SOLUTION MANUAL
Advanced Accounting
JOE BEN HOYLE, THOMAS SCHAEFER, TIMOTHY DOUPNIK
15th Edition
,Solution Manual For All Chapters
SOLUTION MANUAL
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEFER AND TIMOTHY
DOUPNIK
CHAPTER 1-19
CHAPTER 1 THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
Chapter Outline
I. Four methods are principally used to account for an investment in equity securities along with a fair value option.
A. Fair value method: applied by an investor when only a small percentage of a company‘s voting stock
is held.
1. The investor recognizes income when the investee declares a dividend.
2. Portfolios are reported at fair value. If fair values are unavailable, investment is reported at cost.
B. Cost Method: applied to investments without a readily determinable fair value. When the fair value of an
investment in equity securities is not readily determinable, and the investment provides neither significant
influence nor control, the investment may be measured at cost. The investment remains at cost unless
1. A demonstrable impairment occurs for the investment, or
2. An observable price change occurs for identical or similar investments of the same issuer.
The investor typically recognizes its share of investee dividends declared as dividend income.
C. Consolidation: when one firm controls another (e.g., when a parent has a majority interest in the voting stock
of a subsidiary or control through variable interests, their financial statements are consolidated and reported
for the combined entity.
D. Equity method: applied when the investor has the ability to exercise significant influence over operating
and financial policies of the investee.
1. Ability to significantly influence investee is indicated by several factors including representation on the
board of directors, participation in policy-making, etc.
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, outstanding voting stock of the investee is held by the investor.
Current financial reporting standards allow firms to elect to use fair value for any new investment in equity shares
including those where the equity method would otherwise apply. However, the option, once taken, is irrevocable. The
investor recognizes both investee dividends and changes in fair value over time as income.
II. Accounting for an investment: the equity method
A. The investor adjusts the investment account to reflect all changes in the equity of the investee company.
B. The investor accrues investee income when it is reported in the investee‘s financial statements.
C. Dividends declared by the investee create a reduction in the carrying amount of the Investment account. This
book assumes all investee dividends are declared and paid in the same reporting period.
III. Special accounting procedures used in the application of the equity method
A. Reporting a change to the equity method when the ability to significantly influence an investee is achieved
through a series of acquisitions.
1. Initial purchase(s) will be accounted for by means of the fair value method (or at cost) until the ability to
significantly influence is attained.
2. When the ability to exercise significant influence occurs following a series of stock purchases, the investor
applies the equity method prospectively. The total fair value at the date significant influence is attained is
compared to the investee‘s book value to determine future excess fair value amortizations.
B. Investee income from other than continuing operations
1. The investor recognizes its share of investee reported other comprehensive income (OCI) through
the investment account and the investor‘s own OCI.
2. Income items such as discontinued operations that are reported separately by the investee should be
shown in the same manner by the investor. The materiality of these other investee income elements (as it
affects the investor) continues to be a criterion for separate disclosure.
C. Investee losses
1. Losses reported by the investee create corresponding losses for the investor.
2. A permanent decline in the fair value of an investee‘s stock should be recognized immediately by the
investor as an impairment loss.
3. Investee losses can possibly reduce the carrying value of the investment account to a zero balance. At that
point, the equity method ceases to be applicable and the fair-value method is subsequently used.
D. Reporting the sale of an equity investment
1. The investor applies the equity method until the disposal date to establish a proper book value.
2. Following the sale, the equity method continues to be appropriate if enough shares are still held to maintain
the investor‘s ability to significantly influence the investee. If that ability has been lost, the fair-value method
is subsequently used.
2-24
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Solution Manual For All Chapters
IV. Excess investment cost over book value acquired
A. The price an investor pays for equity securities often differs significantly from the investee‘s underlying
book value primarily because the historical cost based accounting model does not keep track of changes
in a firm‘s fair value.
B. Payments made in excess of underlying book value can sometimes be identified with specific investee
accounts such as inventory or equipment.
C. An extra acquisition price can also be assigned to anticipated benefits that are expected to be derived from the
investment. In accounting, these amounts are presumed to reflect an intangible asset referred to as goodwill.
Goodwill is calculated as any excess payment that is not attributable to specific identifiable assets and
liabilities of the investee. Because goodwill is an indefinite-lived asset, it is not amortized.
V. Deferral of intra-entity gross profit in inventory
A. The investor‘s share of intra-entity profits in ending inventory are not recognized until the transferred goods are
either consumed or until they are resold to unrelated parties.
B. Downstream sales of inventory
1. ―Downstream‖ refers to transfers made by the investor to the investee.
2. Intra-entity gross profits from sales are initially deferred under the equity method and then recognized as
income at the time of the inventory‘s eventual disposal.
3. The amount of gross profit to be deferred is the investor‘s ownership percentage multiplied by the markup
on the merchandise remaining at the end of the year.
C. Upstream sales of inventory
1. ―Upstream‖ refers to transfers made by the investee to the investor.
2. Under the equity method, the deferral process for intra-entity gross profits is identical for upstream and
downstream transfers. The procedures are separately identified in Chapter One because the handling does
vary within the consolidation process.
Answers to Discussion Questions
The textbook includes discussion questions to stimulate student thought and discussion. These questions are also designed to
allow students to consider relevant issues that might otherwise be overlooked. Some of these questions may be addressed by
the instructor in class to motivate student discussion. Students should be encouraged to begin by defining the issue(s) in each
case. Next, authoritative accounting literature (FASB ASC) or other relevant literature can be consulted as a preliminary step
in arriving at logical actions. Frequently, the FASB Accounting Standards Codification will provide the necessary support.
Unfortunately, in accounting, definitive resolutions to financial reporting questions are not always available. Students often
seem to believe that all accounting issues have been resolved in the past so that accounting education is only a matter of
learning to apply historically prescribed procedures. However, in actual practice, the only real answer is often the one that
provides the fairest representation of the firm‘s transactions. If an authoritative solution is not available, students should be
directed to list all of the issues involved and the consequences of possible alternative actions. The various factors presented
can be weighed to produce a viable solution.
The discussion questions are designed to help students develop research and critical thinking skills in addressing issues that
go beyond the purely mechanical elements of accounting.
2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Advanced Accounting
JOE BEN HOYLE, THOMAS SCHAEFER, TIMOTHY DOUPNIK
15th Edition
,Solution Manual For All Chapters
SOLUTION MANUAL
ADVANCED ACCOUNTING 15TH EDITION BY JOE BEN HOYLE, THOMAS SCHAEFER AND TIMOTHY
DOUPNIK
CHAPTER 1-19
CHAPTER 1 THE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
Chapter Outline
I. Four methods are principally used to account for an investment in equity securities along with a fair value option.
A. Fair value method: applied by an investor when only a small percentage of a company‘s voting stock
is held.
1. The investor recognizes income when the investee declares a dividend.
2. Portfolios are reported at fair value. If fair values are unavailable, investment is reported at cost.
B. Cost Method: applied to investments without a readily determinable fair value. When the fair value of an
investment in equity securities is not readily determinable, and the investment provides neither significant
influence nor control, the investment may be measured at cost. The investment remains at cost unless
1. A demonstrable impairment occurs for the investment, or
2. An observable price change occurs for identical or similar investments of the same issuer.
The investor typically recognizes its share of investee dividends declared as dividend income.
C. Consolidation: when one firm controls another (e.g., when a parent has a majority interest in the voting stock
of a subsidiary or control through variable interests, their financial statements are consolidated and reported
for the combined entity.
D. Equity method: applied when the investor has the ability to exercise significant influence over operating
and financial policies of the investee.
1. Ability to significantly influence investee is indicated by several factors including representation on the
board of directors, participation in policy-making, etc.
2. GAAP guidelines presume the equity method is applicable if 20 to 50 percent of the
2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, outstanding voting stock of the investee is held by the investor.
Current financial reporting standards allow firms to elect to use fair value for any new investment in equity shares
including those where the equity method would otherwise apply. However, the option, once taken, is irrevocable. The
investor recognizes both investee dividends and changes in fair value over time as income.
II. Accounting for an investment: the equity method
A. The investor adjusts the investment account to reflect all changes in the equity of the investee company.
B. The investor accrues investee income when it is reported in the investee‘s financial statements.
C. Dividends declared by the investee create a reduction in the carrying amount of the Investment account. This
book assumes all investee dividends are declared and paid in the same reporting period.
III. Special accounting procedures used in the application of the equity method
A. Reporting a change to the equity method when the ability to significantly influence an investee is achieved
through a series of acquisitions.
1. Initial purchase(s) will be accounted for by means of the fair value method (or at cost) until the ability to
significantly influence is attained.
2. When the ability to exercise significant influence occurs following a series of stock purchases, the investor
applies the equity method prospectively. The total fair value at the date significant influence is attained is
compared to the investee‘s book value to determine future excess fair value amortizations.
B. Investee income from other than continuing operations
1. The investor recognizes its share of investee reported other comprehensive income (OCI) through
the investment account and the investor‘s own OCI.
2. Income items such as discontinued operations that are reported separately by the investee should be
shown in the same manner by the investor. The materiality of these other investee income elements (as it
affects the investor) continues to be a criterion for separate disclosure.
C. Investee losses
1. Losses reported by the investee create corresponding losses for the investor.
2. A permanent decline in the fair value of an investee‘s stock should be recognized immediately by the
investor as an impairment loss.
3. Investee losses can possibly reduce the carrying value of the investment account to a zero balance. At that
point, the equity method ceases to be applicable and the fair-value method is subsequently used.
D. Reporting the sale of an equity investment
1. The investor applies the equity method until the disposal date to establish a proper book value.
2. Following the sale, the equity method continues to be appropriate if enough shares are still held to maintain
the investor‘s ability to significantly influence the investee. If that ability has been lost, the fair-value method
is subsequently used.
2-24
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, Solution Manual For All Chapters
IV. Excess investment cost over book value acquired
A. The price an investor pays for equity securities often differs significantly from the investee‘s underlying
book value primarily because the historical cost based accounting model does not keep track of changes
in a firm‘s fair value.
B. Payments made in excess of underlying book value can sometimes be identified with specific investee
accounts such as inventory or equipment.
C. An extra acquisition price can also be assigned to anticipated benefits that are expected to be derived from the
investment. In accounting, these amounts are presumed to reflect an intangible asset referred to as goodwill.
Goodwill is calculated as any excess payment that is not attributable to specific identifiable assets and
liabilities of the investee. Because goodwill is an indefinite-lived asset, it is not amortized.
V. Deferral of intra-entity gross profit in inventory
A. The investor‘s share of intra-entity profits in ending inventory are not recognized until the transferred goods are
either consumed or until they are resold to unrelated parties.
B. Downstream sales of inventory
1. ―Downstream‖ refers to transfers made by the investor to the investee.
2. Intra-entity gross profits from sales are initially deferred under the equity method and then recognized as
income at the time of the inventory‘s eventual disposal.
3. The amount of gross profit to be deferred is the investor‘s ownership percentage multiplied by the markup
on the merchandise remaining at the end of the year.
C. Upstream sales of inventory
1. ―Upstream‖ refers to transfers made by the investee to the investor.
2. Under the equity method, the deferral process for intra-entity gross profits is identical for upstream and
downstream transfers. The procedures are separately identified in Chapter One because the handling does
vary within the consolidation process.
Answers to Discussion Questions
The textbook includes discussion questions to stimulate student thought and discussion. These questions are also designed to
allow students to consider relevant issues that might otherwise be overlooked. Some of these questions may be addressed by
the instructor in class to motivate student discussion. Students should be encouraged to begin by defining the issue(s) in each
case. Next, authoritative accounting literature (FASB ASC) or other relevant literature can be consulted as a preliminary step
in arriving at logical actions. Frequently, the FASB Accounting Standards Codification will provide the necessary support.
Unfortunately, in accounting, definitive resolutions to financial reporting questions are not always available. Students often
seem to believe that all accounting issues have been resolved in the past so that accounting education is only a matter of
learning to apply historically prescribed procedures. However, in actual practice, the only real answer is often the one that
provides the fairest representation of the firm‘s transactions. If an authoritative solution is not available, students should be
directed to list all of the issues involved and the consequences of possible alternative actions. The various factors presented
can be weighed to produce a viable solution.
The discussion questions are designed to help students develop research and critical thinking skills in addressing issues that
go beyond the purely mechanical elements of accounting.
2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
