SOLUTION MANUAL Advanced Accounting (15TH ED) by Hoyle, Schaefer, and Doupnik | All Chapters

SOLUTION MANUAL
Advanced Accounting, 15th Edition by
Hoyle, Schaefer, and Doupnik




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,SOLUTION MANUAL FOR x x




ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEFE
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R AND TIMOTHY DOUPNIK
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CHAPTER 1-19 x




CHAPTER 1 TH x x




E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
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Chapter Outlinex




I. Four methods are principally used to account for an investment in equity securities along wi
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th a fair value option.
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A. Fair value method: applied by an investor when only a small percentage of a co
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mpany‘s voting stock is held. x x x x




1. The investor recognizes income when the investee declares a dividend.
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2. Portfolios are reported at fair value. If fair values are unavailable, investment is re
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ported at cost. x x




B. Cost Method: applied to investments without a readily determinable fair value. When th
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e fair value of an investment in equity securities is not readily determinable, and the inve
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stment provides neither significant influence nor control, the investment may be measur
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ed at cost. The investment remains at cost unless
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1. A demonstrable impairment occurs for the investment, or
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2. An observable price change occurs for identical or similar investments of the same is
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suer.
The investor typically recognizes its share of investee dividends declared as dividend inc
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ome.

C. Consolidation: when one firm controls another (e.g., when a parent has a majority inte x x x x x x x x x x x x x


rest in the voting stock of a subsidiary or control through variable interests, their financ
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ial statements are consolidated and reported for the combined entity.
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D. Equity method: applied when the investor has the ability to exercise significant in
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fluence over operating and financial policies of the investee.
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1. Ability to significantly influence investee is indicated by several factors including r
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epresentation on the board of directors, participation in policy-making, etc. x x x x x x x x x




2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
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, outstanding voting stock of the investee is held by the investor. x x x x x x x x x x




Current financial reporting standards allow firms to elect to use fair value for any new invest
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ment in equity shares including those where the equity method would otherwise apply. Howe
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ver, the option, once taken, is irrevocable. The investor recognizes both investee dividends
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and changes in fair value over time as income.
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II. Accounting for an investment: the equity method
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A. The investor adjusts the investment account to reflect all changes in the equity of the in
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vestee company. x




B. The investor accrues investee income when it is reported in the investee‘s financial st
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atements.

C. Dividends declared by the investee create a reduction in the carrying amount of the Inve
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stment account. This book assumes all investee dividends are declared and paid in the
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same reporting period.x x




III. Special accounting procedures used in the application of the equity method
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A. Reporting a change to the equity method when the ability to significantly influence an in
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vestee is achieved through a series of acquisitions.
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1. Initial purchase(s) will be accounted for by means of the fair value method (or at co
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st) until the ability to significantly influence is attained.
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2. When the ability to exercise significant influence occurs following a series of stock p
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urchases, the investor applies the equity method prospectively. The total fair value a
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t the date significant influence is attained is compared to the investee‘s book value t
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o determine future excess fair value amortizations.
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B. Investee income from other than continuing operations
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1. The investor recognizes its share of investee reported other comprehensive in
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come (OCI) through the investment account and the investor‘s own OCI.
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2. Income items such as discontinued operations that are reported separately by the in
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vestee should be shown in the same manner by the investor. The materiality of thes
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e other investee income elements (as it affects the investor) continues to be a criteri
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on for separate disclosure.
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C. Investee losses x


1. Losses reported by the investee create corresponding losses for the investor.
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2. A permanent decline in the fair value of an investee‘s stock should be recognized im
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mediately by the investor as an impairment loss. x x x x x x x


3. Investee losses can possibly reduce the carrying value of the investment account to
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a zero balance. At that point, the equity method ceases to be applicable and the fair-
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value method is subsequently used. x x x x


D. Reporting the sale of an equity investment x x x x x x


1. The investor applies the equity method until the disposal date to establish a proper bo
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ok value. x


2. Following the sale, the equity method continues to be appropriate if enough shares ar
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e still held to maintain the investor‘s ability to significantly influence the investee. If th
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at ability has been lost, the fair-value method is subsequently used.
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, Solution Manual For All Chapters
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IV. Excess investment cost over book value acquired
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A. The price an investor pays for equity securities often differs significantly from the in
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vestee‘s underlying book value primarily because the historical cost based accoun
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ting model does not keep track of changes in a firm‘s fair value.
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B. Payments made in excess of underlying book value can sometimes be identified with s
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pecific investee accounts such as inventory or equipment.
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C. An extra acquisition price can also be assigned to anticipated benefits that are expecte
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d to be derived from the investment. In accounting, these amounts are presumed to refl
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ect an intangible asset referred to as goodwill. Goodwill is calculated as any excess pay
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ment that is not attributable to specific identifiable assets and liabilities of the investee.
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Because goodwill is an indefinite-lived asset, it is not amortized. x x x x x x x x x




V. Deferral of intra-entity gross profit in inventory
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A. The investor‘s share of intra- x x x x


entity profits in ending inventory are not recognized until the transferred goods are either
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consumed or until they are resold to unrelated parties. x x x x x x x x


B. Downstream sales of inventory x x x


1. ―Downstream‖ refers to transfers made by the investor to the investee. x x x x x x x x x x


2. Intra-
entity gross profits from sales are initially deferred under the equity method and the
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n recognized as income at the time of the inventory‘s eventual disposal.
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3. The amount of gross profit to be deferred is the investor‘s ownership percentage m
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ultiplied by the markup on the merchandise remaining at the end of the year. x x x x x x x x x x x x x


C. Upstream sales of inventory x x x


1. ―Upstream‖ refers to transfers made by the investee to the investor. x x x x x x x x x x


2. Under the equity method, the deferral process for intra- x x x x x x x x


entity gross profits is identical for upstream and downstream transfers. The procedu
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res are separately identified in Chapter One because the handling does vary within t
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he consolidation process. x x




Answers to Discussion Questions x x x




The textbook includes discussion questions to stimulate student thought and discussion. These que
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stions are also designed to allow students to consider relevant issues that might otherwise be overlo
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oked. Some of these questions may be addressed by the instructor in class to motivate student disc
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ussion. Students should be encouraged to begin by defining the issue(s) in each case. Next, authorit
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ative accounting literature (FASB ASC) or other relevant literature can be consulted as a preliminary
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xstep in arriving at logical actions. Frequently, the FASB Accounting Standards Codification will prov
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ide the necessary support.
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Unfortunately, in accounting, definitive resolutions to financial reporting questions are not always av
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ailable. Students often seem to believe that all accounting issues have been resolved in the past so t
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hat accounting education is only a matter of learning to apply historically prescribed procedures. Ho
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wever, in actual practice, the only real answer is often the one that provides the fairest representatio
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n of the firm‘s transactions. If an authoritative solution is not available, students should be directed to
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list all of the issues involved and the consequences of possible alternative actions. The various fact
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ors 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 skills i
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n addressing issues that go beyond the purely mechanical elements of accounting.
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