,ACCESS Test Bank for Advanced Accounting 15th Edition Hoyle
b b b b b b b b
Chapterb01b-bThebEquitybMethodbofbAccountingbforbInvestmentsb–
bHoyle,bSchaefer,bDoupnik,bAdvancedbAccounting,b15e
CHAPTER 1 b b
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
b b b b b b
ChapterbOutline
I. Fourbmethodsbarebprincipallybusedbtobaccountbforbanbinvestmentbinbequitybsecuritiesbalongb
withbabfairbvalueboption.
A. Fairbvaluebmethod:bappliedbbybanbinvestorbwhenbonlybabsmallbpercentagebofbab
company’sbvotingbstockbisbheld.
1. Thebinvestorbrecognizesbincomebwhenbthebinvesteebdeclaresbabdividend.
2. Portfoliosbarebreportedbatbfairbvalue.bIfbfairbvaluesbarebunavailable,binvestmentbisb
reportedbatbcost.
B. CostbMethod:bappliedbtobinvestmentsbwithoutbabreadilybdeterminablebfairbvalue.bWhenbt
hebfairbvaluebofbanbinvestmentbinbequitybsecuritiesbisbnotbreadilybdeterminable,bandbthebi
nvestmentbprovidesbneitherbsignificantbinfluencebnorbcontrol,bthebinvestmentbmaybbebm
easuredbatbcost.bThebinvestmentbremainsbatbcostbunless
1. Abdemonstrablebimpairmentboccursbforbthebinvestment,bor
2. Anbobservablebpricebchangeboccursbforbidenticalborbsimilarbinvestmentsbofbthebsamebi
ssuer.
Thebinvestorbtypicallybrecognizesbitsbsharebofbinvesteebdividendsbdeclaredbasbdividendbi
ncome.
C. Consolidation:bwhenbonebfirmbcontrolsbanotherb(e.g.,bwhenbabparentbhasbabmajoritybi
nterestbinbthebvotingbstockbofbabsubsidiaryborbcontrolbthroughbvariablebinterests,btheirbfi
nancialbstatementsbarebconsolidatedbandbreportedbforbthebcombinedbentity.
D. Equitybmethod:bappliedbwhenbthebinvestorbhasbthebabilitybtobexercisebsignificantbi
nfluenceboverboperatingbandbfinancialbpoliciesbofbthebinvestee.
1. Abilitybtobsignificantlybinfluencebinvesteebisbindicatedbbybseveralbfactorsbincludingbr
epresentationbonbthebboardbofbdirectors,bparticipationbinbpolicy-making,betc.
2. GAAPbguidelinesbpresumebthebequitybmethodbisbapplicablebifb20btob50bpercentbofbtheb
outstandingbvotingbstockbofbthebinvesteebisbheldbbybthebinvestor.
Currentbfinancialbreportingbstandardsballowbfirmsbtobelectbtobusebfairbvaluebforbanybnewbinvest
mentbinbequitybsharesbincludingbthosebwherebthebequitybmethodbwouldbotherwisebapply.bHow
ever,btheboption,boncebtaken,bisbirrevocable.bThebinvestorbrecognizesbbothbinvesteebdividend
sbandbchangesbinbfairbvalueboverbtimebasbincome.
1-1
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbL
LC.
mynursytest.store
,ACCESS Test Bank for Advanced Accounting 15th Edition Hoyle
b b b b b b b b
Chapterb01b-bThebEquitybMethodbofbAccountingbforbInvestmentsb–
bHoyle,bSchaefer,bDoupnik,bAdvancedbAccounting,b15e
II. Accountingbforbanbinvestment:bthebequitybmethod
A. Thebinvestorbadjustsbthebinvestmentbaccountbtobreflectballbchangesbinbthebequitybofbthebi
nvesteebcompany.
B. Thebinvestorbaccruesbinvesteebincomebwhenbitbisbreportedbinbthebinvestee’sbfinancialb
statements.
C. DividendsbdeclaredbbybthebinvesteebcreatebabreductionbinbthebcarryingbamountbofbthebIn
vestmentbaccount.bThisbbookbassumesballbinvesteebdividendsbarebdeclaredbandbpaidbinb
thebsamebreportingbperiod.
III. Specialbaccountingbproceduresbusedbinbthebapplicationbofbthebequitybmethod
A. Reportingbabchangebtobthebequitybmethodbwhenbthebabilitybtobsignificantlybinfluencebanbi
nvesteebisbachievedbthroughbabseriesbofbacquisitions.
1. Initialbpurchase(s)bwillbbebaccountedbforbbybmeansbofbthebfairbvaluebmethodb(orbatb
cost)buntilbthebabilitybtobsignificantlybinfluencebisbattained.
2. Whenbthebabilitybtobexercisebsignificantbinfluenceboccursbfollowingbabseriesbofbstockb
purchases,bthebinvestorbappliesbthebequitybmethodbprospectively.bThebtotalbfairbvalu
ebatbthebdatebsignificantbinfluencebisbattainedbisbcomparedbtobthebinvestee’sbbookbva
luebtobdeterminebfuturebexcessbfairbvaluebamortizations.
B. Investeebincomebfrombotherbthanbcontinuingboperations
1. Thebinvestorbrecognizesbitsbsharebofbinvesteebreportedbotherbcomprehensivebi
ncomeb(OCI)bthroughbthebinvestmentbaccountbandbthebinvestor’sbownbOCI.
2. Incomebitemsbsuchbasbdiscontinuedboperationsbthatbarebreportedbseparatelybbybthebi
nvesteebshouldbbebshownbinbthebsamebmannerbbybthebinvestor.bThebmaterialitybofbth
esebotherbinvesteebincomebelementsb(asbitbaffectsbthebinvestor)bcontinuesbtobbebabcri
terionbforbseparatebdisclosure.
C. Investeeblosses
1. Lossesbreportedbbybthebinvesteebcreatebcorrespondingblossesbforbthebinvestor.
2. Abpermanentbdeclinebinbthebfairbvaluebofbanbinvestee’sbstockbshouldbbebrecognizedbi
mmediatelybbybthebinvestorbasbanbimpairmentbloss.
3. Investeeblossesbcanbpossiblybreducebthebcarryingbvaluebofbthebinvestmentbaccountbt
obabzerobbalance.bAtbthatbpoint,bthebequitybmethodbceasesbtobbebapplicablebandbthebf
air-valuebmethodbisbsubsequentlybused.
D. Reportingbthebsalebofbanbequitybinvestment
1. Thebinvestorbappliesbthebequitybmethodbuntilbthebdisposalbdatebtobestablishbabproperb
bookbvalue.
2. Followingbthebsale,bthebequitybmethodbcontinuesbtobbebappropriatebifbenoughbsharesb
arebstillbheldbtobmaintainbthebinvestor’sbabilitybtobsignificantlybinfluencebthebinvestee.bI
fbthatbabilitybhasbbeenblost,bthebfair-valuebmethodbisbsubsequentlybused.
IV. Excessbinvestmentbcostboverbbookbvaluebacquired
A. Thebpricebanbinvestorbpaysbforbequitybsecuritiesboftenbdiffersbsignificantlybfrombthebi
nvestee’sbunderlyingbbookbvaluebprimarilybbecausebthebhistoricalbcostbbasedbacco
untingbmodelbdoesbnotbkeepbtrackbofbchangesbinbabfirm’sbfairbvalue.
B. Paymentsbmadebinbexcessbofbunderlyingbbookbvaluebcanbsometimesbbebidentifiedbwithb
specificbinvesteebaccountsbsuchbasbinventoryborbequipment.
C. Anbextrabacquisitionbpricebcanbalsobbebassignedbtobanticipatedbbenefitsbthatbarebexpect
edbtobbebderivedbfrombthebinvestment.bInbaccounting,bthesebamountsbarebpresumedbtob
reflectbanbintangiblebassetbreferredbtobasbgoodwill.bGoodwillbisbcalculated
1-2
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbL
LC.
mynursytest.store
, ACCESS Test Bank for Advanced Accounting 15th Edition Hoyle
b b b b b b b b
Chapterb01b-bThebEquitybMethodbofbAccountingbforbInvestmentsb–
bHoyle,bSchaefer,bDoupnik,bAdvancedbAccounting,b15e
asbanybexcessbpaymentbthatbisbnotbattributablebtobspecificbidentifiablebassetsbandbliabilitie
sbofbthebinvestee.bBecausebgoodwillbisbanbindefinite-livedbasset,bitbisbnotbamortized.
V. Deferralbofbintra-entitybgrossbprofitbinbinventory
A. Thebinvestor’sbsharebofbintra-
entitybprofitsbinbendingbinventorybarebnotbrecognizedbuntilbthebtransferredbgoodsbarebeith
erbconsumedborbuntilbtheybarebresoldbtobunrelatedbparties.
B. Downstreambsalesbofbinventory
1. “Downstream”brefersbtobtransfersbmadebbybthebinvestorbtobthebinvestee.
2. Intra-
entitybgrossbprofitsbfrombsalesbarebinitiallybdeferredbunderbthebequitybmethodbandbt
henbrecognizedbasbincomebatbthebtimebofbthebinventory’sbeventualbdisposal.
3. Thebamountbofbgrossbprofitbtobbebdeferredbisbthebinvestor’sbownershipbpercentageb
multipliedbbybthebmarkupbonbthebmerchandisebremainingbatbthebendbofbthebyear.
C. Upstreambsalesbofbinventory
1. “Upstream”brefersbtobtransfersbmadebbybthebinvesteebtobthebinvestor.
2. Underbthebequitybmethod,bthebdeferralbprocessbforbintra-
entitybgrossbprofitsbisbidenticalbforbupstreambandbdownstreambtransfers.bThebproce
duresbarebseparatelybidentifiedbinbChapterbOnebbecausebthebhandlingbdoesbvarybwit
hinbthebconsolidationbprocess.
AnswersbtobDiscussionbQuestions
Thebtextbookbincludesbdiscussionbquestionsbtobstimulatebstudentbthoughtbandbdiscussion.bThesebq
uestionsbarebalsobdesignedbtoballowbstudentsbtobconsiderbrelevantbissuesbthatbmightbotherwisebbebo
verlooked.bSomebofbthesebquestionsbmaybbebaddressedbbybthebinstructorbinbclassbtobmotivatebstude
ntbdiscussion.bStudentsbshouldbbebencouragedbtobbeginbbybdefiningbthebissue(s)binbeachbcase.bNext
,bauthoritativebaccountingbliteratureb(FASBbASC)borbotherbrelevantbliteraturebcanbbebconsultedbasbab
preliminarybstepbinbarrivingbatblogicalbactions.bFrequently,bthebFASBbAccountingbStandardsbCodific
ationbwillbprovidebthebnecessarybsupport.
Unfortunately,binbaccounting,bdefinitivebresolutionsbtobfinancialbreportingbquestionsbarebnotbalwaysba
vailable.bStudentsboftenbseembtobbelievebthatballbaccountingbissuesbhavebbeenbresolvedbinbthebpastb
sobthatbaccountingbeducationbisbonlybabmatterbofblearningbtobapplybhistoricallybprescribedbprocedure
s.bHowever,binbactualbpractice,bthebonlybrealbanswerbisboftenbthebonebthatbprovidesbthebfairestbrepre
sentationbofbthebfirm’sbtransactions.bIfbanbauthoritativebsolutionbisbnotbavailable,bstudentsbshouldbbeb
directedbtoblistballbofbthebissuesbinvolvedbandbthebconsequencesbofbpossiblebalternativebactions.bThe
bvariousbfactorsbpresentedbcanbbebweighedbtobproducebabviablebsolution.
Thebdiscussionbquestionsbarebdesignedbtobhelpbstudentsbdevelopbresearchbandbcriticalbthinkingb
skillsbinbaddressingbissuesbthatbgobbeyondbthebpurelybmechanicalbelementsbofbaccounting.
DidbthebCostbMethodbInvitebManipulation?
Thebcostbmethodbofbaccountingbforbinvestmentsboftenbcausedbablackbofbobjectivitybinbreportedbinco
mebfigures.bWithbablargebblockbofbthebinvestee’sbvotingbshares,banbinvestorbcouldbinfluencebthebamo
untbandbtimingbofbthebinvestee’sbdividendbdeclarations.bThus,bwhenbenjoyingbabgoodbearningsbyear,b
anbinvestorbmightbinfluencebthebinvesteebtobwithholdbdeclaringbabdividendbuntilbneededbinbabsubseq
uentbyear.bAlternatively,bifbthebinvestorbjudgedbthatbitsbcurrentbyearbearningsb“neededbabboost,”bitbmi
ghtbinfluencebthebinvesteebtobdeclarebabcurrentbyearbdividend.bThebequitybmethodbeffectivelybremov
esbmanagers’babilitybtobincreasebcurrentbincomeb(orbdeferbincomebtobfuturebperiods)bthroughbtheirbin
fluenceboverbthebtimingbandbamountsbofbinvesteebdividendbdeclarations.
1-3
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbL
LC.
mynursytest.store
b b b b b b b b
Chapterb01b-bThebEquitybMethodbofbAccountingbforbInvestmentsb–
bHoyle,bSchaefer,bDoupnik,bAdvancedbAccounting,b15e
CHAPTER 1 b b
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
b b b b b b
ChapterbOutline
I. Fourbmethodsbarebprincipallybusedbtobaccountbforbanbinvestmentbinbequitybsecuritiesbalongb
withbabfairbvalueboption.
A. Fairbvaluebmethod:bappliedbbybanbinvestorbwhenbonlybabsmallbpercentagebofbab
company’sbvotingbstockbisbheld.
1. Thebinvestorbrecognizesbincomebwhenbthebinvesteebdeclaresbabdividend.
2. Portfoliosbarebreportedbatbfairbvalue.bIfbfairbvaluesbarebunavailable,binvestmentbisb
reportedbatbcost.
B. CostbMethod:bappliedbtobinvestmentsbwithoutbabreadilybdeterminablebfairbvalue.bWhenbt
hebfairbvaluebofbanbinvestmentbinbequitybsecuritiesbisbnotbreadilybdeterminable,bandbthebi
nvestmentbprovidesbneitherbsignificantbinfluencebnorbcontrol,bthebinvestmentbmaybbebm
easuredbatbcost.bThebinvestmentbremainsbatbcostbunless
1. Abdemonstrablebimpairmentboccursbforbthebinvestment,bor
2. Anbobservablebpricebchangeboccursbforbidenticalborbsimilarbinvestmentsbofbthebsamebi
ssuer.
Thebinvestorbtypicallybrecognizesbitsbsharebofbinvesteebdividendsbdeclaredbasbdividendbi
ncome.
C. Consolidation:bwhenbonebfirmbcontrolsbanotherb(e.g.,bwhenbabparentbhasbabmajoritybi
nterestbinbthebvotingbstockbofbabsubsidiaryborbcontrolbthroughbvariablebinterests,btheirbfi
nancialbstatementsbarebconsolidatedbandbreportedbforbthebcombinedbentity.
D. Equitybmethod:bappliedbwhenbthebinvestorbhasbthebabilitybtobexercisebsignificantbi
nfluenceboverboperatingbandbfinancialbpoliciesbofbthebinvestee.
1. Abilitybtobsignificantlybinfluencebinvesteebisbindicatedbbybseveralbfactorsbincludingbr
epresentationbonbthebboardbofbdirectors,bparticipationbinbpolicy-making,betc.
2. GAAPbguidelinesbpresumebthebequitybmethodbisbapplicablebifb20btob50bpercentbofbtheb
outstandingbvotingbstockbofbthebinvesteebisbheldbbybthebinvestor.
Currentbfinancialbreportingbstandardsballowbfirmsbtobelectbtobusebfairbvaluebforbanybnewbinvest
mentbinbequitybsharesbincludingbthosebwherebthebequitybmethodbwouldbotherwisebapply.bHow
ever,btheboption,boncebtaken,bisbirrevocable.bThebinvestorbrecognizesbbothbinvesteebdividend
sbandbchangesbinbfairbvalueboverbtimebasbincome.
1-1
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbL
LC.
mynursytest.store
,ACCESS Test Bank for Advanced Accounting 15th Edition Hoyle
b b b b b b b b
Chapterb01b-bThebEquitybMethodbofbAccountingbforbInvestmentsb–
bHoyle,bSchaefer,bDoupnik,bAdvancedbAccounting,b15e
II. Accountingbforbanbinvestment:bthebequitybmethod
A. Thebinvestorbadjustsbthebinvestmentbaccountbtobreflectballbchangesbinbthebequitybofbthebi
nvesteebcompany.
B. Thebinvestorbaccruesbinvesteebincomebwhenbitbisbreportedbinbthebinvestee’sbfinancialb
statements.
C. DividendsbdeclaredbbybthebinvesteebcreatebabreductionbinbthebcarryingbamountbofbthebIn
vestmentbaccount.bThisbbookbassumesballbinvesteebdividendsbarebdeclaredbandbpaidbinb
thebsamebreportingbperiod.
III. Specialbaccountingbproceduresbusedbinbthebapplicationbofbthebequitybmethod
A. Reportingbabchangebtobthebequitybmethodbwhenbthebabilitybtobsignificantlybinfluencebanbi
nvesteebisbachievedbthroughbabseriesbofbacquisitions.
1. Initialbpurchase(s)bwillbbebaccountedbforbbybmeansbofbthebfairbvaluebmethodb(orbatb
cost)buntilbthebabilitybtobsignificantlybinfluencebisbattained.
2. Whenbthebabilitybtobexercisebsignificantbinfluenceboccursbfollowingbabseriesbofbstockb
purchases,bthebinvestorbappliesbthebequitybmethodbprospectively.bThebtotalbfairbvalu
ebatbthebdatebsignificantbinfluencebisbattainedbisbcomparedbtobthebinvestee’sbbookbva
luebtobdeterminebfuturebexcessbfairbvaluebamortizations.
B. Investeebincomebfrombotherbthanbcontinuingboperations
1. Thebinvestorbrecognizesbitsbsharebofbinvesteebreportedbotherbcomprehensivebi
ncomeb(OCI)bthroughbthebinvestmentbaccountbandbthebinvestor’sbownbOCI.
2. Incomebitemsbsuchbasbdiscontinuedboperationsbthatbarebreportedbseparatelybbybthebi
nvesteebshouldbbebshownbinbthebsamebmannerbbybthebinvestor.bThebmaterialitybofbth
esebotherbinvesteebincomebelementsb(asbitbaffectsbthebinvestor)bcontinuesbtobbebabcri
terionbforbseparatebdisclosure.
C. Investeeblosses
1. Lossesbreportedbbybthebinvesteebcreatebcorrespondingblossesbforbthebinvestor.
2. Abpermanentbdeclinebinbthebfairbvaluebofbanbinvestee’sbstockbshouldbbebrecognizedbi
mmediatelybbybthebinvestorbasbanbimpairmentbloss.
3. Investeeblossesbcanbpossiblybreducebthebcarryingbvaluebofbthebinvestmentbaccountbt
obabzerobbalance.bAtbthatbpoint,bthebequitybmethodbceasesbtobbebapplicablebandbthebf
air-valuebmethodbisbsubsequentlybused.
D. Reportingbthebsalebofbanbequitybinvestment
1. Thebinvestorbappliesbthebequitybmethodbuntilbthebdisposalbdatebtobestablishbabproperb
bookbvalue.
2. Followingbthebsale,bthebequitybmethodbcontinuesbtobbebappropriatebifbenoughbsharesb
arebstillbheldbtobmaintainbthebinvestor’sbabilitybtobsignificantlybinfluencebthebinvestee.bI
fbthatbabilitybhasbbeenblost,bthebfair-valuebmethodbisbsubsequentlybused.
IV. Excessbinvestmentbcostboverbbookbvaluebacquired
A. Thebpricebanbinvestorbpaysbforbequitybsecuritiesboftenbdiffersbsignificantlybfrombthebi
nvestee’sbunderlyingbbookbvaluebprimarilybbecausebthebhistoricalbcostbbasedbacco
untingbmodelbdoesbnotbkeepbtrackbofbchangesbinbabfirm’sbfairbvalue.
B. Paymentsbmadebinbexcessbofbunderlyingbbookbvaluebcanbsometimesbbebidentifiedbwithb
specificbinvesteebaccountsbsuchbasbinventoryborbequipment.
C. Anbextrabacquisitionbpricebcanbalsobbebassignedbtobanticipatedbbenefitsbthatbarebexpect
edbtobbebderivedbfrombthebinvestment.bInbaccounting,bthesebamountsbarebpresumedbtob
reflectbanbintangiblebassetbreferredbtobasbgoodwill.bGoodwillbisbcalculated
1-2
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbL
LC.
mynursytest.store
, ACCESS Test Bank for Advanced Accounting 15th Edition Hoyle
b b b b b b b b
Chapterb01b-bThebEquitybMethodbofbAccountingbforbInvestmentsb–
bHoyle,bSchaefer,bDoupnik,bAdvancedbAccounting,b15e
asbanybexcessbpaymentbthatbisbnotbattributablebtobspecificbidentifiablebassetsbandbliabilitie
sbofbthebinvestee.bBecausebgoodwillbisbanbindefinite-livedbasset,bitbisbnotbamortized.
V. Deferralbofbintra-entitybgrossbprofitbinbinventory
A. Thebinvestor’sbsharebofbintra-
entitybprofitsbinbendingbinventorybarebnotbrecognizedbuntilbthebtransferredbgoodsbarebeith
erbconsumedborbuntilbtheybarebresoldbtobunrelatedbparties.
B. Downstreambsalesbofbinventory
1. “Downstream”brefersbtobtransfersbmadebbybthebinvestorbtobthebinvestee.
2. Intra-
entitybgrossbprofitsbfrombsalesbarebinitiallybdeferredbunderbthebequitybmethodbandbt
henbrecognizedbasbincomebatbthebtimebofbthebinventory’sbeventualbdisposal.
3. Thebamountbofbgrossbprofitbtobbebdeferredbisbthebinvestor’sbownershipbpercentageb
multipliedbbybthebmarkupbonbthebmerchandisebremainingbatbthebendbofbthebyear.
C. Upstreambsalesbofbinventory
1. “Upstream”brefersbtobtransfersbmadebbybthebinvesteebtobthebinvestor.
2. Underbthebequitybmethod,bthebdeferralbprocessbforbintra-
entitybgrossbprofitsbisbidenticalbforbupstreambandbdownstreambtransfers.bThebproce
duresbarebseparatelybidentifiedbinbChapterbOnebbecausebthebhandlingbdoesbvarybwit
hinbthebconsolidationbprocess.
AnswersbtobDiscussionbQuestions
Thebtextbookbincludesbdiscussionbquestionsbtobstimulatebstudentbthoughtbandbdiscussion.bThesebq
uestionsbarebalsobdesignedbtoballowbstudentsbtobconsiderbrelevantbissuesbthatbmightbotherwisebbebo
verlooked.bSomebofbthesebquestionsbmaybbebaddressedbbybthebinstructorbinbclassbtobmotivatebstude
ntbdiscussion.bStudentsbshouldbbebencouragedbtobbeginbbybdefiningbthebissue(s)binbeachbcase.bNext
,bauthoritativebaccountingbliteratureb(FASBbASC)borbotherbrelevantbliteraturebcanbbebconsultedbasbab
preliminarybstepbinbarrivingbatblogicalbactions.bFrequently,bthebFASBbAccountingbStandardsbCodific
ationbwillbprovidebthebnecessarybsupport.
Unfortunately,binbaccounting,bdefinitivebresolutionsbtobfinancialbreportingbquestionsbarebnotbalwaysba
vailable.bStudentsboftenbseembtobbelievebthatballbaccountingbissuesbhavebbeenbresolvedbinbthebpastb
sobthatbaccountingbeducationbisbonlybabmatterbofblearningbtobapplybhistoricallybprescribedbprocedure
s.bHowever,binbactualbpractice,bthebonlybrealbanswerbisboftenbthebonebthatbprovidesbthebfairestbrepre
sentationbofbthebfirm’sbtransactions.bIfbanbauthoritativebsolutionbisbnotbavailable,bstudentsbshouldbbeb
directedbtoblistballbofbthebissuesbinvolvedbandbthebconsequencesbofbpossiblebalternativebactions.bThe
bvariousbfactorsbpresentedbcanbbebweighedbtobproducebabviablebsolution.
Thebdiscussionbquestionsbarebdesignedbtobhelpbstudentsbdevelopbresearchbandbcriticalbthinkingb
skillsbinbaddressingbissuesbthatbgobbeyondbthebpurelybmechanicalbelementsbofbaccounting.
DidbthebCostbMethodbInvitebManipulation?
Thebcostbmethodbofbaccountingbforbinvestmentsboftenbcausedbablackbofbobjectivitybinbreportedbinco
mebfigures.bWithbablargebblockbofbthebinvestee’sbvotingbshares,banbinvestorbcouldbinfluencebthebamo
untbandbtimingbofbthebinvestee’sbdividendbdeclarations.bThus,bwhenbenjoyingbabgoodbearningsbyear,b
anbinvestorbmightbinfluencebthebinvesteebtobwithholdbdeclaringbabdividendbuntilbneededbinbabsubseq
uentbyear.bAlternatively,bifbthebinvestorbjudgedbthatbitsbcurrentbyearbearningsb“neededbabboost,”bitbmi
ghtbinfluencebthebinvesteebtobdeclarebabcurrentbyearbdividend.bThebequitybmethodbeffectivelybremov
esbmanagers’babilitybtobincreasebcurrentbincomeb(orbdeferbincomebtobfuturebperiods)bthroughbtheirbin
fluenceboverbthebtimingbandbamountsbofbinvesteebdividendbdeclarations.
1-3
©bMcGrawbHillbLLC.bAllbrightsbreserved.bNobreproductionborbdistributionbwithoutbthebpriorbwrittenbconsentbofbMcGrawbHillbL
LC.
mynursytest.store
