BUSI 353

ASSIGNMENT #5

GENERAL INSTRUCTIONS FOR ALL ASSIGNMENTS:

(A) See the course outline for due dates.
(B) Please do not use a cover page. Provide your full name and student number on the top of
the first page and then proceed with your answers.
(C) All assignments must be typed and submitted via Canvas using PDF.
(D) Use Arial font and font size 11 with a minimum 2.5-centimetre (1-inch) margin.
(E) For some questions, a page limit is indicated at the top. If you are having difficulty
maintaining the page limit, consider that a challenge for being clear and concise. Effective
use of point form is a good technique for being clear and concise. Do not feel obligated to
use the entire page limit. Often times, the best answers are the ones that directly address
the relevant aspects of the question.
(F) It is unnecessary to repeat the question. You can assume that I am familiar with the
question and proceed with your answer.
(G) Failure to comply with the above instructions may result in a deduction of marks.

** SHOW YOUR WORK **

Question 1

Lima Limited (LL) applies IFRS 9. LL had the following transactions relating to investments during
2017:

January 15 9,000 common shares of Northern Corporation were purchased at $33.50 per
share, plus commissions of $1,980. Northern is a publicly-traded company with
millions of shares outstanding.
August 1 5,000 common shares of Orion Limited were purchased at $52.00 per share,
plus commissions of $3,370. Orion is a publicly-traded company with millions of
shares outstanding.
October 17 LL sold one-third of the Northern shares at $35.00 per share, minus commissions
of $2,850.

LL’s year-end is December 31. At year-end, the Northern shares had a market value of $30.00 per
share and the Orion shares had a market value of $55.50 per share.

REQUIRED (Ignore income taxes)

1. Based on the given information, would it be reasonable for LL to consider these investments to
be “strategic investments”? Explain.

2. LL chooses to account for these investments using the FVPL method. Prepare the applicable
journal entries for the current year, including the adjusting entries at year-end. Do not prepare
any closing entries.

3. Complete the following table:

FVPL Investment in Northern (as of December 31)

FVPL Investment in Orion (as of December 31)

Net income (for the year ended December 31)

Other Comprehensive Income (for the year ended December 31)
Comprehensive income (for the year ended December 31)
4. Prepare the applicable closing entries as of December 31.

Question 2

Refer to the information provided in Question #1 above. Assume the same fact pattern but that LL
elects to use the OCI option under IFRS 9.

REQUIRED

1. Prepare the applicable journal entries for the current year, including the adjusting entries at
year-end. Do not prepare any closing entries.

2. Complete the following table:

Investment in Northern (equity investment with OCI election; FVOCI)

(as of December 31)
Investment in Orion (equity investment with OCI election; FVOCI)
(as of December 31)

Net income (for the year ended December 31)

Other Comprehensive Income (for the year ended December 31)
Comprehensive income (for the year ended December 31)

3. Prepare the applicable closing entries as of December 31.

4. If LL was a private company using ASPE, could LL elect to use the OCI option (FVOCI) to
account for its equity investments? Explain.

Question 3

On January 1, 2017, Hoist Up Company (HUC) purchased bonds of Southern Inc. that had the
following characteristics: 12% coupon rate, $300,000 face value, maturing on December 31, 2021,
and interest paid annually on December 31. The bonds were purchased by HUC for $322,744.72.

The fair value of the bonds at December 31, 2017 was $320,500. The fair value of the bonds at
December 31, 2018 was $308,900. The bonds are not considered to be impaired.

REQUIRED

1. What was the effective yield on these bonds?

2. Prepare a bond amortization table for this bond investment.

3. Assume that HUC accounts for these bonds using the amortized cost method. Prepare journal
entries for the following dates using the net method (round to the nearest dollar):
(a) January 1, 2017;
(b) December 31, 2017; and
(c) December 31, 2018.
Question 4

Refer to the given information in question #3 above. Assume that HUC chooses to apply the FVOCI
method in accounting for these bonds.

REQUIRED

1. Prepare journal entries for the following dates:

(a) January 1, 2017;
(b) December 31, 2017; and
(c) December 31, 2018.

2. Assume that on January 1, 2019, HUC sells the bonds for $307,200. Prepare the applicable
journal entry for the sale.

Question 5

On January 1, 2018, your company acquires 10,000 shares of Investee Business Limited (“IBL”),
representing 40% of the shares of IBL, for $200,000. As part of that investment, your company is
entitled to appoint one director to the four-member Board of Directors.

For the year ended December 31, 2018, IBL earns $400,000 of profit (net income) and no other
comprehensive income.

On January 2, 2019, IBL declares and pays dividends of $80,000 to all shareholders.

REQUIRED

Prepare journal entries for the following dates:

(a) January 1, 2018;
(b) December 31, 2018; and
(c) January 2, 2019.