SOLUTIONS MANUAL for Advanced Accounting, 15th Edition by Joe Ben Hoyle, Schaefer and Doupnik | Complete 19 Chapters

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,Solution Manual For All Chapters
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SOLUTION MANUAL FOR r5 r5




ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAE
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FER AND TIMOTHY DOUPNIK
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CHAPTER 1-19 r5




CHAPTER 1 TH r5 r5




E EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
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Chapter Outline r5




I. Four methods are principally used to account for an investment in equity securities alon
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g with a fair value option.
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A. Fair value method: applied by an investor when only a small percentage of
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a company‘s voting stock is held.
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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 i
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s reported at cost. r5 r5 r5




B. Cost Method: applied to investments without a readily determinable fair value. Whe
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n the fair value of an investment in equity securities is not readily determinable, and
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the investment provides neither significant influence nor control, the investment may
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be measured 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 sam
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e issuer. r5




The investor typically recognizes its share of investee dividends declared as dividend
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income.
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C. Consolidation: when one firm controls another (e.g., when a parent has a majority r5 r5 r5 r5 r5 r5 r5 r5 r5 r5 r5 r5 r


interest in the voting stock of a subsidiary or control through variable interests, th
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eir financial 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 significa
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nt influence over operating and financial policies of the investee.
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1. Ability to significantly influence investee is indicated by several factors includin
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g representation on the board of directors, participation in policy-making, etc.
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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. r5 r5 r5 r5 r5 r5 r5 r5 r5 r5




Current financial reporting standards allow firms to elect to use fair value for any new in
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vestment in equity shares including those where the equity method would otherwise appl
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y. However, the option, once taken, is irrevocable. The investor recognizes both investe
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e dividends 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 th
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e investee company.
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B. The investor accrues investee income when it is reported in the investee‘s financi
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al statements.
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C. Dividends declared by the investee create a reduction in the carrying amount of the
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Investment account. This book assumes all investee dividends are declared and pai
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d in the same reporting period.
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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 a
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n investee 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
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at cost) 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 stoc
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k purchases, the investor applies the equity method prospectively. The total fair
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value at the date significant influence is attained is compared to the investee‘s b
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ook value to 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 comprehensiv
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e income (OCI) through the investment account and the investor‘s own O
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CI.
2. Income items such as discontinued operations that are reported separately by th
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e investee should be shown in the same manner by the investor. The materiality
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of these other investee income elements (as it affects the investor) continues to
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be a criterion for separate disclosure.
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C. Investee losses r5


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 recognize
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d immediately by the investor as an impairment loss.
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3. Investee losses can possibly reduce the carrying value of the investment account
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to a zero balance. At that point, the equity method ceases to be applicable and t
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he fair-value method is subsequently used.
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D. Reporting the sale of an equity investment r5 r5 r5 r5 r5 r5


1. The investor applies the equity method until the disposal date to establish a prop
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er book value. r5 r5


2. Following the sale, the equity method continues to be appropriate if enough share
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s are still held to maintain the investor‘s ability to significantly influence the invest
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ee. If that 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 th
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e investee‘s underlying book value primarily because the historical cost based
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accounting model does not keep track of changes in a firm‘s fair value.r5 r5 r5 r5 r5 r5 r5 r5 r5 r5 r5 r5


B. Payments made in excess of underlying book value can sometimes be identified wit
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h specific 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 exp
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ected to be derived from the investment. In accounting, these amounts are presum
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ed to reflect an intangible asset referred to as goodwill. Goodwill is calculated as an
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y excess payment that is not attributable to specific identifiable assets and liabilities
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of the investee. Because goodwill is an indefinite-lived asset, it is not amortized.
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V. Deferral of intra-entity gross profit in inventory
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A. The investor‘s share of intra- r5 r5 r5 r5


entity profits in ending inventory are not recognized until the transferred goods are eit
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her consumed or until they are resold to unrelated parties.
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B. Downstream sales of inventory r5 r5 r5


1. ―Downstream‖ refers to transfers made by the investor to the investee. r5 r5 r5 r5 r5 r5 r5 r5 r5 r5


2. Intra-
entity gross profits from sales are initially deferred under the equity method and
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then 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 percentag
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e multiplied by the markup on the merchandise remaining at the end of the ye
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ar.
C. Upstream sales of inventory r5 r5 r5


1. ―Upstream‖ refers to transfers made by the investee to the investor. r5 r5 r5 r5 r5 r5 r5 r5 r5 r5


2. Under the equity method, the deferral process for intra- r5 r5 r5 r5 r5 r5 r5 r5


entity gross profits is identical for upstream and downstream transfers. The proc
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edures are separately identified in Chapter One because the handling does vary
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within the consolidation process. r5 r5 r5




Answers to Discussion Questions r5 r5 r5




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 b
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e overlooked. Some of these questions may be addressed by the instructor in class to motivate
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student discussion. Students should be encouraged to begin by defining the issue(s) in each c
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ase. Next, authoritative accounting literature (FASB ASC) or other relevant literature can be con
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sulted as a preliminary step in arriving at logical actions. Frequently, the FASB Accounting Stan
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dards 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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5available. Students often seem to believe that all accounting issues have been resolved in the
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past so that accounting education is only a matter of learning to apply historically prescribed pr
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ocedures. However, in actual practice, the only real answer is often the one that provides the fa
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irest representation of the firm‘s transactions. If an authoritative solution is not available, studen
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ts should be directed to list all of the issues involved and the consequences of possible alternat
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ive actions. 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 s
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kills in addressing issues that go beyond the purely mechanical elements of accounting.
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