Question

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

1. Two hundred and fifty 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 100 of the bonds to collect contractual cash flows over the life of the investment and to hold 150, 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 $1,030 per bond, and Feherty sold 100 of the 150 bonds. Feherty also sold 30 of the 100 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 $1,030 as of December 31, 2021.
2. $27,000 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 $34,000 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

Solution:

1.)

Feherty Inc purchases two hundred and fifty bonds of Donald Company out of which 100 of the bonds would be accounted as amortized cost basis because these are treated as held to maturity investments. However the remaining 150 bonds were held as trading securities and therefore accounted at FVOCI (Fair value through other comprehensive income).

Feherty also purchases $ 27,000 of common stock of Watson company which would be accounted at FVOCI because Feherty cannot significantly influence the operations of Watson company and hence has no voting rights and therefore cannot be accounted at equity method.

2.

a) There is no unrealized gains and losses on these bonds because these are accounted at amortized cost basis. Any changes in fair value of investments are not recorded as income because these are intended to be held to maturity and there is no intention to earn profit through changes in fair value.

b) Number of bonds that were purchased and accounted at amortized cost basis = 100

Number of bonds sold = 30

Gain from sale = Sale value of bonds - par value of bonds

= (30 x 1030 ) - ( 30 x 1000)

= $ 900

This gain would be recognized in net income and hence would be shown in comprehensive income as well.

c)

Number of bonds that were purchased and accounted at FVOCI basis = 150

Number of bonds sold = 100

Number of bonds held at year end = 150 - 100 = 50

Unrealized  Gain = value of bonds at year end - par value of bonds

= (50 x 1030 ) - ( 50 x 1000)

= $ 1,500

This gain would be recognized as other comprehensive income and hence would be shown in comprehensive income as well.

d)

Number of bonds that were purchased and accounted at FVOCI basis = 150

Number of bonds sold = 100

Gain from sale of bonds = Sale value of bonds - par value of bonds

= (100 x 1030 ) - ( 100 x 1000)

= $ 3,000

This gain would be recognized in net income and hence would be shown in comprehensive income as well.

e)

There is an increase in fair value of stock of Watson company.

No stock has been sold so entire increase is attributed to unrealized gain.

As these investments are accounted at FVOCI , gains would be classified as other comprehensive income.

So, Unrealized gain = Fair value of stock at year end - Par value of stock

= $34,000 - $27,000

= $7,000

This gain would be recognized as other comprehensive income and hence would be shown in comprehensive income as well.