Question 1
Borris Company (a publicly traded company) holds a portfolio of debt securities and equity investments. You are provided with the following information:
Debt securities
The fair value of the portfolio is greater than its original cost, even though some securities have decreased in value. The financial vice president and the controller are in the process of classifying the debt securities in accordance with the new IFRS standard (IFRS 9) for the first time. The financial vice president wants to classify all investments that have increased in value during the period as fair value through net income in order to increase net income this year. He wants to account for all the securities that have decreases in value at amortized cost.
The controller disagrees. She states that there are no options now under IFRS. Depending on certain criteria, the debt instruments must be classified into the amortized cost category or fair value through net income category.
For each of the following questions related to the debt securities assume that the company has no issues related to accounting mismatches.
a) Is the controller correct in that there are no choices for the classification of debt instruments?
b) For each of the following types of debt instruments determine, by referring to the newly issued IFRS 9, if the debt security would be measured at amortized cost or fair value.
i. A debt instrument has a variable rate of interest and matures in 2016. The variable rate is based on the prime bank lending rate and pays 2% above prime. The company has, in the past, bought and sold these bonds and not held them until maturity. Include in your answer a discussion of the business model test and the contractual cash flow characteristic to arrive at your answer.
ii. A 5% bond, issued by Xenu Corp., is convertible into equity at the holder's option. If Borris Co. decides to receive shares rather than cash, the conversion rate to be used is a price of $50 per share of Xenu Corp. Borris will likely request to convert to shares when the share price of Xenu is over $55 per share or more.
Share Investments
Borris has the following equity investments in their portfolio. For each of these determine the accounting treatment to be used.
a. Borris had excess cash and purchased shares in IBM. The company intends on cashing in these investments in three years when it plans a major expansion.
b. Borris purchased 30% of the shares of one of its major suppliers.
c. A friend of the president was starting a corporation and needed financial support. The president purchased 10% of the shares in this privately held company.
Question 2 Soda Corporation Problem
Soda Corporation started business on January 1, 2016. The company's historic cost balance sheet on that date and at December 31, 2016, in comparative form are summarized below, together with Statement of Income and the balances for Retained Earnings.
Soda Corporation
Balance Sheet
As at December 31, 2016
(with comparative information for January 1, 2016)
|
|
Dec 31, 2016
|
Jan 1, 2016
|
|
Monetary assets
|
325,000
|
200,000
|
|
Inventories
|
300,000
|
250,000
|
|
Land
|
450,000
|
450,000
|
|
Equipment (net)
|
140,000
|
150,000
|
|
|
1,215,000
|
1,050,000
|
|
Current liabilities
|
190,000
|
100,000
|
|
Long-Term Debt
|
650,000
|
650,000
|
|
Deferred Income Taxes
|
10,000
|
|
|
Common Shares
|
300,000
|
300,000
|
|
Retained Earnings
|
65,000
|
|
|
|
1,215,000
|
1,050,000
|
Soda Corporation Statement of Income Year Ended December 31, 2016
|
Sales
|
800,000
|
|
Cost of Goods Sold
|
|
|
Beginning Inventory
|
250,000
|
|
Purchases
|
520,000
|
|
Cost of Goods Available for Sale
|
770,000
|
|
Less: Ending Inventory
|
300,000
|
|
Cost of Goods Sold
|
470,000
|
|
Gross Profit
|
330,000
|
|
Operating Expenses
|
170,000
|
|
Depreciation Expenses
|
10,000
|
|
Total Expenses
|
180,000
|
|
Income before Income Taxes
|
150,000
|
|
Income Tax Expense
|
|
|
Current
|
65,000
|
|
Deferred
|
10,000
|
|
Total Income Tax Expense
|
75,000
|
|
Net Income
|
75,000
|
| |
|
| |
|
|
Dividends Paid
|
10,000
|
|
Retained Earnings, December 31, 2016
|
65,000
|
The following additional information is provided:
1. Inventory is costed on a FIFO basis. The beginning inventory was purchased when the company started business and the ending inventory was acquired in November, 2016.
2. Land and equipment was acquired when the company was formed. The equipment has a useful life of 15 years and is depreciated on a straight-line basis, no salvage value.
3. Cost of goods sold is assumed to have been incurred evenly throughout 2013.
4. Sales and all revenue and expenses, except for that portion of cost of goods sold represented by beginning inventory, are assumed to have been earned or incurred evenly throughout 2016.
5. Dividends are declared at the end of 2016.
6. The following consumer price index data apply to 2016:
|
January 1, 2016
|
100
|
|
Average
|
160
|
|
November, 2016
|
180
|
|
December 31, 2016
|
200
|
Required:
Prepare the 2017 Statement of Income and The Statement of Changes in Equity and the Balance Sheet at December 31, 2016 in accordance with IAS 29.
Assume the deferred taxes are non-monetary in 2016. Show your calculations of the purchasing power gain or loss.