Reference no: EM132846163

Question - Ayayai Corp., a December 31 year-end company that applies IFRS, acquired an investment of 900 shares of Credence Corp. in mid-2016 for $26,850. Between significant volatility in the markets and in the business prospects of Credence Corp., the accounting for this investment presented a challenge to Ayayai. Toward the end of 2020, Credence discontinued the small annual dividend of $0.50 per share that it had been paying and announced that a major patent responsible for 50% of its income had lost most of its value due to a technological improvement by a competitor.

Situation 1: Credence Corp. is a publicly traded company on the Toronto Stock Exchange, and Ayayai has opted to account for its investment at FV-NI. By the end of 2019, the price of Credence shares had fallen to $26.50 per share from $29 the previous year, and by the end of 2020 they were trading at $11.10.

Situation 2: Credence Corp. is a private enterprise owned by a group of 20 investors and is a supplier of materials to Ayayai. Ayayai purchased the shares to cement the relationship between the two companies and has opted to account for its investment at FV-OCI. In late 2019, Ayayai was beginning to worry about its investment and determined that its value had probably fallen marginally to an estimated fair value of approximately $23,000 from $24,000 the previous year. In 2020, Ayayai was more concerned and, at year end, carried out a thorough analysis of the present value of the likely cash flows to be derived from this investment and estimated an amount of $11,200.

Ayayai Corp. adjusts the carrying amount of its investments directly when recognizing an impairment loss, and each type of investment income is accounted for and reported separately.

For each situation, identify the impairment model that Ayayai should apply.

QUESTION ONE - Situation 1 Ayayai should apply the

a) Fair Value Impairment Model

b) Incurred Loss Model

c) Expected Loss Model

Situation 2 Ayayai should apply the

a) Fair Value Impairment Model

b) Incurred Loss Model

c) Expected Loss Model

QUESTION TWO - Prepare the appropriate journal entries at December 31, 2019, and December 31, 2020, under situation 1.

QUESTION THREE - Prepare the appropriate journal entries at December 31, 2019, and December 31, 2020, under situation 2.

QUESTION FOUR - Assuming Ayayai is a private company that applies ASPE, prepare the appropriate journal entries at December 31, 2019, and December 31, 2020, under situation 1.