Question

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

1. One hundred 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 80, 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 $1,050 per bond, and Feherty sold 30 of the 80 bonds. Feherty also sold 10 of the 30 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 $1,050 as of December 31, 2021.
2. $25,500 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 $31,000 as of December 31, 2021.

Required:
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

2a. Any Donald bonds accounted for at amortized cost that were purchased and held at year end:

Feherty sold 10 bonds which it had planned to hold to collect contractual cash flows over the life of the investment. It was holding the remaining bonds and that should be accounted for at amortized cost.

No unrealized gain/loss is recognized in other comprehensive income or net income.

2b. Any Donald bonds accounted for at amortized cost that were purchased and sold:

Initial Value of bond = $1000

Value of bond at the time of selling = $1050

Gain per bond = 1050 – 1000 = $50

sold 10 bonds therefore, Realized gain = 10* $50 = $500

Net Income	$500
Other Comprehensive Income	0
Comprehensive Income	$500

2c. Any Donald bonds accounted for at FVOCI that were purchased and held at your end:

Feherty sold 30 of the 80 bonds he planned to hold both to collect contractual cash flows but also to sell them if their price appreciates sufficiently.

50 bonds were not sold, so it must be accounted for at FVOCI.

Unrealized gain = (80-30) * ($1050-$1000) = 50 * $50 = $2,500

Net Income	0
Other Comprehensive Income	$2500
Comprehensive Income	$2500

2d. Any Donald bonds accounted for at FVOCI that were purchased and sold:

30 bonds of FVOCI were sold.

Selling price = 30

Realized gain on sale = 30* $50 = $1500

Net Income	$1500
Other Comprehensive Income	0
Comprehensive Income	$1500

2e. The Watson Stock:

Initial Value of common stock = $25,500

Fair value of stock investment increased to = $31,000

Unrealized Gain = 31000 – 25500 = $5,500

Watson stock is accounted for at FVOCI

Net Income	0
Other Comprehensive Income	$5,500
Comprehensive Income	$5,500