Question

In: Accounting

1. What factor is important in classifying an investment at fair value through profit or loss?...

1. What factor is important in classifying an investment at fair value through profit or loss?

a. Whether the instrument has a set maturity date.

b.What is the business model within which the investments are held?

c.Whether the instrument is a debt, equity or derivative instrument.

ACE Inc has the following investments at December 31, 2020:

Historical cost Fair value
Sept 30, 2019
Fair value
Sept 30, 2020
Fair value
Dec 31, 2020
Shares of DEF 25,000 15,000 27,000 30,000
Bonds of Brooke
(purchased at par value)
10,000 12,000 11,000 12,500
Shares of CooksTown 12,000 18,000 16,000 16,000
Shares of Daisy 18,000 16,500 19,500 20,500

4..If ACE classifies its investment in DEF at fair value through profit or loss, what amount will be reported in income for the three months ended December 31, 2020 pertaining to this investment?

a

$3,000 gain.

b

$5,000 gain.

c

$3,000 loss.

d

$0

d.Whether the instrument generates dividends.

2. What should an investment in a debt investment be classified as when management has not specifically identified the classification? That is to say, in the absence of an election, what is the default category?

a.At fair value through OCI.

b

Amortized cost

c

Associate.

d

At fair value through profit or loss.

3. Fisher Corporation has the following investments at September 30, 2020:

Historical cost Fair value
Sept 30, 2019
Fair value
Sept 30, 2020
Shares of ABC $25,000 $15,000 $25,000
Bonds of Brooke 10,000 12,000 11,000
Shares of CooksTown (Fisher holds 35% of the outstanding voting shares of CooksTown) 12,000 18,000 16,000
Shares of Davenport 18,000 20,000 19,000

What method of accounting can Fisher not use to account for its investment in Cookstown?

a.Fair value through other comprehensive income.

b

Fair value through profit or loss.

c

Equity method.

d

Amortized cost.

Solutions

Expert Solution

1. What factor is important in classifying an investment at fair value through profit or loss?

Answer : c.Whether the instrument is a debt, equity or derivative instrument.

Explanation:

- Debt instruments are measured at amortized cost, fair value through other comp. income (FVOCI), or fair value through profit or loss (FVPL)

- Equity instruments are measured at FVPL or at FVOCI. Equity that is held for trading must be measured at FVPI. Derivatives are measured at FVPL.

4. .If ACE classifies its investment in DEF at fair value through profit or loss, what amount will be reported in income for the three months ended December 31, 2020 pertaining to this investment?

Answer:- a. $3,000 gain. (30,000 - 27,000)

2. What should an investment in a debt investment be classified as when management has not specifically identified the classification? That is to say, in the absence of an election, what is the default category?

Answer:- d. At fair value through profit or loss.

3. What method of accounting can Fisher not use to account for its investment in Cookstown?

Answer:- c Equity method.

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