2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill L
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
LC.
,Solution Manual For All Chapters
cn cn cn cn
SOLUTION MANUAL FOR cn cn
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEF
cn cn cn cn cn cn cn cn cn
ER AND TIMOTHY DOUPNIK
cn cn cn
CHAPTER 1-19 cn
CHAPTER 1 TH cn cn
E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
cn cn cn cn cn cn
Chapter Outline cn
I. Four methods are principally used to account for an investment in equity securities along
cn cn cn cn cn cn cn cn cn cn cn cn cn
with a fair value option.
cn cn cn cn cn
A. Fair value method: applied by an investor when only a small percentage of a
cn cn cn cn cn cn cn cn cn cn cn cn cn
company‘s voting stock is held.
cn cn cn cn cn
1. The investor recognizes income when the investee declares a dividend.
cn cn cn cn cn cn cn cn cn
2. Portfolios are reported at fair value. If fair values are unavailable, investment is
cn cn cn cn cn cn cn cn cn cn cn cn
reported at cost.cn cn cn
B. Cost Method: applied to investments without a readily determinable fair value. When
cn cn cn cn cn cn cn cn cn cn cn cn
the fair value of an investment in equity securities is not readily determinable, and the
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
investment provides neither significant influence nor control, the investment may be
cn cn cn cn cn cn cn cn cn cn cn cn
measured at cost. The investment remains at cost unless cn cn cn cn cn cn cn cn
1. A demonstrable impairment occurs for the investment, or
cn cn cn cn cn cn cn
2. An observable price change occurs for identical or similar investments of the same
cn cn cn cn cn cn cn cn cn cn cn cn
issuer. cn
The investor typically recognizes its share of investee dividends declared as dividend i
cn cn cn cn cn cn cn cn cn cn cn cn
ncome.
C. Consolidation: when one firm controls another (e.g., when a parent has a majority i cn cn cn cn cn cn cn cn cn cn cn cn cn
nterest in the voting stock of a subsidiary or control through variable interests, their
cn cn cn cn cn cn cn cn cn cn cn cn cn c
financial statements are consolidated and reported for the combined entity.
n cn cn cn cn cn cn cn cn cn
D. Equity method: applied when the investor has the ability to exercise significant
cn cn cn cn cn cn cn cn cn cn cn
influence over operating and financial policies of the investee.
cn cn cn cn cn cn cn cn cn
1. Ability to significantly influence investee is indicated by several factors including
cn cn cn cn cn cn cn cn cn cn c
representation on the board of directors, participation in policy-making, etc.
n cn cn cn cn cn cn cn cn cn
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill L
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
LC.
, outstanding voting stock of the investee is held by the investor. cn cn cn cn cn cn cn cn cn cn
Current financial reporting standards allow firms to elect to use fair value for any new inv
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
estment in equity shares including those where the equity method would otherwise apply.
cn cn cn cn cn cn cn cn cn cn cn cn cn
However, the option, once taken, is irrevocable. The investor recognizes both investee di
cn cn cn cn cn cn cn cn cn cn cn cn
vidends and changes in fair value over time as income.
cn cn cn cn cn cn cn cn cn
II. Accounting for an investment: the equity method
cn cn cn cn cn cn
A. The investor adjusts the investment account to reflect all changes in the equity of the
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
investee company.
cn cn
B. The investor accrues investee income when it is reported in the investee‘s financial
cn cn cn cn cn cn cn cn cn cn cn cn
statements.
cn
C. Dividends declared by the investee create a reduction in the carrying amount of the I
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
nvestment account. This book assumes all investee dividends are declared and paid
cn cn cn cn cn cn cn cn cn cn cn cn
in the same reporting period.
cn cn cn cn
III. Special accounting procedures used in the application of the equity method
cn cn cn cn cn cn cn cn cn cn
A. Reporting a change to the equity method when the ability to significantly influence an
cn cn cn cn cn cn cn cn cn cn cn cn cn
investee is achieved through a series of acquisitions.
cn cn cn cn cn cn cn cn
1. Initial purchase(s) will be accounted for by means of the fair value method (or a
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
t cost) until the ability to significantly influence is attained.
cn cn cn cn cn cn cn cn cn
2. When the ability to exercise significant influence occurs following a series of stock
cn cn cn cn cn cn cn cn cn cn cn cn
purchases, the investor applies the equity method prospectively. The total fair va
cn cn cn cn cn cn cn cn cn cn cn cn
lue at the date significant influence is attained is compared to the investee‘s book
cn cn cn cn cn cn cn cn cn cn cn cn cn
value to determine future excess fair value amortizations.
cn cn cn cn cn cn cn cn
B. Investee income from other than continuing operations
cn cn cn cn cn cn
1. The investor recognizes its share of investee reported other comprehensive
cn cn cn cn cn cn cn cn cn
income (OCI) through the investment account and the investor‘s own OCI.
cn cn cn cn cn cn cn cn cn cn cn
2. Income items such as discontinued operations that are reported separately by the
cn cn cn cn cn cn cn cn cn cn cn
investee should be shown in the same manner by the investor. The materiality of
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
these other investee income elements (as it affects the investor) continues to be
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
a criterion for separate disclosure.
cn cn cn cn
C. Investee losses cn
1. Losses reported by the investee create corresponding losses for the investor.
cn cn cn cn cn cn cn cn cn cn
2. A permanent decline in the fair value of an investee‘s stock should be recognized
cn cn cn cn cn cn cn cn cn cn cn cn cn
immediately by the investor as an impairment loss.
cn cn cn cn cn cn cn cn
3. Investee losses can possibly reduce the carrying value of the investment account
cn cn cn cn cn cn cn cn cn cn cn cn
to a zero balance. At that point, the equity method ceases to be applicable and th
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
e fair-value method is subsequently used.
cn cn cn cn cn
D. Reporting the sale of an equity investment cn cn cn cn cn cn
1. The investor applies the equity method until the disposal date to establish a proper
cn cn cn cn cn cn cn cn cn cn cn cn cn
book value.
cn cn
2. Following the sale, the equity method continues to be appropriate if enough shares
cn cn cn cn cn cn cn cn cn cn cn cn
are still held to maintain the investor‘s ability to significantly influence the investee
cn cn cn cn cn cn cn cn cn cn cn cn cn
. If that ability has been lost, the fair-value method is subsequently used.
cn cn cn cn cn cn cn cn cn cn cn cn
2-24
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill L
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
LC.
, Solution Manual For All Chapters cn cn cn cn
IV. Excess investment cost over book value acquired
cn cn cn cn cn cn
A. The price an investor pays for equity securities often differs significantly from the
cn cn cn cn cn cn cn cn cn cn cn cn
investee‘s underlying book value primarily because the historical cost based ac
cn cn cn cn cn cn cn cn cn cn cn
counting model does not keep track of changes in a firm‘s fair value.
cn cn cn cn cn cn cn cn cn cn cn cn
B. Payments made in excess of underlying book value can sometimes be identified with
cn cn cn cn cn cn cn cn cn cn cn cn
specific investee accounts such as inventory or equipment.
cn cn cn cn cn cn cn cn
C. An extra acquisition price can also be assigned to anticipated benefits that are expe
cn cn cn cn cn cn cn cn cn cn cn cn cn
cted to be derived from the investment. In accounting, these amounts are presumed
cn cn cn cn cn cn cn cn cn cn cn cn c
to reflect an intangible asset referred to as goodwill. Goodwill is calculated as any ex
n cn cn cn cn cn cn cn cn cn cn cn cn cn cn
cess payment that is not attributable to specific identifiable assets and liabilities of th
cn cn cn cn cn cn cn cn cn cn cn cn cn
e investee. Because goodwill is an indefinite-lived asset, it is not amortized.
cn cn cn cn cn cn cn cn cn cn cn
V. Deferral of intra-entity gross profit in inventory
cn cn cn cn cn cn
A. The investor‘s share of intra-
cn cn cn cn
entity profits in ending inventory are not recognized until the transferred goods are eit
cn cn cn cn cn cn cn cn cn cn cn cn cn
her consumed or until they are resold to unrelated parties.
cn cn cn cn cn cn cn cn cn
B. Downstream sales of inventory cn cn cn
1. ―Downstream‖ refers to transfers made by the investor to the investee. cn cn cn cn cn cn cn cn cn cn
2. Intra-
entity gross profits from sales are initially deferred under the equity method and
cn cn cn cn cn cn cn cn cn cn cn cn cn
then recognized as income at the time of the inventory‘s eventual disposal.
cn cn cn cn cn cn cn cn cn cn cn
3. The amount of gross profit to be deferred is the investor‘s ownership percentage
cn cn cn cn cn cn cn cn cn cn cn cn
multiplied by the markup on the merchandise remaining at the end of the year.
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
C. Upstream sales of inventory cn cn cn
1. ―Upstream‖ refers to transfers made by the investee to the investor. cn cn cn cn cn cn cn cn cn cn
2. Under the equity method, the deferral process for intra- cn cn cn cn cn cn cn cn
entity gross profits is identical for upstream and downstream transfers. The proce
cn cn cn cn cn cn cn cn cn cn cn
dures are separately identified in Chapter One because the handling does vary wi
cn cn cn cn cn cn cn cn cn cn cn cn
thin the consolidation process. cn cn cn
Answers to Discussion Questions cn cn cn
The textbook includes discussion questions to stimulate student thought and discussion. These
cn cn cn cn cn cn cn cn cn cn cn cn
questions are also designed to allow students to consider relevant issues that might otherwise be
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
overlooked. Some of these questions may be addressed by the instructor in class to motivate st
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
udent discussion. Students should be encouraged to begin by defining the issue(s) in each case.
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
Next, authoritative accounting literature (FASB ASC) or other relevant literature can be consulte
cn cn cn cn cn cn cn cn cn cn cn cn cn
d as a preliminary step in arriving at logical actions. Frequently, the FASB Accounting Standards
cn cn cn cn cn cn cn cn cn cn cn cn cn cn c
Codification will provide the necessary support.
n cn cn cn cn cn
Unfortunately, in accounting, definitive resolutions to financial reporting questions are not always
cn cn cn cn cn cn cn cn cn cn cn cn
available. Students often seem to believe that all accounting issues have been resolved in the p
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
ast so that accounting education is only a matter of learning to apply historically prescribed proc
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
edures. However, in actual practice, the only real answer is often the one that provides the faires
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
t representation of the firm‘s transactions. If an authoritative solution is not available, students sh
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
ould be directed to list all of the issues involved and the consequences of possible alternative ac
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
tions. The various factors presented can be weighed to produce a viable solution.
cn cn cn cn cn cn cn cn cn cn cn cn
The discussion questions are designed to help students develop research and critical thinking ski
cn cn cn cn cn cn cn cn cn cn cn cn cn
lls in addressing issues that go beyond the purely mechanical elements of accounting.
cn cn cn cn cn cn cn cn cn cn cn cn
2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill L
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
LC.
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill L
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
LC.
,Solution Manual For All Chapters
cn cn cn cn
SOLUTION MANUAL FOR cn cn
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEF
cn cn cn cn cn cn cn cn cn
ER AND TIMOTHY DOUPNIK
cn cn cn
CHAPTER 1-19 cn
CHAPTER 1 TH cn cn
E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
cn cn cn cn cn cn
Chapter Outline cn
I. Four methods are principally used to account for an investment in equity securities along
cn cn cn cn cn cn cn cn cn cn cn cn cn
with a fair value option.
cn cn cn cn cn
A. Fair value method: applied by an investor when only a small percentage of a
cn cn cn cn cn cn cn cn cn cn cn cn cn
company‘s voting stock is held.
cn cn cn cn cn
1. The investor recognizes income when the investee declares a dividend.
cn cn cn cn cn cn cn cn cn
2. Portfolios are reported at fair value. If fair values are unavailable, investment is
cn cn cn cn cn cn cn cn cn cn cn cn
reported at cost.cn cn cn
B. Cost Method: applied to investments without a readily determinable fair value. When
cn cn cn cn cn cn cn cn cn cn cn cn
the fair value of an investment in equity securities is not readily determinable, and the
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
investment provides neither significant influence nor control, the investment may be
cn cn cn cn cn cn cn cn cn cn cn cn
measured at cost. The investment remains at cost unless cn cn cn cn cn cn cn cn
1. A demonstrable impairment occurs for the investment, or
cn cn cn cn cn cn cn
2. An observable price change occurs for identical or similar investments of the same
cn cn cn cn cn cn cn cn cn cn cn cn
issuer. cn
The investor typically recognizes its share of investee dividends declared as dividend i
cn cn cn cn cn cn cn cn cn cn cn cn
ncome.
C. Consolidation: when one firm controls another (e.g., when a parent has a majority i cn cn cn cn cn cn cn cn cn cn cn cn cn
nterest in the voting stock of a subsidiary or control through variable interests, their
cn cn cn cn cn cn cn cn cn cn cn cn cn c
financial statements are consolidated and reported for the combined entity.
n cn cn cn cn cn cn cn cn cn
D. Equity method: applied when the investor has the ability to exercise significant
cn cn cn cn cn cn cn cn cn cn cn
influence over operating and financial policies of the investee.
cn cn cn cn cn cn cn cn cn
1. Ability to significantly influence investee is indicated by several factors including
cn cn cn cn cn cn cn cn cn cn c
representation on the board of directors, participation in policy-making, etc.
n cn cn cn cn cn cn cn cn cn
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill L
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
LC.
, outstanding voting stock of the investee is held by the investor. cn cn cn cn cn cn cn cn cn cn
Current financial reporting standards allow firms to elect to use fair value for any new inv
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
estment in equity shares including those where the equity method would otherwise apply.
cn cn cn cn cn cn cn cn cn cn cn cn cn
However, the option, once taken, is irrevocable. The investor recognizes both investee di
cn cn cn cn cn cn cn cn cn cn cn cn
vidends and changes in fair value over time as income.
cn cn cn cn cn cn cn cn cn
II. Accounting for an investment: the equity method
cn cn cn cn cn cn
A. The investor adjusts the investment account to reflect all changes in the equity of the
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
investee company.
cn cn
B. The investor accrues investee income when it is reported in the investee‘s financial
cn cn cn cn cn cn cn cn cn cn cn cn
statements.
cn
C. Dividends declared by the investee create a reduction in the carrying amount of the I
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
nvestment account. This book assumes all investee dividends are declared and paid
cn cn cn cn cn cn cn cn cn cn cn cn
in the same reporting period.
cn cn cn cn
III. Special accounting procedures used in the application of the equity method
cn cn cn cn cn cn cn cn cn cn
A. Reporting a change to the equity method when the ability to significantly influence an
cn cn cn cn cn cn cn cn cn cn cn cn cn
investee is achieved through a series of acquisitions.
cn cn cn cn cn cn cn cn
1. Initial purchase(s) will be accounted for by means of the fair value method (or a
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
t cost) until the ability to significantly influence is attained.
cn cn cn cn cn cn cn cn cn
2. When the ability to exercise significant influence occurs following a series of stock
cn cn cn cn cn cn cn cn cn cn cn cn
purchases, the investor applies the equity method prospectively. The total fair va
cn cn cn cn cn cn cn cn cn cn cn cn
lue at the date significant influence is attained is compared to the investee‘s book
cn cn cn cn cn cn cn cn cn cn cn cn cn
value to determine future excess fair value amortizations.
cn cn cn cn cn cn cn cn
B. Investee income from other than continuing operations
cn cn cn cn cn cn
1. The investor recognizes its share of investee reported other comprehensive
cn cn cn cn cn cn cn cn cn
income (OCI) through the investment account and the investor‘s own OCI.
cn cn cn cn cn cn cn cn cn cn cn
2. Income items such as discontinued operations that are reported separately by the
cn cn cn cn cn cn cn cn cn cn cn
investee should be shown in the same manner by the investor. The materiality of
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
these other investee income elements (as it affects the investor) continues to be
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
a criterion for separate disclosure.
cn cn cn cn
C. Investee losses cn
1. Losses reported by the investee create corresponding losses for the investor.
cn cn cn cn cn cn cn cn cn cn
2. A permanent decline in the fair value of an investee‘s stock should be recognized
cn cn cn cn cn cn cn cn cn cn cn cn cn
immediately by the investor as an impairment loss.
cn cn cn cn cn cn cn cn
3. Investee losses can possibly reduce the carrying value of the investment account
cn cn cn cn cn cn cn cn cn cn cn cn
to a zero balance. At that point, the equity method ceases to be applicable and th
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
e fair-value method is subsequently used.
cn cn cn cn cn
D. Reporting the sale of an equity investment cn cn cn cn cn cn
1. The investor applies the equity method until the disposal date to establish a proper
cn cn cn cn cn cn cn cn cn cn cn cn cn
book value.
cn cn
2. Following the sale, the equity method continues to be appropriate if enough shares
cn cn cn cn cn cn cn cn cn cn cn cn
are still held to maintain the investor‘s ability to significantly influence the investee
cn cn cn cn cn cn cn cn cn cn cn cn cn
. If that ability has been lost, the fair-value method is subsequently used.
cn cn cn cn cn cn cn cn cn cn cn cn
2-24
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill L
cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn cn
LC.
, Solution Manual For All Chapters cn cn cn cn
IV. Excess investment cost over book value acquired
cn cn cn cn cn cn
A. The price an investor pays for equity securities often differs significantly from the
cn cn cn cn cn cn cn cn cn cn cn cn
investee‘s underlying book value primarily because the historical cost based ac
cn cn cn cn cn cn cn cn cn cn cn
counting model does not keep track of changes in a firm‘s fair value.
cn cn cn cn cn cn cn cn cn cn cn cn
B. Payments made in excess of underlying book value can sometimes be identified with
cn cn cn cn cn cn cn cn cn cn cn cn
specific investee accounts such as inventory or equipment.
cn cn cn cn cn cn cn cn
C. An extra acquisition price can also be assigned to anticipated benefits that are expe
cn cn cn cn cn cn cn cn cn cn cn cn cn
cted to be derived from the investment. In accounting, these amounts are presumed
cn cn cn cn cn cn cn cn cn cn cn cn c
to reflect an intangible asset referred to as goodwill. Goodwill is calculated as any ex
n cn cn cn cn cn cn cn cn cn cn cn cn cn cn
cess payment that is not attributable to specific identifiable assets and liabilities of th
cn cn cn cn cn cn cn cn cn cn cn cn cn
e investee. Because goodwill is an indefinite-lived asset, it is not amortized.
cn cn cn cn cn cn cn cn cn cn cn
V. Deferral of intra-entity gross profit in inventory
cn cn cn cn cn cn
A. The investor‘s share of intra-
cn cn cn cn
entity profits in ending inventory are not recognized until the transferred goods are eit
cn cn cn cn cn cn cn cn cn cn cn cn cn
her consumed or until they are resold to unrelated parties.
cn cn cn cn cn cn cn cn cn
B. Downstream sales of inventory cn cn cn
1. ―Downstream‖ refers to transfers made by the investor to the investee. cn cn cn cn cn cn cn cn cn cn
2. Intra-
entity gross profits from sales are initially deferred under the equity method and
cn cn cn cn cn cn cn cn cn cn cn cn cn
then recognized as income at the time of the inventory‘s eventual disposal.
cn cn cn cn cn cn cn cn cn cn cn
3. The amount of gross profit to be deferred is the investor‘s ownership percentage
cn cn cn cn cn cn cn cn cn cn cn cn
multiplied by the markup on the merchandise remaining at the end of the year.
cn cn cn cn cn cn cn cn cn cn cn cn cn cn
C. Upstream sales of inventory cn cn cn
1. ―Upstream‖ refers to transfers made by the investee to the investor. cn cn cn cn cn cn cn cn cn cn
2. Under the equity method, the deferral process for intra- cn cn cn cn cn cn cn cn
entity gross profits is identical for upstream and downstream transfers. The proce
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dures are separately identified in Chapter One because the handling does vary wi
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thin the consolidation process. cn cn cn
Answers to Discussion Questions cn cn cn
The textbook includes discussion questions to stimulate student thought and discussion. These
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questions are also designed to allow students to consider relevant issues that might otherwise be
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overlooked. Some of these questions may be addressed by the instructor in class to motivate st
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udent discussion. Students should be encouraged to begin by defining the issue(s) in each case.
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Next, authoritative accounting literature (FASB ASC) or other relevant literature can be consulte
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d as a preliminary step in arriving at logical actions. Frequently, the FASB Accounting Standards
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Codification will provide the necessary support.
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Unfortunately, in accounting, definitive resolutions to financial reporting questions are not always
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available. Students often seem to believe that all accounting issues have been resolved in the p
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ast so that accounting education is only a matter of learning to apply historically prescribed proc
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edures. However, in actual practice, the only real answer is often the one that provides the faires
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t representation of the firm‘s transactions. If an authoritative solution is not available, students sh
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ould be directed to list all of the issues involved and the consequences of possible alternative ac
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tions. The various factors presented can be weighed to produce a viable solution.
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The discussion questions are designed to help students develop research and critical thinking ski
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lls in addressing issues that go beyond the purely mechanical elements of accounting.
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2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill L
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LC.
