Test Practice
Test Practice
Test Practice
Required:
Explain conceptually why this difference in accounting for strategic versus portfolio investments
is justified. [Hint: consider how information asymmetry differs between them.]
Strategic investments provide the investor with the opportunity to direct or to influence the
strategic direction of the investee. This ability is valuable because it reduces the potential moral
hazard between the investor and the company’s management. In addition, an investor with
control, joint control, or significant influence, implies that the investor has access to valuable
insight information about the investee, which is not available to portfolio investors. The reduction
in both types of information asymmetry, moral hazard and adverse selection, for strategic
investments implies that such investment should not be valued using market prices or other
aspects of fair value.
Required:
Record the journal entries necessary to reflect the foregoing transactions. Briefly justify your
chosen treatment.
a. The company acquired 100,000 ordinary shares in Norman Inc. for $5 cash per share
plus a $10,000 transaction fee. ICI’s management did not make any specific election
with respect to the classification of this investment.
In the absence of an election to present the changes in fair value through OCI, they must be
classified as FVPL. The asset is recorded at fair value and the transaction costs are expensed.
Cash 510,000
($500,000 + $10,000)
b. ICI purchased 5,000, $25, 3.0% cumulative preferred shares in Bleay Inc. for $130,000
including transaction costs of $5,000. ICI irrevocably elected to present changes in fair
value through OCI.
This asset is classified at FVOCI in accordance with irrevocable election. The transaction fee is
capitalized (added to the cost of the asset).
Cash 130,000
(5,000 shares x $25 per share + $5,000)
c. ICI paid $2,393,859 plus a $50,000 transaction fee for $2.5 million of 3.5% semi-annual
bonds issued by Zoe Corp. that mature in five years. The effective rate of interest earned
is 2.0% PER PERIOD. The objective of the company’s business model for this type of
asset is to hold the investment for the purpose of collecting the contractual cash flows.
Cash 2,443,959
($2,392,859 + $50,000)
As the investment meets ICI’s investment objectives of holding the asset for the purpose of
collecting the contractual cash flows and as the expected cash inflows are solely payments of
principal and interest on the principal amount outstanding. It is appropriate to classify the
investment at amortized cost. The transaction fee is capitalized (added to the cost of the asset).
ICI has a December 31 year-end. It does not prepare interim financial statements.
Required:
Prepare the necessary journal entries to record income earned on these assets in 2023 and the
requisite fair value adjustments at December 31, 2023.
a. On July 1, 2023, ICI received a $43,750 interest payment on the Zoe Corp. bonds. The
next interest payment is due on January 1, 2024.
Cash 2,443,959
($2,392,859 + $50,000)
b. On September 30, 2023, ICI received a $3,750 dividend on the Bleay Inc. cumulative
preferred shares.
c. On December 31, 2023, ICI received a $2,000 dividend on the Norman Inc. ordinary
shares.The market value of the Norman Inc. ordinary shares as at December 31, 2023,
was $4.90 per share.
● Recall: In the absence of an election to present the changes in fair value through OCI,
they must be classified as FVPL.
Dividends on Norman ordinary shares
Date Accounts Debit Credit
d. The market value of the Norman Inc. ordinary shares as at December 31, 2023, was
$4.90 per share.
● Recall: In the absence of an election to present the changes in fair value through OCI,
they must be classified as FVPL.
● The company acquired 100,000 ordinary shares in Norman Inc. for $5 cash per share
Holding loss on Norman ordinary shares
Date Accounts Debit Credit
Dec 31, Holding loss on investment-FVPL 10,000
2023
Investment in financial asset-FVPL 10,000
(100,000 x $4.90 - $500,000)
e. The market value of the Bleay Inc.’s cumulative preferred shares as at December 31,
2023, was $26.25 per share.
● Recall: The asset is classified as FVOCI in accordance with the irrevocable election.
● ICI purchased 5,000, $25, 3.0% cumulative preferred shares in Bleary Inc. for $130,000
including transaction costs of $5,000
f. The market value of the investment in the Zoe Corp. bonds as at December 31, 2023,
was $2,500,000.
The excavator was expected to last 20,000 hours, at which time it was estimated to be worth
$10,000. During its first year of operations, the machine was used 1,500 hours. BEC used the
units-of-production method to calculate depreciation expense on its excavation equipment.
Required:
a. Determine the historical cost base of the excavator.
Cost:
● PP&E is initially capitalized at cost
○ Cost represents the fair value of cash and other consideration that has been
exchanged for the goods
Freight in 4,000
b. Prepare the journal entry to record the first year of depreciation expense for the
excavator.
Depreciation rate per hour = (Historical cost - Residual value) / Useful life
= $112,000 - $110,000 / 20,000 hours = $5.10 per hour
Required:
a. Calculate depreciation expense for 2023 and 2024 using the straight-line method.
Historical cost:
Cost excluding amounts below 100,000
Delivery 1,000
Installation 6,000
Testing 3,000
Year 1 (2023), asset is first available for use March 1 (used 10 out of 12 months)
Depreciation expense = (Cost of asset - Residual value) / Useful life
= ($110,000 - $4,000) / 8 = $13,250
2023 = Depreciation expense x Used months
= $13,250 x 10 months / 12 months = $11,042
Year 2 (2024)
2024 = $13,250
b. Calculate depreciation expense for 2023 and 2024 using the double-declining-balance
method (2 / 8 = 25%).
Depreciation expense = Cost of asset x Depreciation rate
= $110,000 x 0.25 = $27,500
Year 1 (2023), asset is first available for use March 1 (used 10 out of 12 months)
2023 = Depreciation expense x Used months
= $27,500 x 10 months / 12 months = $22,917
Note: you do not consider the residual value in the calculation but it does determine when
depreciation would end
Year 2 (2024)
Depreciation expense = Carrying amount x Depreciation rate
= $87,083 x 0.25 = $21,771
c. Calculate depreciation expense for 2023 and 2024 using the units-of-production method.
Depreciation Rate per Unit of Output = (Acquisition cost - Residual Value) / Estimated
productive outputs in units
= ($110,000 - $4,000) / 40,000 units = $2.65 per unit
Year 1 (2023)
Annual Productive Output Depreciation = Depreciation rate per unit of output x Units produced
2023 = $2.65 x $4,000 = $10,600
There is no proration for the number of months as the units consider what did happen (and likely
would be higher if it was a full year)
Year 2 (2024)
Annual Productive Output Depreciation = Depreciation rate per unit of output x Units produced
2024 = $2.65 x 7,000 units = $18,550
Transaction 2: On January 9, 2023, Global Xing sold to Quest some cables connecting the cities
of Toronto and Montreal. These cables were laid along the shores of Lake Ontario and the St.
Lawrence River. In exchange, Global Xing received from Quest cables connecting the same two
cities, but running through a more inland route farther to the northwest. The rationale for the
exchange was to facilitate servicing and maintenance of the cables. [Note: Fibre-optic cables
require little maintenance in general.] In this transaction, Global Xing received $1 million.
The following table provides additional information on the assets exchanged in the transactions
described above (in $ millions).
Required:
Long lived assets acquired in exchange for non monetary assets
● Valuation alternatives and accounting for non monetary exchanges of long lived assets:
○ If there is commercial substance to the exchange, then the new assets is
recorded based on fair value
○ If there is no commercial substance, or fair value cannot be determined, then the
new assets is recorded based on the net book value of the asset given up
● Transaction #1: This exchange has commercial substance. The two sets of cable have
different risk, timing, and amount of cash flows because they service different markets
(i.e., continents). Therefore, use fair values to record the exchange.
● The fair market value of the assets given up is used to value the transaction if both the
assets given up and received can be reliable measured
FV North-South America cables = FV North-South America cables + Cash paid
= $390 millions + $20 million = $410 million
Chapter 9:
a. The company spent $5 million in 2023 to manufacture testing equipment. The equipment
is used to verify the sensitivity tolerances of the electronics produced for sale to reduce
future warranty claims.
b. The company supports the advanced electronics research department at Innovative
University (IU) and has provided $2 million of funding per year for the past ten years.
IU’s leading-edge research has resulted in the development of numerous commercially
viable products through the years. NC’s arrangement with IU is that NC is entitled to
40% of the profits from commercial ventures arising from the research it funds. To date,
NC has earned $42 million from these ventures, netting $22 million after deducting the
funding costs. In 2023, NC continued its support of IU and issued IU a $2 million cheque
last month.
c. The company fabricated a prototype of a voice-activated robot butler for domestic use. It
spent $4 million on development costs in 2023, and believes that it will need to spend
another $1 million over the next year to refine the invention sufficiently to get it ready for
mass production. Extensive market research indicated that there will be strong
consumer demand for this product. Company-prepared budgets indicate that NC will be
able to recover its development costs in the first year of sales. The company is
committed to bringing the product to market.
Required:
For each of the three situations, indicate whether the costs incurred in 2023 should be
capitalized or expensed. Provide brief supporting rationale for each of your proposed accounting
treatments.
a. The company spent $5 million in 2023 to manufacture testing equipment. The equipment
is used to verify the sensitivity tolerances of the electronics produced for sale to reduce
future warranty claims.
The $5 million cost of manufacturing the testing equipment should be capitalized in the same
manner as other tangible fixed assets. Depreciation should then be expensed over the
equipment’s useful life. As the testing equipment is used to improve the quality of the electronic
products manufactured, during the production process, the depreciation charge would be
included in the inventoriable costs of the products tested (paragraph 49, IAS 16 and paragraph
2, IAS 2).
The $2 million contribution to IU is a research expenditure and should be expensed. The fact
that past research costs have been recouped through downstream commercial ventures is
irrelevant, as the non-directed research not being funded does not meet the six development
criteria set out in paragraph 57 of IAS 38.
c. The company fabricated a prototype of a voice-activated robot butler for domestic use. It
spent $4 million on development costs in 2023, and believes that it will need to spend
another $1 million over the next year to refine the invention sufficiently to get it ready for
mass production. Extensive market research indicated that there will be strong
consumer demand for this product. Company-prepared budgets indicate that NC will be
able to recover its development costs in the first year of sales. The company is
committed to bringing the product to market.
● These tests appear to have been met, and qualifying costs should be capitalized, subject
to what is said below
○ If the criteria for capitalization are not met, the costs to date should be expensed,
rather capitalized
○ Only costs incurred after the projects first met the six tests above are eligible for
capitalization. That is to say that (research) costs previously expensed cannot be
included in the cost of the asset. The asset should be amortized over its useful
life
Required:
Prepare the journal entries for Petropower using IFRS. Assume that the company has a policy
of capitalizing the costs of exploration and evaluation.
Exploration costs
Date Accounts Debit Credit
2023 Intangible assets 8,500,000
Cash 8,500,000
Exploration costs = $8,500,000 capitalized
Development costs
Date Accounts Debit Credit
2024 Intangible assets 4,000,000
Cash 4,000,000
Development costs = $4,000,000 capitalized
● Note that the depreciation rate should use the best information available, which is the
most recent estimate of reserves at the end of 2024, adjusted to the beginning of the
year.
Beginning of year reserves = End of year reserve (estimated reserves) + Production during
2024
Beginning of year reserves = $540,000 + $60,000 = $600,000
Extraction of BOE
Date Accounts Debit Credit
2024 Depletion expense 1,250,000
Intangible assets 1,250,000
Intangible assets = (Production during 2024 / Beginning of years reserves) x Intangible assets
= ($60,000 / $600,000) x $12,500,000 = 0.10 x $12,500,000 = $1,250,000
P9-45 Government grants (5 mins)
Edelweiss Music Production received a government grant to subsidize the production of music
with Canadian content (meaning using Canadian writers, singers, instrumentalists, etc., in the
recordings). Based on activity in the current year, the company is eligible to receive $150,000 to
offset labour costs, and $80,000 to offset equipment purchases.
Required:
Record the journal entries for the government grants using the gross method.
Gross method records government grants as income if the grant is a subsidy of expenses, and
deferred income (a liability) if it is a subsidy if asset cost.
Labour costs
Date Accounts Debit Credit
Government grant receivable 150,000
Other income (government grant) 150,000
Equipment purchases
Date Accounts Debit Credit
Government grant receivable 80,000
Deferred income 80,000
Required:
Record the journal entries for the government grants using the net method.
Net method records government grants as deductions in expenses and assets that the grant
subsidizes.
Labour costs
Date Accounts Debit Credit
Government grant receivable 150,000
Wages expense 150,000
Equipment purchases
Date Accounts Debit Credit
Government grant receivable 80,000
Equipment 80,000
FINAL EXAM Practice
As enterprise creates value at many different points or periods of time. Conceptually, revenue
and associated costs or income, should be recorded whenever the enterprise creates or adds
value. The discovery of a process or product, manufacturing distribution, product display, sales
delivery, credit provisions, warranties, are all value adding activities. So revenue or income
could be recognized at all of these points or periods of time.
Large coffees sell for $4.00 each. In September, Coffee Heaven sold 140,000 cups of coffee to
its loyalty program participants. The company has a very loyal customer base and it expects
that 100% of the customers in the loyalty program will subsequently redeem their loyalty cards
for a free coffee. In October, Coffee Heaven redeemed 15,000 loyalty cards.
Required:
a. Prepare a summary journal entry to record the sale of coffee in September to customers
who are enrolled in the loyalty program.
b. Prepare a summary journal entry to record the redemption of the loyalty cards in
October.
Loyalty programs:
● Some suppliers may offer loyalty programs to customers
● These programs require customers to continue buying specific products
● Exchange the customer receives some rewards or incentives
● The primary purpose is to attract or retain customers or to encourage repeat customers
● The journal entry for recognizing a contract with a loyalty income element is as follows:
Cash/Receivable xxx
Sales xxx
Deferred revenues xxx
The deferred revenue account records the loyalty revenue until it has been earned.
● The journal entry for when the customer takes advantage of the loyalty program, or the
contract has expired is as follows:
Required:
Record the entries on Cassiar’s books relating to the $45 million of accounts receivable.
Completion of collection
Date Accounts Debit Credit
Cash 250,000
Allowance for doubtful accounts 200,000
Due from factor 450,000
Cash = Due from factor - Allowance for doubtful accounts
= $450,000 = $200,000 = $250,000
Allowance for doubtful accounts = Accounts receivable - Collected amount
= $45,000,000 - $44,800,000 = $200,000
Due from factor = $450,000
As the final step to the factoring, reverse the final portion of the original journal entry (Short-term
debt).
Date Accounts Debit Credit
Short term debt - Asset backed financing 44,100,000
Interest expense 900,000
Accounts receivable 45,000,000
Interest expense = Accounts receivable - Short term debt - Asset backed financing
= $45,000,000 - $44,100,000 = $900,000
Chapter 6: Inventories
Required:
a. What was the cost of goods sold for the year?
b. What was the value of the finished goods inventory on December 31?
b. What was the value of the finished goods inventory on December 31?
Required:
a. How much did Argyle pay for this bond on January 1, 2023?
N = 6 periods
I=6
PMT = $10,000,000 x 0.08 = $800,000
FV = $10,000,000
PV = $10,983,465
b. On December 31, 2023, the market yield for bonds of equivalent risk and maturity is 7%.
What would be the market value of this bond on December 31, immediately after the
coupon payment on that date?
N=5
I=7
PMT = $10,000,000 x 0.08 = $800,000
FV = $10,000,000
PV = $10,401,020
c. On December 31, 2024, the market yield for bonds of equivalent risk and maturity is 8%.
What would be the market value of this bond on December 31, immediately after the
coupon payment on that date?
N=4
I=8
PMT = $10,000,000 x 0.08 = $800,000
FV = $10,000,000
PV = $10,000,000
d. Assume one of three scenarios: the bond is to be (i) amortized cost, (ii) FVOCI, or (iii)
FVPL:
● How much would the balance sheet value of this bond be on December 31, 2023, and
December 31, 2024?
● How much income would be reported in 2023 and 2024 for this bond?
● How much would OCI and accumulated OCI be for fiscal years 2023 and 2024?
Dec 31 Beginning + - =
Amortized Cost Interest Income Coupon Payment Ending Amortized
6% 8% Cost
FVOCI:
2023 OCI unrealized gain or loss = PV Dec 31, 2023 - Ending amortized cost 2023
= $10,410,020 - $10,842,473 = -432,453
FVPL:
2023 unrealized gains (losses) = PV Dec 31, 2023 - PV Jan 1, 2023
= $10,410,020 - $10,983,465 = -573,445
FVOCI:
Accumulated OCI, Dec 31 2023 = -432,453
2024 OCI unrealized gain or loss = PV Dec 31, 2024 - (PV Dec 31, 2023 + Interest 2024 -
coupon payment)
= $10,000,000 - ($10,410,020 + $650,548 - 800,000) = -260,568
Accumulated OCI, Dec 31, 2024 = -432,453 + -260,568 = -693,021
FVPL:
Unrealized gains (losses) = PV Dec 31, 2024 - PV Dec 31, 2023
= $10,000,000 - $10,410,020 = -410,020
Required:
Allocate the purchase price among the assets acquired.
PPE category Intended use Appraised Fraction of Total price Allocated price
value in optimal total appraised
use value
The following is the complete mineral exploration, development, and extraction history of Nikko
Minerals Inc. Early in 2019, owners invested $50 million to start the company. No further
financing was required. The company started explorations in 2019. However, all exploration
efforts between 2019 and 2021 were unsuccessful. It was not until early in 2022 that Nikko
found its one and only viable mineral deposit, which it immediately began to develop. It took two
years to complete the development of the site and all the minerals were extracted in three
years, starting in 2024.
Required:
Assume Nikko uses the full cost method to account for exploration costs and complete the
following table. Balance sheet amounts should be presented as at the year-end of December
31. Note also that when the ore is extracted, capitalized exploration and development (E&D)
costs are amortized using a units-of-production depletion rate, which is the accumulated
deferred costs divided by the estimated units of ore discovered (6,000,000 units).
Cap E+D cost 5,000 12,000 20,000 30,000 41,000 27,333 10,250 0
Total assets 50,000 50,000 50,000 50,000 50,000 58,333 76,250 75,000
Share capital 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000
Total owners equity 50,000 50,000 50,000 50,000 50,000 58,333 76,250 75,000
Exploration cost 0 0 0 0 0 0 0 0
Required:
a. Determine whether the asset is impaired, and, if so, prepare the journal entry.
b. Management determined that the fair value less costs to sell off the machine as at
December 31, 2024, was $975,000. Prepare the required journal entry, if any.
Refer to problem P10-32. Assume that Super Computers Inc. is a private company that elects to
report its financial results in accordance with ASPE. Provide the required information above.
Requirement a. Determine whether the asset is impaired, and, if so, prepare the journal entry.
Impairment under ASPE
● Perform impairment test when events or circumstances indicate that the carrying value
of asset or asset group exceeds the fair value
● If trigger exists, apply two step test:
1. Calculate the discounted cash flows and compare the carrying amount. If
discounted cash flows less than the carrying amount, then
2. Write asset down to its fair value (i.e. discounted cash flows)
Impairment test
Impairment test
Impairment $400,000
Requirement b. Management determined that the fair value less costs to sell off the machine
as at December 31, 2024, was $975,000. Prepare the required journal entry, if any.
Depreciation 2024
Net carrying value after impairment = Original cost - Accumulated depreciation - Impairment
= $2,400,000 - $600,000 - $400,000 = $1,400,000
Impairment test
No entry is required.