Question

Feherty, Inc., accounts for its investments under IFRS No. 9 and purchased the following investments during December 2021:

1. One hundred and thirty of Donald Company’s $1,000 bonds. The bonds pay semiannual interest, return principal in 10 years, and include no other cash flows or other features. Feherty plans to hold 20 of the bonds to collect contractual cash flows over the life of the investment and to hold 110, both to collect contractual cash flows but also to sell them if their price appreciates sufficiently. Subsequent to Feherty’s purchase of the bonds, but prior to December 31, the fair value of the bonds increased to $1,040 per bond, and Feherty sold 20 of the 110 bonds. Feherty also sold 10 of the 20 bonds it had planned to hold to collect contractual cash flows over the life of the investment. The fair value of the bonds remained at $1,040 as of December 31, 2021.
2. $25,800 of Watson Company common stock. Feherty does not have the ability to significantly influence the operations of Watson. Feherty elected to account for this equity investment at fair value through OCI (FVOCI). Subsequent to Feherty’s purchase of the stock, the fair value of the stock investment increased to $31,600 as of December 31, 2021.

Required:
1. Indicate how Feherty would account for its investments when it acquired the Donald bonds and Watson stock.
2. For each of the following categories of Feherty's investments, calculate the effect of realized and unrealized gains and losses on Feherty’s net income, other comprehensive income, and comprehensive income for the year ended December 31, 2021:
(a) any Donald bonds accounted for at amortized cost that were purchased and held at year end,
(b) any Donald bonds accounted for at amortized cost that were purchased and sold,
(c) any Donald bonds accounted for at FVOCI that were purchased and held at year end,
(d) any Donald bonds accounted for at FVOCI that were purchased and sold, and
(e) the Watson stock. Ignore interest revenue and taxes.

Answer 1

1. Accounting for Investment

a. 130 Bonds of Donald Inc,

Recognition of 20 Bonds at amortized cost as the intention is hold the bond till maturity and collect contractual cash flows.

Bond at Amortised Cost Debit $20000

Bank Credit $20000

Recognition of 110 bonds at FVOCI as the intention to collect cash flows and to sell both.

Bond at FVOCI Debit $110000

Bank Credit $110000

b. Recognition of investment in shares of Watson Inc. will be at FVOCI as company choose irrevocable option to value equity investment at FVOCI.

Investment in Shares Debit $25800

Bank Credit $25800

2. a) 10 bonds that were purchase and held at year end

Bond at Amortised Cost Debit $400

P&L Credit $400

b) 10 Bonds at amotised cost purchase and sold at year end

Bank Debit $10400

Bond at amortized cost Credit $10000

P&L Credit $400

c) 90 bonds at FVOCI purchase and held at year end

Bond at FVOCI Debit $3600

OCI Credit $3600

d) 20 Bonds at FVOCI purchase and sold at year end

Bank Debit $20800

Bonds at FVOCI Credit $20000

P&L Credit $800

e) Watson Stock

Investment in equity Debit $5800

FVOCI Credit $5800