Question

QUESTION 1
Colton’s Western Wear Corp. (CWW) is a publicly reportable enterprise. Its year end is December 31. During 20X4 it invested some of its excess cash in various debt and equity securities. Pertinent details follow:
• All dividend and interest payments were received on the scheduled payment dates.
• CWW only updates the book value of its investments at the time of the transactions and at year end.
• CWW elects to reclassify reserves (AOCI) to retained earnings immediately upon derecognition of investments in equity securities at FVOCI — elect.
January 1, 20X4
• Paid $2,600 to purchase 100 common shares of Zulu Inc. CWW elected to irrevocably classify the investment at FVOCI — elect.
February 1, 20X4
• Paid $11.65 per share to purchase 2,700 shares of PLZ Corp., a publicly traded company with over 1,000,000 shares outstanding. July 1, 20X4
• Paid $262,443 to acquire $250,000 of General Company Inc. six-year, 7% bonds. Interest is paid on June 30 and December 31 each year. CWW’s objective of its business model for this investment is to hold the financial asset for purpose of collecting contractual cash flows.
• Paid $96,490 to acquire $100,000 of Gidget Corp.’s four-year, 5% bonds. Interest is paid on June 30 and December 31 each year. CWW’s business model for this investment is to hold the investment with a view to profiting from a decline in the market rate of interest.
December 15, 20X4
• PLZ declared dividends of $1.00 per share, payable on January 5, 20X5.
• Zulu declared dividends of $0.50 per share, payable on December 31, 20X4.
December 31, 20X4

Investment in		Market value
PLZ Corp. shares		$29.85 per share
Zulu Inc. shares		$24.00 per share
		market rate of interest
General Company Inc.’s bonds		5.5%
Gidget Corp.’s bonds		4.8%

January 1, 20X5
• CWW reclassified its investment in General Company’s bonds to at FVPL.
• CWW reclassified its investment in Gidget’s bonds to amortized cost.
July 1, 20X5
CWW sold all of its investments. The net proceeds of each sale follow:

Investment in	Sales price
PLZ Corp. shares	$27.50 per share
Zulu Inc. shares	$27.00 per share
General Company Inc.’s bonds	$258,000
Gidget Corp.’s bonds	$106,000

Required:
Prepare all journal entries to reflect the purchase, income recognition, revaluation, reclassification, and derecognition of the investments detailed in the question. Provide a separate journal entry for each event, date it, include a brief description of the pertinent details, and provide supporting calculations. Clearly indicate the nature of the investment in each journal entry (for example, Investment in Co. X — FVPL, FVOCI, or FVOCI — elect, or at amortized cost).

Answer 1

January 1, 20x4

Financial Asset - FVOCI 2,600

Cash 2,600

To record the purchase of Zulu shares.

February 1, 20x4

Financial Asset - FVPL 31,455

Cash 31,455

To record the purchase of PLZ shares.

11.65 x 2,700 shares = 31.455

July 1, 20x4

Financial Asset - AC 262,443

Cash 262,443

To record the purchase of General Co. Bonds.

Financial Asset - FVPL 96,490

Cash 96,490

To record the purchase of Gidget Corp. Bonds.

December 15, 20x4:

Dividend Receivable 2,700

Dividend Income 2,700

To record PLZ cash dividends declared.

1 x 2,700 shares

Dividend Receivable 50

Dividend Income 50

To record Zulu cash dividends declared.

0.5 x 100 shares

December 31, 20x4:

Cash 8,750

Interest Income 8,750

To record semi-annual receipt of interest on General Bonds.

250,000 x 7% x 6/12 = 8,750

Cash 2,500

Interest Income 2,550

To record semi-annual receipt of interest on Gidget Bonds.

100,000 x 5% x 6/12= 2,500

Interest Income 876.71

Financial Asset - AC 876.71

To record the amortization of General Bonds.

(262,443 x 6% x 6/12) - 8,750 = 876.71

The 6% is the effective interest rate of the bond.

Cash 50

Dividend Receivable 50

To record receipt of Zulu cash dividend.

Financial Asset - FVOCI elect 49,140

Unrealize Gain - OCI 49,140

To recognize the change in fair value of PLZ Shares.

Fair Value 2,700 x 29.85 80,595

Less: Carrying Amount 31,455

Gain - OCI 49,140

Unrealize Loss - P/L 200

Financial Asset - FVPL 200

To recognize the change in fair value of Zulu shares.

Fair Value 100 x 24.00 2,400

Less: Carrying Amount 2,600

Loss - Profit / Loss 200

Financial Asset - FVPL 4,147.37

Unrealized Gain - P/L 4,147.37

To recognize the change in fair value of Gidget Bonds.

Fair Value 100,637.37***

Less: Carrying Amount 96,490

Gain - Profit / Loss 4,147.37

**PV of Principal 100,000 n=7 i=2.4%

**PV of Interest 2,500 n=7 i=2.4%

January 1, 20x5

Financial Asset - FVPL 267,591.38**

Gain on Reclassification 5,994.19**

Financial Asset - AC 261,597.19

To record the reclassification of General Bonds from AC to FVPL.

**PV of Principal 250,000 n=11 i=2.75%

**PV of Interest 8,750 n=11 i=2.75%

Financial Asset - AC 100,637.37

Financial Asset 100,637.37

To record the reclassification of Gidget Bonds from FVPL to AC.

January 5, 20x5

Cash 2,700

Dividend Receivable 2,700

To record receipt of PLZ cash dividend.

June 30, 20x5

Cash 8,750

Interest Income 8,750

To record semi-annual receipt of interest on General Bonds.

250,000 x 7% x 6/12 = 8,750

Cash 2,500

Interest Income 2,550

To record semi-annual receipt of interest on Gidget Bonds.

100,000 x 5% x 6/12= 2,500

Interest Income 84.70

Financial Asset - AC 84.70

To record the amortization of Gidget Bonds.

(100,637.37 x 4.8% x 6/12) - 2,500 =

The 4.8% is the effective interest rate of the bond.

July 1, 20x5

Cash 74,250

Loss on Sale 6,345

Financial Asset - FVOCI elect 80,595

To record the sale of PLZ Shares.

Sales Price 2,700 x 27.5 74,250

Carrying Amount 80,595

Loss on Sale 6,345

Unrealize Gain - OCI 49,140

Retained Earnings 49,140

To transfer the unrealized gain on PLZ shares to retained earnings.

Cash 2,700

Financial Asset - FVPL 2,400

Gain on Sale 300

To record the sale of Zulu Shares.

Sales Price 100 x 27 2,700

Carrying Amount 2,400

Gain on Sale 300

Cash 258,000

Loss on Sale 9,591.38

Financial Asset - FVPL 267,591.38

To record the sale of General Bonds.

Sales Price 258,000

Carrying Amount 267,591.38

Loss on Sale 9,591.38

Cash 106,000

Financial Asset - AC 100,552.67

Gain on Sale 5,477.33

To record the sale of Gidget bonds.

Sales Price 106,000

Carrying Amount 100,552.67

Gain on Sale 5,477.33