,Solution qManual qFor qAll qChapters
SOLUTION MANUAL FOR q q
ADVANCED qACCOUNTING q15TH qEDITION qBY qJOE qBEN qHOYLE, qTHOMAS
qSCHAEFER qAND qTIMOTHY qDOUPNIK
CHAPTER q1-19
CHAPTER 1 q
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
q q q q q q q
Chapter qOutline
I. Four qmethods qare qprincipally qused qto qaccount qfor qan qinvestment qin qequity qsecurities
qalong qwith qa qfair qvalue qoption.
A. Fair qvalue qmethod: qapplied qby qan qinvestor qwhen qonly qa qsmall qpercentage
qof qa qcompany‘s qvoting qstock qis qheld.
1. The qinvestor qrecognizes qincome qwhen qthe qinvestee qdeclares qa qdividend.
2. Portfolios qare qreported qat qfair qvalue. qIf qfair qvalues qare qunavailable,
qinvestment qis qreported qat qcost.
B. Cost qMethod: qapplied qto qinvestments qwithout qa qreadily qdeterminable qfair qvalue.
qWhen qthe qfair qvalue qof qan qinvestment qin qequity qsecurities qis qnot qreadily
qdeterminable, qand qthe qinvestment qprovides qneither qsignificant qinfluence qnor
qcontrol, qthe qinvestment qmay qbe qmeasured qat qcost. qThe qinvestment qremains qat
qcost qunless
1. A qdemonstrable qimpairment qoccurs qfor qthe qinvestment, qor
2. An qobservable qprice qchange qoccurs qfor qidentical qor qsimilar qinvestments qof qthe
qsame qissuer.
The qinvestor qtypically qrecognizes qits qshare qof qinvestee qdividends qdeclared qas
qdividend qincome.
C. Consolidation: qwhen qone qfirm qcontrols qanother q(e.g., qwhen qa qparent qhas qa
qmajority qinterest qin qthe qvoting qstock qof qa qsubsidiary qor qcontrol qthrough qvariable
qinterests, qtheir qfinancial qstatements qare qconsolidated qand qreported qfor qthe
qcombined qentity.
D. Equity qmethod: qapplied qwhen qthe qinvestor qhas qthe qability qto qexercise
qsignificant qinfluence qover qoperating qand qfinancial qpolicies qof qthe qinvestee.
1. Ability qto qsignificantly qinfluence qinvestee qis qindicated qby qseveral qfactors
qincluding qrepresentation qon qthe qboard qof qdirectors, qparticipation qin qpolicy-
making, qetc.
2. GAAP qguidelines qpresume qthe qequity qmethod qis qapplicable qif q20 qto q50 qpercent qof qthe
, outstanding qvoting qstock qof qthe qinvestee qis qheld qby qthe qinvestor.
Current qfinancial qreporting qstandards qallow qfirms qto qelect qto quse qfair qvalue qfor qany
qnew qinvestment qin qequity qshares qincluding qthose qwhere qthe qequity qmethod qwould
qotherwise qapply. qHowever, qthe qoption, qonce qtaken, qis qirrevocable. qThe qinvestor
qrecognizes qboth qinvestee qdividends qand qchanges qin qfair qvalue qover qtime qas qincome.
II. Accounting qfor qan qinvestment: qthe qequity qmethod
A. The qinvestor qadjusts qthe qinvestment qaccount qto qreflect qall qchanges qin qthe qequity
qof qthe qinvestee qcompany.
B. The qinvestor qaccrues qinvestee qincome qwhen qit qis qreported qin qthe qinvestee‘s
qfinancial qstatements.
C. Dividends qdeclared qby qthe qinvestee qcreate qa qreduction qin qthe qcarrying qamount qof
qthe qInvestment qaccount. qThis qbook qassumes qall qinvestee qdividends qare qdeclared
qand qpaid qin qthe qsame qreporting qperiod.
III. Special qaccounting qprocedures qused qin qthe qapplication qof qthe qequity qmethod
A. Reporting qa qchange qto qthe qequity qmethod qwhen qthe qability qto qsignificantly
qinfluence qan qinvestee qis qachieved qthrough qa qseries qof qacquisitions.
1. Initial qpurchase(s) qwill qbe qaccounted qfor qby qmeans qof qthe qfair qvalue qmethod
q(or qat qcost) quntil qthe qability qto qsignificantly qinfluence qis qattained.
2. When qthe qability qto qexercise qsignificant qinfluence qoccurs qfollowing qa qseries qof
qstock qpurchases, qthe qinvestor qapplies qthe qequity qmethod qprospectively. qThe
qtotal qfair qvalue qat qthe qdate qsignificant qinfluence qis qattained qis qcompared qto
qthe qinvestee‘s qbook qvalue qto qdetermine qfuture qexcess qfair qvalue
qamortizations.
B. Investee qincome qfrom qother qthan qcontinuing qoperations
1. The qinvestor qrecognizes qits qshare qof qinvestee qreported qother
qcomprehensive qincome q(OCI) qthrough qthe qinvestment qaccount qand qthe
qinvestor‘s qown qOCI.
2. Income qitems qsuch qas qdiscontinued qoperations qthat qare qreported qseparately qby
qthe qinvestee qshould qbe qshown qin qthe qsame qmanner qby qthe qinvestor. qThe
qmateriality qof qthese qother qinvestee qincome qelements q(as qit qaffects qthe
qinvestor) qcontinues qto qbe qa qcriterion qfor qseparate qdisclosure.
C. Investee qlosses
1. Losses qreported qby qthe qinvestee qcreate qcorresponding qlosses qfor qthe qinvestor.
2. A qpermanent qdecline qin qthe qfair qvalue qof qan qinvestee‘s qstock qshould qbe
qrecognized qimmediately qby qthe qinvestor qas qan qimpairment qloss.
3. Investee qlosses qcan qpossibly qreduce qthe qcarrying qvalue qof qthe qinvestment
qaccount qto qa qzero qbalance. qAt qthat qpoint, qthe qequity qmethod qceases qto qbe
qapplicable qand qthe qfair-value qmethod qis qsubsequently qused.
D. Reporting qthe qsale qof qan qequity qinvestment
1. The qinvestor qapplies qthe qequity qmethod quntil qthe qdisposal qdate qto qestablish qa
qproper qbook qvalue.
2. Following qthe qsale, qthe qequity qmethod qcontinues qto qbe qappropriate qif qenough
qshares qare qstill qheld qto qmaintain qthe qinvestor‘s qability qto qsignificantly qinfluence
qthe qinvestee. qIf qthat qability qhas qbeen qlost, qthe qfair-value qmethod qis
qsubsequently qused.
2-24
© qMcGraw qHill qLLC. qAll qrights qreserved. qNo qreproduction qor qdistribution qwithout qthe qprior qwritten qconsent qof
qMcGraw qHill qLLC.
, Solution qManual qFor qAll qChapters
IV. Excess qinvestment qcost qover qbook qvalue qacquired
A. The qprice qan qinvestor qpays qfor qequity qsecurities qoften qdiffers qsignificantly
qfrom qthe qinvestee‘s qunderlying qbook qvalue qprimarily qbecause qthe qhistorical
qcost qbased qaccounting qmodel qdoes qnot qkeep qtrack qof qchanges qin qa qfirm‘s
qfair qvalue.
B. Payments qmade qin qexcess qof qunderlying qbook qvalue qcan qsometimes qbe qidentified
qwith qspecific qinvestee qaccounts qsuch qas qinventory qor qequipment.
C. An qextra qacquisition qprice qcan qalso qbe qassigned qto qanticipated qbenefits qthat qare
qexpected qto qbe qderived qfrom qthe qinvestment. qIn qaccounting, qthese qamounts qare
qpresumed qto qreflect qan qintangible qasset qreferred qto qas qgoodwill. qGoodwill qis
qcalculated qas qany qexcess qpayment qthat qis qnot qattributable qto qspecific qidentifiable
qassets qand qliabilities qof qthe qinvestee. qBecause qgoodwill qis qan qindefinite-lived
qasset, qit qis qnot qamortized.
V. Deferral qof qintra-entity qgross qprofit qin qinventory
A. The qinvestor‘s qshare qof qintra-entity qprofits qin qending qinventory qare qnot qrecognized
quntil qthe qtransferred qgoods qare qeither qconsumed qor quntil qthey qare qresold qto
qunrelated qparties.
B. Downstream qsales qof qinventory
1. ―Downstream‖ qrefers qto qtransfers qmade qby qthe qinvestor qto qthe qinvestee.
2. Intra-entity qgross qprofits qfrom qsales qare qinitially qdeferred qunder qthe qequity
qmethod qand qthen qrecognized qas qincome qat qthe qtime qof qthe qinventory‘s
qeventual qdisposal.
3. The qamount qof qgross qprofit qto qbe qdeferred qis qthe qinvestor‘s qownership
qpercentage qmultiplied qby qthe qmarkup qon qthe qmerchandise qremaining qat qthe
qend qof qthe qyear.
C. Upstream qsales qof qinventory
1. ―Upstream‖ qrefers qto qtransfers qmade qby qthe qinvestee qto qthe qinvestor.
2. Under qthe qequity qmethod, qthe qdeferral qprocess qfor qintra-entity qgross qprofits qis
qidentical qfor qupstream qand qdownstream qtransfers. qThe qprocedures qare
qseparately qidentified qin qChapter qOne qbecause qthe qhandling qdoes qvary qwithin
qthe qconsolidation qprocess.
Answers qto qDiscussion qQuestions
The qtextbook qincludes qdiscussion qquestions qto qstimulate qstudent qthought qand qdiscussion.
qThese qquestions qare qalso qdesigned qto qallow qstudents qto qconsider qrelevant qissues qthat qmight
qotherwise qbe qoverlooked. qSome qof qthese qquestions qmay qbe qaddressed qby qthe qinstructor qin
qclass qto qmotivate qstudent qdiscussion. qStudents qshould qbe qencouraged qto qbegin qby qdefining
qthe qissue(s) qin qeach qcase. qNext, qauthoritative qaccounting qliterature q(FASB qASC) qor qother
qrelevant qliterature qcan qbe qconsulted qas qa qpreliminary qstep qin qarriving qat qlogical qactions.
qFrequently, qthe qFASB qAccounting qStandards qCodification qwill qprovide qthe qnecessary qsupport.
Unfortunately, qin qaccounting, qdefinitive qresolutions qto qfinancial qreporting qquestions qare qnot
qalways qavailable. qStudents qoften qseem qto qbelieve qthat qall qaccounting qissues qhave qbeen
qresolved qin qthe qpast qso qthat qaccounting qeducation qis qonly qa qmatter qof qlearning qto qapply
qhistorically qprescribed qprocedures. qHowever, qin qactual qpractice, qthe qonly qreal qanswer qis qoften
qthe qone qthat qprovides qthe qfairest qrepresentation qof qthe qfirm‘s qtransactions. qIf qan qauthoritative
qsolution qis qnot qavailable, qstudents qshould qbe qdirected qto qlist qall qof qthe qissues qinvolved qand
qthe qconsequences qof qpossible qalternative qactions. qThe qvarious qfactors qpresented qcan qbe
qweighed qto qproduce qa qviable qsolution.
The qdiscussion qquestions qare qdesigned qto qhelp qstudents qdevelop qresearch qand qcritical
2-3
© qMcGraw qHill qLLC. qAll qrights qreserved. qNo qreproduction q or qdistribution qwithout qthe qprior qwritten qconsent qof
qMcGraw qHill qLLC.
SOLUTION MANUAL FOR q q
ADVANCED qACCOUNTING q15TH qEDITION qBY qJOE qBEN qHOYLE, qTHOMAS
qSCHAEFER qAND qTIMOTHY qDOUPNIK
CHAPTER q1-19
CHAPTER 1 q
THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
q q q q q q q
Chapter qOutline
I. Four qmethods qare qprincipally qused qto qaccount qfor qan qinvestment qin qequity qsecurities
qalong qwith qa qfair qvalue qoption.
A. Fair qvalue qmethod: qapplied qby qan qinvestor qwhen qonly qa qsmall qpercentage
qof qa qcompany‘s qvoting qstock qis qheld.
1. The qinvestor qrecognizes qincome qwhen qthe qinvestee qdeclares qa qdividend.
2. Portfolios qare qreported qat qfair qvalue. qIf qfair qvalues qare qunavailable,
qinvestment qis qreported qat qcost.
B. Cost qMethod: qapplied qto qinvestments qwithout qa qreadily qdeterminable qfair qvalue.
qWhen qthe qfair qvalue qof qan qinvestment qin qequity qsecurities qis qnot qreadily
qdeterminable, qand qthe qinvestment qprovides qneither qsignificant qinfluence qnor
qcontrol, qthe qinvestment qmay qbe qmeasured qat qcost. qThe qinvestment qremains qat
qcost qunless
1. A qdemonstrable qimpairment qoccurs qfor qthe qinvestment, qor
2. An qobservable qprice qchange qoccurs qfor qidentical qor qsimilar qinvestments qof qthe
qsame qissuer.
The qinvestor qtypically qrecognizes qits qshare qof qinvestee qdividends qdeclared qas
qdividend qincome.
C. Consolidation: qwhen qone qfirm qcontrols qanother q(e.g., qwhen qa qparent qhas qa
qmajority qinterest qin qthe qvoting qstock qof qa qsubsidiary qor qcontrol qthrough qvariable
qinterests, qtheir qfinancial qstatements qare qconsolidated qand qreported qfor qthe
qcombined qentity.
D. Equity qmethod: qapplied qwhen qthe qinvestor qhas qthe qability qto qexercise
qsignificant qinfluence qover qoperating qand qfinancial qpolicies qof qthe qinvestee.
1. Ability qto qsignificantly qinfluence qinvestee qis qindicated qby qseveral qfactors
qincluding qrepresentation qon qthe qboard qof qdirectors, qparticipation qin qpolicy-
making, qetc.
2. GAAP qguidelines qpresume qthe qequity qmethod qis qapplicable qif q20 qto q50 qpercent qof qthe
, outstanding qvoting qstock qof qthe qinvestee qis qheld qby qthe qinvestor.
Current qfinancial qreporting qstandards qallow qfirms qto qelect qto quse qfair qvalue qfor qany
qnew qinvestment qin qequity qshares qincluding qthose qwhere qthe qequity qmethod qwould
qotherwise qapply. qHowever, qthe qoption, qonce qtaken, qis qirrevocable. qThe qinvestor
qrecognizes qboth qinvestee qdividends qand qchanges qin qfair qvalue qover qtime qas qincome.
II. Accounting qfor qan qinvestment: qthe qequity qmethod
A. The qinvestor qadjusts qthe qinvestment qaccount qto qreflect qall qchanges qin qthe qequity
qof qthe qinvestee qcompany.
B. The qinvestor qaccrues qinvestee qincome qwhen qit qis qreported qin qthe qinvestee‘s
qfinancial qstatements.
C. Dividends qdeclared qby qthe qinvestee qcreate qa qreduction qin qthe qcarrying qamount qof
qthe qInvestment qaccount. qThis qbook qassumes qall qinvestee qdividends qare qdeclared
qand qpaid qin qthe qsame qreporting qperiod.
III. Special qaccounting qprocedures qused qin qthe qapplication qof qthe qequity qmethod
A. Reporting qa qchange qto qthe qequity qmethod qwhen qthe qability qto qsignificantly
qinfluence qan qinvestee qis qachieved qthrough qa qseries qof qacquisitions.
1. Initial qpurchase(s) qwill qbe qaccounted qfor qby qmeans qof qthe qfair qvalue qmethod
q(or qat qcost) quntil qthe qability qto qsignificantly qinfluence qis qattained.
2. When qthe qability qto qexercise qsignificant qinfluence qoccurs qfollowing qa qseries qof
qstock qpurchases, qthe qinvestor qapplies qthe qequity qmethod qprospectively. qThe
qtotal qfair qvalue qat qthe qdate qsignificant qinfluence qis qattained qis qcompared qto
qthe qinvestee‘s qbook qvalue qto qdetermine qfuture qexcess qfair qvalue
qamortizations.
B. Investee qincome qfrom qother qthan qcontinuing qoperations
1. The qinvestor qrecognizes qits qshare qof qinvestee qreported qother
qcomprehensive qincome q(OCI) qthrough qthe qinvestment qaccount qand qthe
qinvestor‘s qown qOCI.
2. Income qitems qsuch qas qdiscontinued qoperations qthat qare qreported qseparately qby
qthe qinvestee qshould qbe qshown qin qthe qsame qmanner qby qthe qinvestor. qThe
qmateriality qof qthese qother qinvestee qincome qelements q(as qit qaffects qthe
qinvestor) qcontinues qto qbe qa qcriterion qfor qseparate qdisclosure.
C. Investee qlosses
1. Losses qreported qby qthe qinvestee qcreate qcorresponding qlosses qfor qthe qinvestor.
2. A qpermanent qdecline qin qthe qfair qvalue qof qan qinvestee‘s qstock qshould qbe
qrecognized qimmediately qby qthe qinvestor qas qan qimpairment qloss.
3. Investee qlosses qcan qpossibly qreduce qthe qcarrying qvalue qof qthe qinvestment
qaccount qto qa qzero qbalance. qAt qthat qpoint, qthe qequity qmethod qceases qto qbe
qapplicable qand qthe qfair-value qmethod qis qsubsequently qused.
D. Reporting qthe qsale qof qan qequity qinvestment
1. The qinvestor qapplies qthe qequity qmethod quntil qthe qdisposal qdate qto qestablish qa
qproper qbook qvalue.
2. Following qthe qsale, qthe qequity qmethod qcontinues qto qbe qappropriate qif qenough
qshares qare qstill qheld qto qmaintain qthe qinvestor‘s qability qto qsignificantly qinfluence
qthe qinvestee. qIf qthat qability qhas qbeen qlost, qthe qfair-value qmethod qis
qsubsequently qused.
2-24
© qMcGraw qHill qLLC. qAll qrights qreserved. qNo qreproduction qor qdistribution qwithout qthe qprior qwritten qconsent qof
qMcGraw qHill qLLC.
, Solution qManual qFor qAll qChapters
IV. Excess qinvestment qcost qover qbook qvalue qacquired
A. The qprice qan qinvestor qpays qfor qequity qsecurities qoften qdiffers qsignificantly
qfrom qthe qinvestee‘s qunderlying qbook qvalue qprimarily qbecause qthe qhistorical
qcost qbased qaccounting qmodel qdoes qnot qkeep qtrack qof qchanges qin qa qfirm‘s
qfair qvalue.
B. Payments qmade qin qexcess qof qunderlying qbook qvalue qcan qsometimes qbe qidentified
qwith qspecific qinvestee qaccounts qsuch qas qinventory qor qequipment.
C. An qextra qacquisition qprice qcan qalso qbe qassigned qto qanticipated qbenefits qthat qare
qexpected qto qbe qderived qfrom qthe qinvestment. qIn qaccounting, qthese qamounts qare
qpresumed qto qreflect qan qintangible qasset qreferred qto qas qgoodwill. qGoodwill qis
qcalculated qas qany qexcess qpayment qthat qis qnot qattributable qto qspecific qidentifiable
qassets qand qliabilities qof qthe qinvestee. qBecause qgoodwill qis qan qindefinite-lived
qasset, qit qis qnot qamortized.
V. Deferral qof qintra-entity qgross qprofit qin qinventory
A. The qinvestor‘s qshare qof qintra-entity qprofits qin qending qinventory qare qnot qrecognized
quntil qthe qtransferred qgoods qare qeither qconsumed qor quntil qthey qare qresold qto
qunrelated qparties.
B. Downstream qsales qof qinventory
1. ―Downstream‖ qrefers qto qtransfers qmade qby qthe qinvestor qto qthe qinvestee.
2. Intra-entity qgross qprofits qfrom qsales qare qinitially qdeferred qunder qthe qequity
qmethod qand qthen qrecognized qas qincome qat qthe qtime qof qthe qinventory‘s
qeventual qdisposal.
3. The qamount qof qgross qprofit qto qbe qdeferred qis qthe qinvestor‘s qownership
qpercentage qmultiplied qby qthe qmarkup qon qthe qmerchandise qremaining qat qthe
qend qof qthe qyear.
C. Upstream qsales qof qinventory
1. ―Upstream‖ qrefers qto qtransfers qmade qby qthe qinvestee qto qthe qinvestor.
2. Under qthe qequity qmethod, qthe qdeferral qprocess qfor qintra-entity qgross qprofits qis
qidentical qfor qupstream qand qdownstream qtransfers. qThe qprocedures qare
qseparately qidentified qin qChapter qOne qbecause qthe qhandling qdoes qvary qwithin
qthe qconsolidation qprocess.
Answers qto qDiscussion qQuestions
The qtextbook qincludes qdiscussion qquestions qto qstimulate qstudent qthought qand qdiscussion.
qThese qquestions qare qalso qdesigned qto qallow qstudents qto qconsider qrelevant qissues qthat qmight
qotherwise qbe qoverlooked. qSome qof qthese qquestions qmay qbe qaddressed qby qthe qinstructor qin
qclass qto qmotivate qstudent qdiscussion. qStudents qshould qbe qencouraged qto qbegin qby qdefining
qthe qissue(s) qin qeach qcase. qNext, qauthoritative qaccounting qliterature q(FASB qASC) qor qother
qrelevant qliterature qcan qbe qconsulted qas qa qpreliminary qstep qin qarriving qat qlogical qactions.
qFrequently, qthe qFASB qAccounting qStandards qCodification qwill qprovide qthe qnecessary qsupport.
Unfortunately, qin qaccounting, qdefinitive qresolutions qto qfinancial qreporting qquestions qare qnot
qalways qavailable. qStudents qoften qseem qto qbelieve qthat qall qaccounting qissues qhave qbeen
qresolved qin qthe qpast qso qthat qaccounting qeducation qis qonly qa qmatter qof qlearning qto qapply
qhistorically qprescribed qprocedures. qHowever, qin qactual qpractice, qthe qonly qreal qanswer qis qoften
qthe qone qthat qprovides qthe qfairest qrepresentation qof qthe qfirm‘s qtransactions. qIf qan qauthoritative
qsolution qis qnot qavailable, qstudents qshould qbe qdirected qto qlist qall qof qthe qissues qinvolved qand
qthe qconsequences qof qpossible qalternative qactions. qThe qvarious qfactors qpresented qcan qbe
qweighed qto qproduce qa qviable qsolution.
The qdiscussion qquestions qare qdesigned qto qhelp qstudents qdevelop qresearch qand qcritical
2-3
© qMcGraw qHill qLLC. qAll qrights qreserved. qNo qreproduction q or qdistribution qwithout qthe qprior qwritten qconsent qof
qMcGraw qHill qLLC.
