Chapter 12, Problem 12.18P

To determine

IFRS: International Financial Reporting Standard is abbreviated as IFRS. The IFRS is set up to bring a standard global language in accounting, so that the other firms across the globe can understand the accounting term of all other businesses.

Investment: The act of allocating money to buy a monetary asset, in order to generate wealth in the future is referred to as investment.

Other-than-temporary (OTT) impairment: When the market value of an investment declines to a value lower than its cost, it is referred to as OTT impairment.

Fair value: Fair value is the price at which, both seller and buyer agree to exchange the asset. So, fair value is the selling price to the seller and the purchase price for the buyer.

Net income: Net income is the excess amount of revenue which is arises after deducting all the expenses of a company.  In simply, it is the difference between total revenue and total expenses of the company.

Other Comprehensive income: OCI includes all financial items which result in changes in the stockholders’ equity, other than stock investments and dividends.

To Journalize:  The entries to account for fair value changes during 2016 and 2017, as per the IAS No. 39 for Other-than-temporary Impairments.

Explanation of Solution

Journalize the transactions for adjustments of investment in Company B bonds in the books of S Enterprises.

2016:

Credit losses:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.16	OTT Impairment Loss–I/S		240,000
	Investment in Company B Bonds			240,000
	(To record credit losses of impairment loss of investment)

Table (1)

Note: According to IFRS Number: 39 recoveries of OTT impairments for debt investments are recognized only for credit losses.

2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.17	Investment in Company B Bonds		100,000
	Recovery of OTT Impairment Loss – I/S			100,000
	(To record recovery of impairment loss of investment)

Table (2)

Note: According to IFRS Number: 39 recoveries of OTT impairments for debt investments alone are recognized as earnings.

Working Notes:

Compute the OTT impairment recoveries as on December 31, 2017.

Security	Credit Loss in 2016	–	Credit Loss in 2017	=	Recoveries
Company B	$240,000	–	$140,000	=	$100,000

Table (3)

Trading securities: These are short-term investments in debt and equity securities with an intention of trading and earning profits due to changes in market prices.

Journalize the transactions for adjustments of investment in Corporation O bonds in the books of S Enterprises.

Note: As per the IFRS Number: 39, the investment in Corporation O bonds are trading securities, the OTT impairment is irrelevant.

2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.16	Unrealized Holding Gains and Losses–I/S		100,000
	Fair Value Adjustment			100,000
	(To record adjustment of trading securities to fair market value)

Table (4)

Working Notes:

Compute the net unrealized holding gain (loss) as on December 31, 2016.

Security	Fair Value	–	Amortized Cost	=	Fair Value Adjustment
Corporation O	$2,200,000	–	$2,500,000	=	$(300,000)
Existing balance in fair value adjustment					200,000
Increase (decrease) needed in fair value adjustment					$(100,000)

Table (5)

Note: With a prior positive balance of $200,000, and to maintain a negative balance of $300,000 in 2016, a negative balance of $100,000 is assumed as decrease needed in fair value adjustment.

2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.17	Fair Value Adjustment		500,000
	Net Unrealized Holding Gains  and Losses–I/S			500,000
	(To record adjustment of trading securities to fair market value)

Table (6)

Working Notes:

Compute the net unrealized holding gain (loss) as on December 31, 2017.

Security	Fair Value	–	Amortized Cost	=	Fair Value Adjustment
Corporation O	$2,700,000	–	$2,500,000	=	$200,000
Existing balance in fair value adjustment					300,000
Increase (decrease) needed in fair value adjustment					$500,000

Table (7)

Note: With a negative balance of $300,000 in 2016, and to maintain a positive balance of $200,000 in 2017, a negative balance of $500,000 is assumed as decrease needed in fair value adjustment.

Available-for-sale securities: Available-for-sale are short-term or long-term securities which are held to manage the interest risk, meet liquidity needs, and any prepayment risks.

Journalize the transactions for adjustments of investment in Incorporation J bonds in the books of S Enterprises.

2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.16	OTT Impairment Loss–I/S		800,000
	Investment in Incorporation J Bonds			800,000
	(To record credit losses of impairment loss of investment)

Table (8)

Note: According to IFRS Number: 39 recoveries of OTT impairments for available-for-sale debt investments are recognized for fair value adjustment.

Working Notes:

Compute the OTT impairment recoveries as on December 31, 2016.

Security	Fair value	–	Amortized Cost	=	Recoveries
Company B	$2,7000,000	–	$3,500,000	=	$(800,000)

Table (9)

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.16	Fair Value Adjustment		400,000
	Net Unrealized Holding Gains  and Losses– Other Comprehensive Income			400,000
	(To record reclassification of temporary losses of investment)

Table (10)

2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.17	Fair Value Adjustment		200,000
	Net Unrealized Holding Gains  and Losses– Other Comprehensive Income			200,000
	(To record reclassification of temporary losses of investment)

Table (11)

Note: As the investment in Incorporation J bonds are available-for-sale securities and the fair value has increased, the OTT impairment adjustment is irrelevant.

Working Notes:

Compute the net unrealized holding gain (loss) as on December 31, 2017.

Security	Fair Value	–	Amortized Cost	=	Fair Value Adjustment
Incorporation J	$2,900,000	–	$2,700,000	=	$200,000

Table (12)

Journalize the transactions for adjustments of investment in Corporation H equity in the books of S Enterprises.

2016:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.16	OTT Impairment Loss–I/S		400,000
	Investment in Corporation H Equity			400,000
	(To record impairment loss of investment)

Table (13)

Note: According to IFRS Number: 39 OTT impairments for equity investments would not be recovered.

Working Notes:

Compute the OTT impairment adjustment as on December 31, 2016.

Security	Fair Value	–	Amortized Cost	=	OTT Impairment
Corporation H	$600,000	–	$1,000,000	=	$(400,000)

Table (14)

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.16	Net Unrealized Holding Gains and Losses–Other Comprehensive Income		120,000
	Fair Value Adjustment			120,000
	(To record reclassification of temporary losses of investment)

Table (15)

2017:

Date	Account Titles and Explanation	Post Ref.	Debit ($)	Credit ($)
12.31.17	Fair Value Adjustment		100,000
	Net Unrealized Holding Gains and Losses – Other Comprehensive Income			100,000
	(To record adjustment of available-for-sale securities to fair market value)

Table (16)

Note: As the investment in Corporation H bonds are available-for-sale securities and the fair value has increased, the OTT impairment adjustment is irrelevant.

Working Notes:

Compute the net unrealized holding gain (loss) as on December 31, 2017.

Security	Fair Value in 2017	–	Fair Value in 2016	=	Fair Value Adjustment
Corporation H	$700,000	–	$600,000	=	$100,000

Table (17)