P9-13 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 2006, Fellows acquired 25% of Yukasato's common shares for $588,000 and accounts for this investment using the equity method. The book value of Yukasatos net assets at the date of purchase was $1,800,000 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, 2017, Yukasato Inc. reported net income of $250,000 and paid dividends of $100,000 $204,000 In 2008, Fellows acquired 10% of Admin Importers common shares for 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: TRADING INVESTMENTS (USING THE FV-NI MODEL) at November 30, 2016 Cost Fair Value Craxi Electric $326,000 $314,000 Renoir Inc. 184,000 181,000 Seferis Inc. 95,000 98,500 Total $605,000 $593,500 INVESTMENTS (USING THE FV-OCI MODEL) at November 30, 2016 Admin Importers 204,000 198,000 TRADING INVESTMENTS (USING THE FV-NI MODEL) at November 30, 2017 Cost Fair Value Craxi Electric $326,000 $323,000 Renoir Inc. 184,000 180,000 Mer Limited 105,000 108,500 Total $615,000 $611,500 INVESTMENTS (USING THE FV-OCI MODEL) at November 30, 2017 Admin Importers 204,000 205,000 On November 14, 2017, 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, 2017 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 OBrien, controller, for review:

Part a) Instructions

ENTRY 1 (NOVEMBER 8, 2017) Cash 99,500 FV - Investments 98,500 Investment Income or Loss 1,000

ENTRY 2 (NOVEMBER 26, 2017) FV-NI Investments 105,000 Cash 105,000 (To record the purchase of Mer common shares for $102,200 plus brokerage fees of $2,800)

ENTRY 3 (NOVEMBER 30, 2017) Investment Income or Loss 3,000 Allowance for Investment Impairment 3,000 (To recognize a loss equal to the excess of cost over fair value of equity securities) The journal entries proposed by Ted Yan will establish the value of Fellows equity investments to be reported on the companys external financial statements. Review each journal entry and indicate whether it is in accordance with the applicable accounting standards, assuming the company has adopted the recognition and measurement standards of IFRS 9 Financial Instruments. If an entry is incorrect, prepare the entry(ies) that should have been made.

ENTRY 4 (NOVEMBER 30, 2017) Cash 38,500 Investment Income or Loss 38,500 (To record the following dividends received from investments: Yukasato Inc. $25,000 Admin Importers $9,000 Craxi Electric $4,500 Yukasato

ENTRY 5 (NOVEMBER 30, 2017) Investment in Associate 62,500 Investment Income or Loss 62,500 (To record share of Yukasato Inc. income under the equity method, $250,000 0.25) Additional information to the question Yukasato paid dividends of $10,000 What is the correct journal entry to record the receipt of these dividends

Part b) Instructions Because Fellows owns more than 20% of Yukasato Inc., Julie OBrien 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?

Part c) Instructions What is the reason for the above statement? To be accounted for using the FV-OCI model, the investment under IFRS 9 must not be held for the purposes of trading either for debt or equity securities. 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?