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Copyright  2013 McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual, Chapter 2 1

Chapter 2

Investments in Equity Securities

Modern Advanced Accounting in Canada Canadian 7th Edition Hilton Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Copyright  2013 McGraw-Hill Ryerson Limited. All rights reserved.

• Modern Advanced Accounting in Canada, Seventh Edition

A brief description of the major points covered in each case and problem.

CASES

Case 2-1 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 2-2 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 2-3 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 2-4 This case, adapted from a past UFE, involves a parent company that is in financial difficulty. An investment in an associate has been written off and a subsidiary has been sued. The student must assess whether the company can continue to report on a going concern basis and determine what should be disclosed in the notes to the financial statements.

Case 2-5 This case, adapted from a past UFE, 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 the accounting issues for the various types of investments.

Case 2-6 This case, adapted from a past UFE, involves a company that is considering the purchase of a 46.7% interest in another company in the scrap metal business. The student must write a memo to discuss 1) all relevant business considerations pertaining to the purchase and 2) how the purchaser should report its investment if it were to proceed with the purchase.

Copyright  2013 McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual, Chapter 2 3

PROBLEMS

Problem 2-1 (20 min.) 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 2-2 (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 2-3 (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 2-4 (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 2-5 (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 FVTOCI.

Problem 2-6 (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, FVTOCI, held-for- significant-influence and held-for-control investments.

Problem 2-7 (30 min)

Copyright  2013 McGraw-Hill Ryerson Limited. All rights reserved.

• Modern Advanced Accounting in Canada, Seventh Edition

This problem requires the preparation of slides for a presentation to describe GAAP for private enterprises for financial instruments as they relate to FVTPL, FVTOCI, held-for-significant- influence and held-for-control investments.

WEB-BASED PROBLEMS

Web Problem 2-1 The student answers a series of questions based on the 2011 financial statements of Rogers Communications Inc., a Canadian company. The questions deal with ratio analysis and investments reported using cost method, equity method and fair-value method.

Web Problem 2-2 The student answers a series of questions based on the 2011 financial statements of Goldcorp Inc., a Canadian company. The questions deal with ratio analysis and investments reported using cost method, equity method and fair-value method.

SOLUTIONS TO REVIEW QUESTIONS

• A business combination is a transaction or other event in which an acquirer obtains control

of one or more businesses. Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’ are also business combinations as that term is used in this IFRS. A parent–subsidiary relationship exists when, through an investment in shares or other means, 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 entity has the power to determine another entity’s key

strategic policies and activities. 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 other entity’s key strategic policies and activities.