Solution pManual pFor pAll pChapters
SOLUTION pMANUAL pFOR
ADVANCED pACCOUNTING p15TH pEDITION pBY pJOE pBEN pHOYLE,
pTHOMAS pSCHAEFER pAND pTIMOTHY pDOUPNIK
CHAPTER p1-19
CHAPTER p1
pTHE pEQUITY pMETHOD pOF pACCOUNTING pFOR
pINVESTMENTS
Chapter pOutline
I. Four pmethods pare pprincipally pused pto paccount pfor pan pinvestment pin pequity
psecurities palong pwith pa pfair pvalue poption.
A. Fair pvalue pmethod: papplied pby pan pinvestor pwhen ponly pa psmall
ppercentage pof pa pcompany‘s pvoting pstock pis pheld.
1. The pinvestor precognizes pincome pwhen pthe pinvestee pdeclares pa pdividend.
2. Portfolios pare preported pat pfair pvalue. pIf pfair pvalues pare punavailable,
pinvestment pis preported pat pcost.
B. Cost pMethod: papplied pto pinvestments pwithout pa preadily pdeterminable pfair
pvalue. pWhen pthe pfair pvalue pof pan pinvestment pin pequity psecurities pis pnot
preadily pdeterminable, pand pthe pinvestment pprovides pneither psignificant
pinfluence pnor pcontrol, pthe pinvestment pmay pbe pmeasured pat pcost. pThe
pinvestment premains pat pcost punless
1. A pdemonstrable pimpairment poccurs pfor pthe pinvestment, por
2. An pobservable pprice pchange poccurs pfor pidentical por psimilar pinvestments
pof pthe psame pissuer.
The pinvestor ptypically precognizes pits pshare pof pinvestee pdividends pdeclared
pas pdividend pincome.
C. Consolidation: pwhen pone pfirm pcontrols panother p(e.g., pwhen pa pparent
phas pa pmajority pinterest pin pthe pvoting pstock pof pa psubsidiary por pcontrol
pthrough pvariable pinterests, ptheir pfinancial pstatements pare pconsolidated
pand preported pfor pthe pcombined pentity.
D. Equity pmethod: papplied pwhen pthe pinvestor phas pthe pability pto
pexercise psignificant pinfluence pover poperating pand pfinancial ppolicies
pof pthe pinvestee.
1. Ability pto psignificantly pinfluence pinvestee pis pindicated pby pseveral
2-1
© pMcGraw pHill pLLC. pAll prights preserved. pNo preproduction por pdistribution pwithout pthe pprior pwritten pconsent pof
pMcGraw pHill pLLC.
, pfactors pincluding prepresentation pon pthe pboard pof pdirectors,
pparticipation pin ppolicy-making, petc.
2. GAAP pguidelines ppresume pthe pequity pmethod pis papplicable pif p20 pto p50
ppercent pof pthe
2-1
© pMcGraw pHill pLLC. pAll prights preserved. pNo preproduction por pdistribution pwithout pthe pprior pwritten pconsent pof
pMcGraw pHill pLLC.
, outstanding pvoting pstock pof pthe pinvestee pis pheld pby pthe pinvestor.
Current pfinancial preporting pstandards pallow pfirms pto pelect pto puse pfair pvalue
pfor pany pnew pinvestment pin pequity pshares pincluding pthose pwhere pthe pequity
pmethod pwould potherwise papply. pHowever, pthe poption, ponce ptaken, pis
pirrevocable. pThe pinvestor precognizes pboth pinvestee pdividends pand pchanges pin
pfair pvalue pover ptime pas pincome.
II. Accounting pfor pan pinvestment: pthe pequity pmethod
A. The pinvestor padjusts pthe pinvestment paccount pto preflect pall pchanges pin
pthe pequity pof pthe pinvestee pcompany.
B. The pinvestor paccrues pinvestee pincome pwhen pit pis preported pin pthe
pinvestee‘s pfinancial pstatements.
C. Dividends pdeclared pby pthe pinvestee pcreate pa preduction pin pthe pcarrying
pamount pof pthe pInvestment paccount. pThis pbook passumes pall pinvestee
pdividends pare pdeclared pand ppaid pin pthe psame preporting pperiod.
III. Special paccounting pprocedures pused pin pthe papplication pof pthe pequity pmethod
A. Reporting pa pchange pto pthe pequity pmethod pwhen pthe pability pto
psignificantly pinfluence pan pinvestee pis pachieved pthrough pa pseries pof
pacquisitions.
1. Initial ppurchase(s) pwill pbe paccounted pfor pby pmeans pof pthe pfair pvalue
pmethod p(or pat pcost) puntil pthe pability pto psignificantly pinfluence pis
pattained.
2. When pthe pability pto pexercise psignificant pinfluence poccurs pfollowing pa
pseries pof pstock ppurchases, pthe pinvestor papplies pthe pequity pmethod
pprospectively. pThe ptotal pfair pvalue pat pthe pdate psignificant pinfluence pis
pattained pis pcompared pto pthe pinvestee‘s pbook pvalue pto pdetermine
pfuture pexcess pfair pvalue pamortizations.
B. Investee pincome pfrom pother pthan pcontinuing poperations
1. The pinvestor precognizes pits pshare pof pinvestee preported pother
pcomprehensive pincome p(OCI) pthrough pthe pinvestment paccount
pand pthe pinvestor‘s pown pOCI.
2. Income pitems psuch pas pdiscontinued poperations pthat pare preported
pseparately pby pthe pinvestee pshould pbe pshown pin pthe psame pmanner
pby pthe pinvestor. pThe pmateriality pof pthese pother pinvestee pincome
pelements p(as pit paffects pthe pinvestor) pcontinues pto pbe pa pcriterion pfor
pseparate pdisclosure.
C. Investee plosses
1. Losses preported pby pthe pinvestee pcreate pcorresponding plosses pfor pthe pinvestor.
2. A ppermanent pdecline pin pthe pfair pvalue pof pan pinvestee‘s pstock pshould
pbe precognized pimmediately pby pthe pinvestor pas pan pimpairment ploss.
3. Investee plosses pcan ppossibly preduce pthe pcarrying pvalue pof pthe
pinvestment paccount pto pa pzero pbalance. pAt pthat ppoint, pthe pequity
pmethod pceases pto pbe papplicable pand pthe pfair-value pmethod pis
psubsequently pused.
D. Reporting pthe psale pof pan pequity pinvestment
1. The pinvestor papplies pthe pequity pmethod puntil pthe pdisposal pdate pto
2-24
© pMcGraw pHill pLLC. pAll prights preserved. pNo preproduction por pdistribution pwithout pthe pprior pwritten pconsent pof
pMcGraw pHill pLLC.
, pestablish pa pproper pbook pvalue.
2. Following pthe psale, pthe pequity pmethod pcontinues pto pbe pappropriate pif
penough pshares pare pstill pheld pto pmaintain pthe pinvestor‘s pability pto
psignificantly pinfluence pthe pinvestee. pIf pthat pability phas pbeen plost, pthe
pfair-value pmethod pis psubsequently pused.
2-24
© pMcGraw pHill pLLC. pAll prights preserved. pNo preproduction por pdistribution pwithout pthe pprior pwritten pconsent pof
pMcGraw pHill pLLC.
SOLUTION pMANUAL pFOR
ADVANCED pACCOUNTING p15TH pEDITION pBY pJOE pBEN pHOYLE,
pTHOMAS pSCHAEFER pAND pTIMOTHY pDOUPNIK
CHAPTER p1-19
CHAPTER p1
pTHE pEQUITY pMETHOD pOF pACCOUNTING pFOR
pINVESTMENTS
Chapter pOutline
I. Four pmethods pare pprincipally pused pto paccount pfor pan pinvestment pin pequity
psecurities palong pwith pa pfair pvalue poption.
A. Fair pvalue pmethod: papplied pby pan pinvestor pwhen ponly pa psmall
ppercentage pof pa pcompany‘s pvoting pstock pis pheld.
1. The pinvestor precognizes pincome pwhen pthe pinvestee pdeclares pa pdividend.
2. Portfolios pare preported pat pfair pvalue. pIf pfair pvalues pare punavailable,
pinvestment pis preported pat pcost.
B. Cost pMethod: papplied pto pinvestments pwithout pa preadily pdeterminable pfair
pvalue. pWhen pthe pfair pvalue pof pan pinvestment pin pequity psecurities pis pnot
preadily pdeterminable, pand pthe pinvestment pprovides pneither psignificant
pinfluence pnor pcontrol, pthe pinvestment pmay pbe pmeasured pat pcost. pThe
pinvestment premains pat pcost punless
1. A pdemonstrable pimpairment poccurs pfor pthe pinvestment, por
2. An pobservable pprice pchange poccurs pfor pidentical por psimilar pinvestments
pof pthe psame pissuer.
The pinvestor ptypically precognizes pits pshare pof pinvestee pdividends pdeclared
pas pdividend pincome.
C. Consolidation: pwhen pone pfirm pcontrols panother p(e.g., pwhen pa pparent
phas pa pmajority pinterest pin pthe pvoting pstock pof pa psubsidiary por pcontrol
pthrough pvariable pinterests, ptheir pfinancial pstatements pare pconsolidated
pand preported pfor pthe pcombined pentity.
D. Equity pmethod: papplied pwhen pthe pinvestor phas pthe pability pto
pexercise psignificant pinfluence pover poperating pand pfinancial ppolicies
pof pthe pinvestee.
1. Ability pto psignificantly pinfluence pinvestee pis pindicated pby pseveral
2-1
© pMcGraw pHill pLLC. pAll prights preserved. pNo preproduction por pdistribution pwithout pthe pprior pwritten pconsent pof
pMcGraw pHill pLLC.
, pfactors pincluding prepresentation pon pthe pboard pof pdirectors,
pparticipation pin ppolicy-making, petc.
2. GAAP pguidelines ppresume pthe pequity pmethod pis papplicable pif p20 pto p50
ppercent pof pthe
2-1
© pMcGraw pHill pLLC. pAll prights preserved. pNo preproduction por pdistribution pwithout pthe pprior pwritten pconsent pof
pMcGraw pHill pLLC.
, outstanding pvoting pstock pof pthe pinvestee pis pheld pby pthe pinvestor.
Current pfinancial preporting pstandards pallow pfirms pto pelect pto puse pfair pvalue
pfor pany pnew pinvestment pin pequity pshares pincluding pthose pwhere pthe pequity
pmethod pwould potherwise papply. pHowever, pthe poption, ponce ptaken, pis
pirrevocable. pThe pinvestor precognizes pboth pinvestee pdividends pand pchanges pin
pfair pvalue pover ptime pas pincome.
II. Accounting pfor pan pinvestment: pthe pequity pmethod
A. The pinvestor padjusts pthe pinvestment paccount pto preflect pall pchanges pin
pthe pequity pof pthe pinvestee pcompany.
B. The pinvestor paccrues pinvestee pincome pwhen pit pis preported pin pthe
pinvestee‘s pfinancial pstatements.
C. Dividends pdeclared pby pthe pinvestee pcreate pa preduction pin pthe pcarrying
pamount pof pthe pInvestment paccount. pThis pbook passumes pall pinvestee
pdividends pare pdeclared pand ppaid pin pthe psame preporting pperiod.
III. Special paccounting pprocedures pused pin pthe papplication pof pthe pequity pmethod
A. Reporting pa pchange pto pthe pequity pmethod pwhen pthe pability pto
psignificantly pinfluence pan pinvestee pis pachieved pthrough pa pseries pof
pacquisitions.
1. Initial ppurchase(s) pwill pbe paccounted pfor pby pmeans pof pthe pfair pvalue
pmethod p(or pat pcost) puntil pthe pability pto psignificantly pinfluence pis
pattained.
2. When pthe pability pto pexercise psignificant pinfluence poccurs pfollowing pa
pseries pof pstock ppurchases, pthe pinvestor papplies pthe pequity pmethod
pprospectively. pThe ptotal pfair pvalue pat pthe pdate psignificant pinfluence pis
pattained pis pcompared pto pthe pinvestee‘s pbook pvalue pto pdetermine
pfuture pexcess pfair pvalue pamortizations.
B. Investee pincome pfrom pother pthan pcontinuing poperations
1. The pinvestor precognizes pits pshare pof pinvestee preported pother
pcomprehensive pincome p(OCI) pthrough pthe pinvestment paccount
pand pthe pinvestor‘s pown pOCI.
2. Income pitems psuch pas pdiscontinued poperations pthat pare preported
pseparately pby pthe pinvestee pshould pbe pshown pin pthe psame pmanner
pby pthe pinvestor. pThe pmateriality pof pthese pother pinvestee pincome
pelements p(as pit paffects pthe pinvestor) pcontinues pto pbe pa pcriterion pfor
pseparate pdisclosure.
C. Investee plosses
1. Losses preported pby pthe pinvestee pcreate pcorresponding plosses pfor pthe pinvestor.
2. A ppermanent pdecline pin pthe pfair pvalue pof pan pinvestee‘s pstock pshould
pbe precognized pimmediately pby pthe pinvestor pas pan pimpairment ploss.
3. Investee plosses pcan ppossibly preduce pthe pcarrying pvalue pof pthe
pinvestment paccount pto pa pzero pbalance. pAt pthat ppoint, pthe pequity
pmethod pceases pto pbe papplicable pand pthe pfair-value pmethod pis
psubsequently pused.
D. Reporting pthe psale pof pan pequity pinvestment
1. The pinvestor papplies pthe pequity pmethod puntil pthe pdisposal pdate pto
2-24
© pMcGraw pHill pLLC. pAll prights preserved. pNo preproduction por pdistribution pwithout pthe pprior pwritten pconsent pof
pMcGraw pHill pLLC.
, pestablish pa pproper pbook pvalue.
2. Following pthe psale, pthe pequity pmethod pcontinues pto pbe pappropriate pif
penough pshares pare pstill pheld pto pmaintain pthe pinvestor‘s pability pto
psignificantly pinfluence pthe pinvestee. pIf pthat pability phas pbeen plost, pthe
pfair-value pmethod pis psubsequently pused.
2-24
© pMcGraw pHill pLLC. pAll prights preserved. pNo preproduction por pdistribution pwithout pthe pprior pwritten pconsent pof
pMcGraw pHill pLLC.
