Franklyn A Plus Pass
SOLUTION & INSTRUCTOR’S MANUAL for Advanced Accounting,
5th Edition by Robert F. Hopkins
All Chapters Fully Covered 1-13| Verified Questions & Accurate Solutions for Study
Guide| A+ PASS ASSURED
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, Chapter 1— Accounting for
Intercorporate Investments
1. a. If the investor acquired 100% of the investee at book value, the Equity Investment account is
equal to the Stockholders‘ Equity of the investee company. It, therefore, includes the assets
and liabilities of the investee company in one account. The investor‘s balance sheet,
therefore, includes the Stockholders‘ Equity of the investee company, and, implicitly, its
assets and liabilities. In the consolidation process, the balance sheets of the investor and
investee company are brought together. Consolidated Stockholders‘ Equity will be the same
as that which the investor currently reports; only total assets and total liabilities will change.
b. If the investor owns 100% of the investee, the equity income that the investor reports is equal
to the net income of the investee, thus implicitly including its revenues and expenses.
Replacing the equity income with the revenues and expenses of the investee company in the
consolidation process will yield the same net income.
2. FASB ASC 323-10 provides the following guidance with respect to the accounting for
receipt of dividends using the equity method:
The equity method tends to be most appropriate if an investment enables the investor to
influence the operating or financial decisions of the investee. The investor then has a
degree of responsibility for the return on its investment, and it is appropriate to include in
the results of operations of the investor its share of the earnings or losses of the investee.
(¶323-10-05-5)
The equity method is an appropriate means of recognizing increases or decreases measured by
generally accepted accounting principles (GAAP) in the economic resources underlying the
investments. Furthermore, the equity method of accounting more closely meets the objectives of
accrual accounting than does the cost method because the investor recognizes its share of the
Fr
earnings and losses of the investee in the periods in which they are reflected in the accounts of the
investee. (¶323-10-05-4)
an
Under the equity method, an investor shall recognize its share of the earnings or losses of an
k
investee in the periods for which they are reported by the investee in its financial statements
ly
rather than in the period in which an investee declares a dividend (¶323-10- 35-4).
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Solutions Manual, Chapter 1 1-1
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, Franklyn A Plus Pass
3. The recognition of equity income does not mean that cash has been received. In fact, dividends
paid by the investee to the investor are typically a small percentage of its reported net income.
The projection of future net income that includes equity income as a significant component might
not, therefore, imply significant generation of cash.
4. The accounting for Altria‘s investment in ABI depends on the degree of influence or control it
can exert over that company. A classification of ―no influence‖ does not appear appropriate since
Altria owns 10.1% of the outstanding common stock and also ―active representation on ABI‘s
Board of Directors (―ABI Board‖) and certain ABI Board committees. Through this
representation, Altria participates in ABI policy making processes.‖ A classification of
―significant influence‖ seems most appropriate given the facts, and this classification warrants
accounting for the investment using the equity method of accounting.
5. a. An investor may write down the carrying amount of its Equity Investment if the fair value of
that investment has declined below its carrying value and that decline is deemed to be other
than temporary.
b. There is considerable judgment in determining whether a decline in fair value is other than
temporary. The write-down amounts to a prediction that the future fair value of the investment
will not rise above the current carrying amount. If a company deems the decline to be
temporary, it does not write down the investment, and a loss is not recognized in its income
statement. If the decline is deemed to be other than temporary, the investment is written down
and a loss is reported. Companies can use this flexibility to decide whether to recognize a loss
in the current year or to postpone it to a future year.
6. Under the equity method, an investor recognizes its share of the earnings or losses of an investee
in the periods for which they are reported by the investee in its financial statements. FASB ASC
323-10-35-7 states that ―Intra-entity profits and losses shall be eliminated until realized by the
investor or investee as if the investee were consolidated.‖ These intercompany items are
Fr
eliminated to avoid double counting and prematurely recognizing income.
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1-2 Advanced Accounting, 5th Edition
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, 7. FASB ASC 323-10-15 requires the use of the equity method of accounting for an investor whose
investment in voting stock gives it the ability to exercise significant influence over operating and
financial policies of an investee. Section 15-6 states that ―Ability to exercise significant influence
over operating and financial policies of an investee may be indicated in several ways, including
the following: Representation on the board of directors, Participation in policy-making processes,
Material intra-entity transactions, change of managerial personnel, Technological dependency, and
Extent of ownership by an investor in relation to the concentration of other shareholdings (but
substantial or majority ownership of the voting stock of an investee by another investor does not
necessarily preclude the ability to exercise significant influence by the investor)‖ (emphasis
added). It is clear, in this case, that the investee is critically dependent upon the technology
licensed to it by the investor. The investor should, therefore, account for its investment using the
equity method.
8. Even though the investor owns 30% of the investee, it should not use the equity method as it
cannot exert significant influence over the investee. Further, since the investee is not a public
company (all of the remaining stock is privately held), the investor should use the cost method to
account for this investment as the fair value method presumes a publicly traded stock with
sufficient liquidity to reasonably determine a fair value.
9. a. The losses did not affect Enron‘s income statement. Since the investees were insolvent,
Enron‘s Equity Investment was reduced to zero (it had not made any loans or other advances
to the investee companies). As a result, Enron discontinued reporting for these Equity
Investments using the equity method and, therefore, did not recognize its proportionate share
of investee losses.
b. ―… only after its share of that net income equals the share of net losses not recognized during
the period the equity method was suspended‖ means that the investee has recouped all of the
losses that have been reported. Since the investor ceases to account for its Equity Investment
using the equity method once the balance reaches zero (assuming that it has not guaranteed
Fr
the debts of the investee company), this generally implies that the investee‘s Stockholders‘
Equity is below zero (i.e., a deficit). The investor resumes its accounting for the Equity
an
investment using the equity method once the investee‘s Stockholders‘ Equity is positive. It is
at that point when the investee company has recouped all of its prior losses (assuming that the
k
investee company has not raised additional equity capital).
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Solutions Manual, Chapter 1 1-3
ss
SOLUTION & INSTRUCTOR’S MANUAL for Advanced Accounting,
5th Edition by Robert F. Hopkins
All Chapters Fully Covered 1-13| Verified Questions & Accurate Solutions for Study
Guide| A+ PASS ASSURED
Fr
an
k ly
ne
A
pl
us
Pa
ss
, Chapter 1— Accounting for
Intercorporate Investments
1. a. If the investor acquired 100% of the investee at book value, the Equity Investment account is
equal to the Stockholders‘ Equity of the investee company. It, therefore, includes the assets
and liabilities of the investee company in one account. The investor‘s balance sheet,
therefore, includes the Stockholders‘ Equity of the investee company, and, implicitly, its
assets and liabilities. In the consolidation process, the balance sheets of the investor and
investee company are brought together. Consolidated Stockholders‘ Equity will be the same
as that which the investor currently reports; only total assets and total liabilities will change.
b. If the investor owns 100% of the investee, the equity income that the investor reports is equal
to the net income of the investee, thus implicitly including its revenues and expenses.
Replacing the equity income with the revenues and expenses of the investee company in the
consolidation process will yield the same net income.
2. FASB ASC 323-10 provides the following guidance with respect to the accounting for
receipt of dividends using the equity method:
The equity method tends to be most appropriate if an investment enables the investor to
influence the operating or financial decisions of the investee. The investor then has a
degree of responsibility for the return on its investment, and it is appropriate to include in
the results of operations of the investor its share of the earnings or losses of the investee.
(¶323-10-05-5)
The equity method is an appropriate means of recognizing increases or decreases measured by
generally accepted accounting principles (GAAP) in the economic resources underlying the
investments. Furthermore, the equity method of accounting more closely meets the objectives of
accrual accounting than does the cost method because the investor recognizes its share of the
Fr
earnings and losses of the investee in the periods in which they are reflected in the accounts of the
investee. (¶323-10-05-4)
an
Under the equity method, an investor shall recognize its share of the earnings or losses of an
k
investee in the periods for which they are reported by the investee in its financial statements
ly
rather than in the period in which an investee declares a dividend (¶323-10- 35-4).
ne
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2023
Solutions Manual, Chapter 1 1-1
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, Franklyn A Plus Pass
3. The recognition of equity income does not mean that cash has been received. In fact, dividends
paid by the investee to the investor are typically a small percentage of its reported net income.
The projection of future net income that includes equity income as a significant component might
not, therefore, imply significant generation of cash.
4. The accounting for Altria‘s investment in ABI depends on the degree of influence or control it
can exert over that company. A classification of ―no influence‖ does not appear appropriate since
Altria owns 10.1% of the outstanding common stock and also ―active representation on ABI‘s
Board of Directors (―ABI Board‖) and certain ABI Board committees. Through this
representation, Altria participates in ABI policy making processes.‖ A classification of
―significant influence‖ seems most appropriate given the facts, and this classification warrants
accounting for the investment using the equity method of accounting.
5. a. An investor may write down the carrying amount of its Equity Investment if the fair value of
that investment has declined below its carrying value and that decline is deemed to be other
than temporary.
b. There is considerable judgment in determining whether a decline in fair value is other than
temporary. The write-down amounts to a prediction that the future fair value of the investment
will not rise above the current carrying amount. If a company deems the decline to be
temporary, it does not write down the investment, and a loss is not recognized in its income
statement. If the decline is deemed to be other than temporary, the investment is written down
and a loss is reported. Companies can use this flexibility to decide whether to recognize a loss
in the current year or to postpone it to a future year.
6. Under the equity method, an investor recognizes its share of the earnings or losses of an investee
in the periods for which they are reported by the investee in its financial statements. FASB ASC
323-10-35-7 states that ―Intra-entity profits and losses shall be eliminated until realized by the
investor or investee as if the investee were consolidated.‖ These intercompany items are
Fr
eliminated to avoid double counting and prematurely recognizing income.
an
k ly
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A
pl
us
Pa
2023
1-2 Advanced Accounting, 5th Edition
ss
, 7. FASB ASC 323-10-15 requires the use of the equity method of accounting for an investor whose
investment in voting stock gives it the ability to exercise significant influence over operating and
financial policies of an investee. Section 15-6 states that ―Ability to exercise significant influence
over operating and financial policies of an investee may be indicated in several ways, including
the following: Representation on the board of directors, Participation in policy-making processes,
Material intra-entity transactions, change of managerial personnel, Technological dependency, and
Extent of ownership by an investor in relation to the concentration of other shareholdings (but
substantial or majority ownership of the voting stock of an investee by another investor does not
necessarily preclude the ability to exercise significant influence by the investor)‖ (emphasis
added). It is clear, in this case, that the investee is critically dependent upon the technology
licensed to it by the investor. The investor should, therefore, account for its investment using the
equity method.
8. Even though the investor owns 30% of the investee, it should not use the equity method as it
cannot exert significant influence over the investee. Further, since the investee is not a public
company (all of the remaining stock is privately held), the investor should use the cost method to
account for this investment as the fair value method presumes a publicly traded stock with
sufficient liquidity to reasonably determine a fair value.
9. a. The losses did not affect Enron‘s income statement. Since the investees were insolvent,
Enron‘s Equity Investment was reduced to zero (it had not made any loans or other advances
to the investee companies). As a result, Enron discontinued reporting for these Equity
Investments using the equity method and, therefore, did not recognize its proportionate share
of investee losses.
b. ―… only after its share of that net income equals the share of net losses not recognized during
the period the equity method was suspended‖ means that the investee has recouped all of the
losses that have been reported. Since the investor ceases to account for its Equity Investment
using the equity method once the balance reaches zero (assuming that it has not guaranteed
Fr
the debts of the investee company), this generally implies that the investee‘s Stockholders‘
Equity is below zero (i.e., a deficit). The investor resumes its accounting for the Equity
an
investment using the equity method once the investee‘s Stockholders‘ Equity is positive. It is
at that point when the investee company has recouped all of its prior losses (assuming that the
k
investee company has not raised additional equity capital).
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Solutions Manual, Chapter 1 1-3
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