Fellows Inc., a publicly traded manufacturing company in the technology industry, has a November 30 fiscal year end. The company grew rapidly in its first 10 years and made three public offerings over this period. During its rapid growth period, Fellows acquired common shares in Yukasato Inc. and Admin Importers.

In 2009, Fellows acquired 25% of Yukasato?s common shares for $588,000 and accounts for thisinvestment using the equity method. The book value of Yukasato?s net ?assets at the date of purchase was $1.8 million. The excess of the purchase price over the book value of the net assets relates to assets that are subject to amortization. These assets have a remaining life of 20 years. For its fiscal year ended November 30, 2020, Yukasato Inc. reported net income of $250,000 and paid dividends of $100,000.

In 2011, Fellows acquired 10% of Admin Importers? common shares for $204,000 and accounts for this investment using the FV-OCI model.

Fellows also has a policy of investing idle cash in equity securities to generate short-term profits. The following data are for Fellows? trading investment portfolio:

On November 14, 2020, Ted Yan was hired by Fellows as assistant controller. His first assignment was to prepare the entries to record the November activity and the November 30, 2020 year-end adjusting entries for the current trading investments and the investment in common shares of Admin Importers.

Using Fellows? ledger of investment transactions and the data given above, Yan proposed the following entries and submitted them to Julie O?Brien, controller, for review:

Instructions

a. The journal entries proposed by Ted Yan will establish the value of Fellows? equity investments to be reported on the company?s external financial statements. Review each journal entry and indicate whether it is in accordance with the applicable accounting standards. If an entry is incorrect, prepare the entry(ies) that should have been made.

b. Digging Deeper Because Fellows owns more than 20% of Yukasato Inc., Julie O?Brien has adopted the equity method to account for this investment. Under what circumstances would it be inappropriate to use the equity method to account for a 25% interest in the common shares of Yukasato Inc.? If the equity method is not appropriate in this case, what method would you recommend? Why?

c. Digging Deeper Are there any differences between the characteristics of trading investments accounted for using the FV-NI model and investments accounted for using the FV-OCI model in general? Explain. Are there any differences in the specific case of Fellows Inc.?s investments?

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Trading Investments (Using the FV-NI Model) at November 30, 2019 Fair Value Cost $326,000 Craxi Electric $314,000 181,000 Renoir Inc. 184,000 Seferis Inc. 95,000 98,500 $605,000 Total $593,500 Investments (Using the FV-0CI Model) at November 30, 2019 Cost Fair Value Admin Importers $204,000 $198,000 Trading Investments (Using the FV-NI Model) at November 30, 2020 Fair Value Cost Craxi Electric $326,000 $323,000 Renoir Inc. 184,000 180,000 Mer Limited 105,000 108,000 Total $615,000 $611,000 Investments (Using the FV-OCI Model) at November 30, 2020 Fair Value Çost Admin Importers $204,000 $205,000 Entry 1 (November 8, 2020) Cash 99,500 FV-NI Investments 98,500 Gain on Disposal of Investments-FV-NI (To record the sale of Seferis Inc. shares for $99,500) – Assume no 1,000 change in fair value since November 30, 2019. Entry 2 (November 26, 2020) FV-NI Investments 105,000 Cash 105,000 (To record the purchase of Mer Limited common shares for $102,200 plus brokerage fees of $2,800) Entry 3 (November 30, 2020) Investment Income or Loss 3,000 Allowance for Investment Impairment (To recognize a loss equal to the excess of cost over fair value of equity securities) 3,000 Entry 4 (November 30, 2020) Cash 38,500 Dividend Revenue 38,500 (To record the following dividends received from investments: Yukasato Inc. $25,000; Admin Importers $9,000; and Craxi Electric $4,500) Entry 5 (November 30, 2020) Investment in Associate 62,500 Investment Income or Loss 62,500 (To record share of Yukasato Inc. income under the equity method, $250,000 x 0.25)