BUSI 353

SOLUTION ASSIGNMENT #5

Solution 1
If your answer involves “other comprehensive income (OCI)” then you must use that account name. You cannot just write
“unrealized gain or loss” as this would suggest that the item would go through regular net income. Note: first time must
write out account name then can use “OCI”.

Requirement 1

No, LL cannot reasonably consider these investments to be “strategic investments”. Strategic investments are equity investments
whereby the investor has either control, joint control or significant influence over the investee. LL has purchased just a small
number of shares relative to the total outstanding shares of the investees. Accordingly, it could not be reasonably concluded that
these investments are strategic from LL’s perspective.

Requirement 2

January 15

FVPL Investments (Northern) (9,000 X $33.50) ................................................... 301,500

Investment Income/Loss (transaction expenses) ................................................. 1,980
Cash ...................................................................................................... 303,480

August 1
FVPL Investments (Orion) (5,000 X $52.00) ........................................................ 260,000
Investment Income/Loss (transaction expenses) ................................................. 3,370
Cash ...................................................................................................... 263,370

October 17
One-third of the shares sold represents 3,000 shares (=9,000 x 1/3)
Cash [(3,000 X $35) – $2,850] ............................................................................. 102,150
FVPL Investments (Northern)*................................................................ 100,500
NI:Gain on Sale ...................................................................................... 1,650
*(3,000/9,000 X $301,500)

Carrying Fair Unrealized

Shares Value Value Gain (Loss)

Northern (6,000 shares)* $201,000 $180,000* ($21,000)

Orion (5,000 shares) 260,000 277,500** $17,500

*Of the 9,000 shares purchased on January 15, 3,000 (one-third) were sold October 17. 6,000/9,000 X $301,500 = $201,000.
* 6,000 shares x $30 = $180,000;
** 5,000 shares x $55.50 = $277,500

December 31
NI:Unrealized gain/loss ........................................................................................ 21,000*
FVPL Investments (Northern) ................................................................. 21,000
FVPL Investments (Orion) ................................................................................... 17,500**
NI:Unrealized gain/loss........................................................................... 17,500
* (30 – 33.50) x 6,000 shares left = 21,000 loss
** (55.50 – 52) x 5,000 shares = 17,500 gain
 Requirement 3

FVPL Investment in Northern (as of December 31) $180,000 Debit

FVPL Investment in Orion (as of December 31) $277,500 Debit

Net income (Loss) (for the year ended December 31) ($7,200)
(1,980)+(3,370)+1,650+(21,000)+17,500
Other Comprehensive Income (Loss) (for the year ended December 31) 0
Comprehensive income (Loss) (for the year ended December 31) ($7,200)

Requirement 4

December 31 (Closing Entries)

Income Summary ................................................................................................ 5,350
Investment Income/Loss (transaction expenses) (1,980+3,370) ............. 5,350

NI:Gain on Sale ................................................................................................... 1,650

Income Summary ................................................................................... 1,650
Income Summary ................................................................................................ 3,500

NI:Unrealized gain/loss (21,000 loss – 17,500 gain) ............................... 3,500

Retained Earnings ............................................................................................... 7,200

Income Summary ................................................................................... 7,200

Solution 2

Requirement #1

January 15
Investments (Northern) (FVOCI) (9,000 X $33.50) + 1,980 .................................. 303,480

Cash ...................................................................................................... 303,480

August 1

Investments (Orion) (FVOCI) (5,000 X $52.00) + 3,370 ....................................... 263,370

Cash ...................................................................................................... 263,370
October 17

Cash [(3,000 X $35) – $2,850] ............................................................................. 102,150

Investments (Northern) (FVOCI)* ................................................................. 101,160
Other Comprehensive Income:Realized Gain on Sale ................................. 990

*(3,000/9,000 X $303,480)

Carrying Fair Unrealized

(c) Shares Value Value Gain (Loss)

Northern (6,000 shares)* $202,320 $180,000 ($22,320)

Orion (5,000 shares) 263,370 277,500 $14,130
*Of the 9,000 shares purchased on January 15, 3,000 (one-third) were sold October 17. 6,000/9,000 X $303,480 = $202,320.
December 31

OCI:Unrealized gain/loss ..................................................................................... 22,320

Investments (Northern) (FVOCI) ............................................................. 22,320
Investments (Orion) (FVOCI) ............................................................................... 14,130

OCI:Unrealized gain/loss ........................................................................ 14,130

Requirement #2

Investment in Northern (equity investment with OCI election; FVOCI) $180,000 Debit
(as of December 31)
Investment in Orion (equity investment with OCI election; FVOCI) $277,500 Debit
(as of December 31)

Net income (for the year ended December 31) 0

Other Comprehensive Income (for the year ended December 31) ($7,200)
990+(22,320)+14,130
Comprehensive income (for the year ended December 31) ($7,200)

Requirement #3

December 31 (Closing Entries)

OCI:Realized Gain on Sale .................................................................................. 990
Accumulated Other Comprehensive Income (AOCI) ............................... 990

AOCI (22,320-14,130) ......................................................................................... 8,190

OCI:Unrealized gain/loss ........................................................................ 8,190

AOCI ............................................................................................................... 990

Retained Earnings .................................................................................. 990
[This entry reclassifies the Realized Gain to Retained Earnings. This entry is necessary because “no recycling” through the regular
income statement is permitted when electing to use the OCI method on equity securities.]

Requirement #4

No. The concept of OCI does not exist in ASPE. Equity securities that are publicly traded must be accounted for at FVPL.

Solution 3

Requirement #1
The effective yield on these bonds was 10%.

322,744.72 = 36,000Annuity(i%, 5 years) + 300,000PMT(i%, 5 years)

Calculator: FV = 300,000; PMT = 300,000 x 0.12 = 36,000; PV = (322,744.72); N = 5, CPT I = 10%

Requirement #2
Opening Cash Interest Premium Ending
Date Balance Received Revenue Amortized Balance
Jan. 1, 2017 — — — $322,744.72
Dec. 31, 2017 $322,744.72 $36,000.00 $32,274.47 $3,725.53 319,019.19
Dec. 31, 2018 319,019.19 36,000.00 31,901.92 4,098.08 314,921.11
Dec. 31, 2019 314,921.11 36,000.00 31,492.11 4,507.89 310,413.22
Dec. 31, 2020 310,413.22 36,000.00 31,041.32 4,958.68 305,454.54
Dec. 31, 2021 305,454.54 36,000.00 30,545.46 *5,454.54 300,000.00
Requirement #3

(a) January 1, 2017

Bond Investment – Amortized Cost...................................................................... 322,745

Cash ...................................................................................................... 322,745

(b) December 31, 2017

Cash.................................................................................................................... 36,000
Interest Income (322,744.72 x 0.10) ............................................................... 32,274

Bond Investment – Amortized Cost ................................................................ 3,726

(c) December 31, 2018

Cash.................................................................................................................... 36,000
Interest Income (322,744.72 - 3,726) x 0.10 ................................................... 31,902
Bond Investment – Amortized Cost ................................................................ 4,098

Solution 4

Requirement #1

(a) January 1, 2017

FVOCI Bond Investment ...................................................................................... 322,745

Cash ...................................................................................................... 322,745

(b) December 31, 2017

Cash.................................................................................................................... 36,000
Interest Income .............................................................................................. 32,274
FVOCI Bond Investment ................................................................................ 3,726

The carrying value of the FVOCI Bond Investment is now: 322,745-3,726=319,019. Also see amortization table above.

FVOCI Bond Investment ...................................................................................... 1,481

OCI:Unrealized gain/loss ........................................................................ 1,481

To adjust FVOCI Bond Investment to fair value. 320,500-319,019=1,481.

The carrying value of the FVOCI Bond Investment is now: 320,500

(c) December 31, 2018

Cash.................................................................................................................... 36,000
Interest Income .............................................................................................. 31,902*
FVOCI Bond Investment ................................................................................ 4,098
 * Note: calculate interest based on amortized carrying value using interest rate at issuance date. See amortization table from
Solution 3 above.

The carrying value of the FVOCI Bond Investment is now: 320,500-4,098=316,402.

OCI:Unrealized gain/loss ..................................................................................... 7,502

FVOCI Bond Investment......................................................................... 7,502

To adjust FVOCI Bond Investment to fair value. 308,900-316,402=(7,502).

The carrying value of the FVOCI Bond Investment is now: 308,900

Requirement #2

Cash.................................................................................................................... 307,200
NI:Loss on Disposal............................................................................................. 7,721*

FVOCI Bond Investment ................................................................................ 308,900

OCI:Unrealized gain/loss (remove the 1,481 CR - 7,502 DR) ......................... 6,021

* Using amortized cost, the bond carrying value would have been 314,921. This is needed to calculate the realized gain/loss
amount. 307,200-314,921=7,721 Loss on Disposal.

Solution 5

(a) DR Investment in IBL (significant influence) 200,000

Jan 1, 2018 CR Cash 200,000

(b) DR Investment in IBL (significant influence) 160,000

Dec. 31, 2018 CR Investment income 160,000
NI accrual: 400,000 x 40% = 160,000

(c) DR Cash ($80,000 x 40%) 32,000

Jan 2, 2019 CR Investment in IBL (significant influence) 32,000