Question

The following information relates to the 2017 debt and equity investment transactions of Wildcat Ltd., a publicly

accountable Canadian corporation. All of the investments were acquired for trading purposes and accounted for

using the FV-NI model, with all transaction costs being expensed. No investments were held at December 31, 2016, and

the company prepares fi nancial statements only annually, each December 31, following IFRS 9. Dividend and interest

income are not recorded or reported separately from other investment income accounts.

1. On February 1, the company purchased Williams Corp. 12% bonds, with a par value of $500,000, at 106.5 plus

accrued interest to yield 10%. Interest is payable April 1 and October 1.

2. On April 1, semi-annual interest was received on the Williams bonds.

3. On July 1, 9% bonds of Saint Inc. were purchased. These bonds, with a par value of $200,000, were purchased at

101 plus accrued interest to yield 8.5%. Interest dates are June 1 and December 1.

4. On August 12, 3,000 shares of Scotia Corp. were acquired at a cost of $59 per share. A 1% commission was paid.

5. On September 1, Williams Corp. bonds with a par value of $100,000 were sold at 104 plus accrued interest.

6. On September 28, a dividend of $0.50 per share was received on the Scotia Corp. shares.

7. On October 1, semi-annual interest was received on the remaining Williams Corp. bonds.

8. On December 1, semi-annual interest was received on the Saint Inc. bonds.

9. On December 28, a dividend of $0.52 per share was received on the Scotia Corp. shares.

10. On December 31, the following fair values were determined: Williams Corp. bonds 101.75; Saint Inc. bonds 97;

and Scotia Corp. shares $60.50.

Instructions

(a) Prepare all 2017 journal entries necessary to properly account for the investment in the Williams Corp. bonds.

(b) Prepare all 2017 journal entries necessary to properly account for the investment in the Saint Inc. bonds.

(c) Prepare all 2017 journal entries necessary to properly account for the investment in the Scotia Corp. shares.

(d) Assume that there were trading investments on hand at December 31, 2016, accounted for using the FV-NI model,

and that they consisted of shares with a cost of $400,000 and a fair value of $390,000. These non–dividend-paying

shares were sold early in 2017 and their original cost was recovered exactly. What effect would this transaction have

on 2017 net income?

(e) Assume that the interest income on the Saint Inc. bonds that were purchased on July 1, 2017, was separately

tracked and reported. Prepare the entries that are required on July 1, December 1, and December 31, 2017, to

account for this investment.

Answer 1

Part A

Williams Corp. bonds

Date	Account titles and explanation	Debit	Credit
February 1, 2017	FV-NI Investments ($500,000 X 106.5%)	532500
	Interest Receivable ($500,000 X 12% X 4/12)	20000
	Cash		552500
April 1, 2017	Cash ($500,000 X 12% X 6/12)	30000
	Interest Receivable		20000
	Investment Income or Loss		10000
September 1, 2017	Cash ($100,000 X 104% )+ ($100,000 X 12% X 5/12)	109000
	Investment Income or Loss		2500
	FV-NI Investments ($532,500 X 1/5)		106500
October 1, 2017	Cash	24000
	Investment Income or Loss ($400,000 X 12% X 6/12)		24000
December 31, 2017	Interest Receivable	12000
	Investment Income or Loss ($400,000 X 12% X 3/12)		12000
December 31, 2017	Investment Income or Loss	19000
	FV-NI Investments (($532,500 - $106,500) -$407,000)		19000

Part B

Saint Inc. bonds

Date	Account titles and explanation	Debit	Credit
July 1, 2017	FV-NI Investments ($200,000 X 101%)	202000
	Interest Receivable ($200,000 X 9% X 1/12)	1500
	Cash		203500
December 31, 2017	Cash ($200,000 X 9% X 6/12)	9000
	Interest Receivable		1500
	Investment Income or Loss		7500
December 31, 2017	Interest Receivable	1500
	Investment Income or Loss $200,000 X 9% X 1/12)		1500
December 31, 2017	Investment Income or Loss	8000
	FV-NI Investments ($202,000 - $194,000 FV)		8000

Part C

Scotia Corp. shares

Date	Account titles and explanation	Debit	Credit
August 12, 2015	FV-NI Investments (3,000 shares X $59)	177000
	Investment Income or Loss	1770
	Cash		178770
September 28, 2017	Cash	1500
	Investment Income or Loss (3,000 X $0.50)		1500
December 28, 2017	Cash	1560
	Investment Income or Loss ((3,000 X $0.52)		1560
December 31, 2017	FV-NI Investments ($181,500 FV - $177,000)	4500
	Investment Income or Loss		4500

Part D

Increase in net income of $100000 (400000-390000) (fair value of $400000 is greater than trading investment value of $390000). Thus, there is an investment income of $10000

Part E

Date	Account titles and explanation	Debit	Credit
July 1, 2017	FV-NI Investments (3,000 shares X $59)	202000
	Interest Receivable	1500
	Cash		203500
December 1, 2017	Cash	9000
	Interest Receivable		1500
	Interest Income		7154
	FV-NI Investments		346
December 31, 2017	Interest Receivable ($9,000 X 1/6)	1500
	Interest Income ($8,570 X 1/6)		1428
	FV-NI Investments ($430 X 1/6)		72
December 31, 2017	Unrealized Gain or Loss	7582
	FV-NI Investments ((201,654 – $72)-($200000*97%))		7582

Schedule of Interest Income and Bond Premium Amortization—Effective Interest Method 9% Bond Yielding 8.5%
Date	Cash received	Interest income	Bond premium amortization	Carrying amounts of bonds
07/01/17				202000
12/01/17	7500	7154	346	201654
06/01/18	9000	8570	430	201224

07/01/17-12/01/17 = 5 months

($200,000 X 9% X 6/12) = 9000

Interest income = previous carrying amount * 8.5% *6 /12

Bond premium amortization = Cash received – interest income

Carrying amount = previous carrying amount – bond premium amortization