Question #1:

On January 1, Year 1, Head Ltd. purchased 50,000 common shares, representing 40% of the outstanding shares, of Toe Ltd. for $800,000. The assets of Toe included a building with a market value $300,000 greater than book value. The building had a remaining useful life of 10 years.

During Year 1, Toe had a net income of $200,000 and paid dividends of $80,000. During Year 1, Head sold Toe merchandise for $240,000 at a gross profit rate of 40%. At year end, 50% of this merchandise remained in Toe's inventory. Head's tax rate is 30%.

During Year 2, Toe had a net income of $240,000 and paid dividends of $140,000. At year end, the market price of the shares was $18.

Required:

a) Provide all the necessary Year 1 journal entries for Head Ltd. from purchase to all year-end adjustments, assuming they have significant influence. Your journal entries must be in standard form.

b) Show all calculations necessary to determine the end of Year 2 balance in Head's "Investment in Toe" account. Use a table format with one line per item and label each item. Provide the ending balance. Please highlight your final figure in yellow.

Question #2:

On December 31, 2017, PCP Ltd. purchased bonds of ACP Ltd. The bonds mature on December 31, 2022, and have a maturity value of $1,000,000. The stated interest rate on the bonds is 4% (yearly rate). Interest is paid each June 30 and December 31. The bonds were purchased to yield 3.4% (yearly rate). The bonds will be accounted for as FVTPL.

a) What was the purchase price of the bonds (to the nearest dollar)? Please highlight your final figure in yellow.

b)

i) How much bond interest income (round to the nearest dollar) should PCP report on June 30, 2018? (Please highlight your final figure in yellow.)

ii) How much bond interest income (round to the nearest dollar) should PCP report on December 31, 2018? (Please highlight your final figure in yellow.)

c) On December 31, 2018, the bonds were available in the secondary market at a yield rate of 3.6%.

i) Should PCP report an unrealized gain or loss, a realized gain or loss, or no gain or loss? Explain why.

ii) Regardless of your answer to i), assume they should report some kind of gain or loss. What would be the amount of the gain or loss? Show calculations for possible part marks. Please highlight your final figure in yellow, and clearly indicate if it is a gain or a loss.