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In early 2017, for the first time, Whispering Winds Corp. invested in the common shares of...

In early 2017, for the first time, Whispering Winds Corp. invested in the common shares of another Canadian company. It acquired 5,900 shares of Toronto Stock Exchange-traded Bayscape Ltd. at a cost of $81,125. Bayscape is projected to reach a value of $15.50 per share by the end of 2017 and $17.00 by the end of 2018, and has consistently paid an annual dividend of $0.90 per share. Whispering Winds is also a Canadian public corporation with a December 31 year end.

The controller of Whispering Winds is uncertain about which accounting method to use. The company is interested in establishing a closer relationship with Bayscape, but if that fails, Whispering Winds considers the investment a good opportunity to make a gain on its sale in the future. The controller has been advised that the investment could be accounted for at cost or at fair value. If at fair value, a decision would have to be made about whether to put the changes in fair value through net income or other comprehensive income. As one step in making a decision, the controller would like to know what the effect would be on total assets and net income in each of 2017 and 2018 if the predictions about Bayscape’s share prices and dividends are correct. Assume there would be no recycling of realized investment gains and losses.

Prepare journal entries for each of the three accounting alternatives indicated to recognize each of the following: (1) the 2017 dividend, (2) any December 31, 2017 adjustments, (3) the 2018 dividend, and (4) any December 31, 2018 adjustments. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

1) Cost

(1) FV-NI

(1) FV-OCI

(2) Cost

(2) FV-NI

(2) FV-OCI

(3) Cost

(3) FV-NI

(3) FV-OCI

(4) Cost

(4) FV-NI

(4) FV-OCI

Solutions

Expert Solution

The company can classify th investment as one of the following three categories:

  • Fair Value through P&L (FVTPL): Any realised or unrealised profit/loss will be considered in statement of profit or loss.
  • Fair Value through OCI (FV-OCI): Any realised gain will be recorded  in statement of profit or loss. any unrealised gain will be recorded in OCI and will increase the reserves and not current year's profit.
  • Equity Method(applicable only when a company has a significant influence or control over another company): Only realised gains/losses will be considered and it will be adjusted through the investment value.
Fair Value through P&L
Journal Entry Effect on financial statements DR Amount CR Amount
2017 Dividend Income
Bank Account Dr. Increase in assets 5310
    To Dividend Income (P&L) Increase of income in P&L 5310
Dec 31, 2017 Fair value adjustment
Financial Asset (FVTPL) Dr. Increase in assets 10325
    To Income from fair value measurement (P&L) Increase of income in P&L 10325
2018 Dividend Income
Bank Account Dr. Increase in assets 5310
    To Dividend Income (P&L) Increase of income in P&L 5310
Dec 31, 2018 Fair value adjustment
Financial Asset (FVTPL) Dr. Increase in assets 8850
    To Income from fair value measurement (P&L) Increase of income in P&L 8850
Fair Value through Other Comprehensive Income statement
Journal Entry Effect on financial statements DR Amount CR Amount
2017 Dividend Income
Bank Account Dr. Increase in assets 5310
    To Dividend Income (P&L) Increase of income in P&L 5310
Dec 31, 2017 Fair value adjustment
Financial Asset Dr. Increase in assets 10325
    To Unrealised gain from fair value measurement (OCI) Increase of Unrealised gain in OCI 10325
2018 Dividend Income
Bank Account Dr. Increase in assets 5310
    To Dividend Income (P&L) Increase of income in P&L 5310
Dec 31, 2018 Fair value adjustment
Financial Asset Dr. Increase in assets 8850
    To Unrealised gain from fair value measurement (OCI) Increase of Unrealised gain in OCI 8850
Equity Method:
Journal Entry Effect on financial statements DR Amount CR Amount
2017 Dividend Income
Bank Account Dr. Increase in assets 5310
    To Investment in Bayscape Ltd. Decrease of investment amount 5310
Dec 31, 2017 Fair value adjustment - NO JOURNAL ENTRY
2018 Dividend Income
Bank Account Dr. Increase in assets 5310
    To Investment in Bayscape Ltd. Decrease of investment amount 5310
Dec 31, 2018 Fair value adjustment - NO JOURNAL ENTRY

Calculation of amounts:

Cost oer share on date of purchse = 81,125/5900 = $13.75

  • 2017 dividend = 0.90*5900 = $5,310
  • 2017 Fair value adjustment = (15.50-13.75)*5900 = $10,325
  • 2018 dividend = 0.90*5900 = $5,310
  • 2018 Fair value adjustment = (17-15.50)*5900 = $8,850

ekkarill92 answered 1 year ago
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