Nuts & Bolts Inc. You have just assumed the role of a controller at Nuts & Bolts Inc (NBI), a profitable and established manufacturing company. Due to the pandemic, the demand for the company’s goods has dropped. Luckily, NBI has a substantial cash balance and management is not worried about the company’s long-term survival.

Having said that, management also understands the importance of not having the cash being idle and therefore, they decide to make some investments this year. Management believes that the current economic environment will ‘make it easy’ for them to profit from trading debt and equity securities amid the recent market fluctuations.

As of December 31, 2020, NBI has several investments which are described below. NBI purchased on April 30, 3000 shares of Virtual Inc for $3,000,000. On August 1, NBI purchased 100 more shares for $500/share. On September 1, Virtual Inc. issued and paid dividends of $25 per share. On December 31, the shares were valued at $1600/share. Commission for such purchase and sale is 1% on the value of the shares being traded each way.

On January 1, 2020 NBI purchased 1,000 bonds with the face value of $1,000 each, an annual coupon rate of 5% payable on December 31 from Esports Inc. The bond matures in 5 years. The market rate at the time of purchase was 8%. As of December 31, 2020, the bond’s fair value is $950,000. These bonds are actively traded in the market. Ignore transaction costs associated with bonds.

The management of NBI truly believes in taking care of its customers when possible. NBI offers its smaller customers to take advantage of its “Loan4U” program. Essentially, if a customer falls on tough times and needs a cash injection, NBI is happy to provide it in exchange for a bond. However, NBI management are quite selective and not every interested company will be approved for this opportunity. Management’s goal is to find companies that are not too high risk but also would be willing to pay a high interest rate. Recently, NBI approved BaseBall Inc for the Loan4U program. On October 1, 2020, NBI ‘purchased’ $100,000, 3-year, 12% bond from BaseBall. The effective interest rate is 14%. Interest is payable semi-annually on April 1 and October 1.

Case questions

Part A) While NBI is a publicly traded company, it is considering to go private in 2 years. Management is wondering if it continues with the same investment strategy, what the difference in accounting treatment would be under IFRS and ASPE for

1. Shares such as those from Virtual Inc.
2. Bonds such as those from Esports Inc.
3. Bonds such as those from BaseBall Inc.

Please discuss Part A qualitatively, first the difference between IFRS and ASPE for the above investments, and second, which method NBI should use in 2020, if no special election is made.

Be sure to support your answer with appropriate criteria.

Part B) Management would like you to prepare journal entries and all the necessary calculations to reflect the transactions involving the 3 investments in 2020 in preparation for the current year’s financial statements. Management also wants to know the balance of each of the investment on balance sheet date. Specifically assume that for the bonds from BaseBall, FVOCI is the appropriate method, regardless of your conclusion in Part A. Please use a financial calculator or excel to calculate all present values.

Part C) Fast forward six months later, and it is now June 30, 2021. The following transactions occurred in the first half of 2021:

1. On February 1, 2021, NBI sold the bonds from Esports for $980,000 plus accrued interest.
2. On April 1, 2021, NBI received interest payment from BaseBall.

Management wants you to provide the journal entries for the above transactions.

Answer rating: 100% (QA)

Part A While NBI is a publicly traded company it is considering to go private in 2 years Management ... View the full answer