, 14 Holding loss (OCII)

21,480


Investment in Noranda Corp (AFS)

21,480

(302,220 - 100,740) - (6,000*$30)



Investment in Orange Corp (AFS)

14,000


Holding gain (OCI)

14,000

(5,000*55 - 261,000)



2014, Dr. Harjinder Deol Page 7

Question 6
On January 1, 2011, Jacob Corp accepted a $500,000 6% note from Job Inc payable on January 1, 2016. Job Incs
credit rating would have enabled it to borrow money at 10%. Job Inc. paid interest regularly for the years 2011
through 2013. However, in January 2014, Job Inc was faced with financial distress, and started talks with Jacob
Corp to restructure the loan.

Required:
Assess whether the loan should be classified as non-performing or impaired under the following circumstances:
(a) Job Inc. says that it cannot pay any interest, but will repay the principal amount of $500,000 on January 2016.

When the loan was made originally, it would have been recorded at a discount:

FV PMT N I/Y PV

500,000 30,000 5 10 424,184


Note amortization schedule:

Date Cash Interest Amortization Carrying Value

Jan 01, 11

424,184

Jan 01, 12 30,000 42,418 (12,418) 436,602

Jan 01, 13 30,000 43,660 (13,660) 450,262

Jan 01, 14 30,000 45,026 (15,026) 465,288

Jan 01, 15 30,000 46,529 (16,529) 481,817

Jan 01, 16 30,000 48,183 (18,183) 500,000

Book Value on Jan 1, 2014

465,288



Calculation on note fair value


FV PMT N I/Y PV

500,000 - 2 10 413,223
Book Value of note > Fair Value so note is impaired

(b) Job Inc. asks for a reduction in the coupon rate to 4%, an extension of the repayment date to January 1, 2018.


Calculation on note fair value


FV PMT N I/Y PV

500,000 20,000 4 10 404,904

Book Value of note > Fair Value so note is impaired

Note if Book Value was less than fair value, then loan would be classified as non-performing