DESCRIPTION OF CASES AND PROBLEMS

Copyright  2010 McGraw-Hill Ryerson Limited. All rights reserved.28 Modern Advanced Accounting in Canada, Sixth Edition

Chapter 2

Investments in Equity Securities

Modern Advanced Accounting in Canada 6th Edition Hilton Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Copyright  2010 McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual, Chapter 2 29

DESCRIPTION OF CASES AND PROBLEMS

CASES

Case 1 A company increases its equity investment from 10% to 25%. Management wants to compare the equity method and fair-value method in order to understand the affect on the accounting and wants to know which method better reflects management’s performance.

Case 2 A company has acquired an investment in shares of another company and members of its accounting department have differing views about how to account for it.

Case 3 This case focuses on the accounting for a long-term investment when the investee is hostile and refuses to co-operate with the investor.

Case 4 In order to maintain his company’s earnings growth, the CEO would like to direct a 40% owned investee company to declare a dividend greater than its normal yearly dividend. If the cost method were used, this income manipulation would work if no part of the dividend were treated as a liquidating dividend. It will not work if the equity method has to be used to account for the investment.

Case 5 This case, adapted from the CICA, gives an illustration of a company that has raised money for its operations in several ways (i.e. other than raising common equity) and asks the student to analyze both the accounting issues and methods that should be used to account for various aspects of the business and methods that should be used to account for the various types of investments.

PROBLEMS

Problem 1 (20 min.)

Copyright  2010 McGraw-Hill Ryerson Limited. All rights reserved.30 Modern Advanced Accounting in Canada, Sixth Edition This problem involves the calculation of the balance in the investment account for an investment carried under the equity method over a two-year period. Then, journal entries are required to reclassify and account for the investment as FVTPL for the third year.

Problem 2 (20 min.) This problem involves the preparation of journal entries for a FVTPL investment for one year. In year 2, journal entries are required to reclassify and account for the investment as a held-for- significant-influence investment.

Problem 3 (30 min.) This problem involves the preparation of journal entries over a two-year period for an investment under two assumptions: (a) that it is a significant influence investment and (b) that it is accounted for using the cost method.

Problem 4 (40 min) This problem requires journal entries, the calculation of the balance in the investment account and the preparation of the investor’s income statement under both the equity method and cost method. The investee reports a loss from discontinued operations for the year.

Problem 5 (40 min) This problem compares the investment account balance, the income per year, and the cumulative income for a three-year period for a 20% investment if it was classified as FVTPL, investment in associate and fair-value-through-OCI.

Problem 6 (30 min) This problem requires the preparation of slides for a presentation to describe GAAP for publicly accountable enterprises for financial instruments as they relate to FVTPL, fair-value-through- OCI, held-for-significant-influence and held-for-control investments.

Problem 7 (30 min) This problem requires the preparation of slides for a presentation to describe GAAP for private enterprises for financial instruments as they relate to FVTPL, fair-value-through-OCI, held-for- significant-influence and held-for-control investments.

Copyright  2010 McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual, Chapter 2 31

WEB-BASED PROBLEMS

Problem 1 The student answers a series of questions based on the most recent financial statements of Vodafone, a British company. The questions deal with ratio analysis and investments reported using cost method, equity method and fair-value method.

Problem 2 The student answers a series of questions based on the most recent financial statements of Siemens, a German company. The questions deal with ratio analysis and investments reported using cost method, equity method and fair-value method.

REVIEW QUESTIONS

• A business combination is an economic event whereby one company unites with or

gains control over the net assets of another company. A parent–subsidiary relationship exists when, through an investment in shares, the parent company has control over the subsidiary company. The key common element is the concept of control.

• A FVTPL investment is reported at fair value with the fair value adjustment reported in

net income whereas an investment in an associate is reported using the equity method.

• A control investment exists if one company can determine another company's strategic

operating and financing policies without the co-operation of others. Joint control exists when two or more companies have an agreement that establishes joint control such that no one of them can unilaterally determine the joint venture's strategic operating and financing policies.

• The purpose of the IFRS 8: Operating Segments is to improve the information available

to shareholders and investors about the lines of business and geographic areas in which the company does business. Some of this information is lost in the aggregation process of consolidation, and the disaggregation of segment reporting is valuable for detailed analysis.

• The equity method should be used to report an investment when the investor has

significant influence over the investee, which is called an associate. The ability to