,ACCESSTestBankforAdvancedAccounting15thEditionHoyle
A A A A A A A A
ChapterA01A-ATheAEquityAMethodAofAAccountingAforAInvestmentsA–
AHoyle,ASchaefer,ADoupnik, A AdvancedAAccounting,A15e
CHAPTER 1 T A A
HE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
A A A A A A A
ChapterAOutline
I. FourAmethodsAareAprincipallyAusedAtoAaccountAforAanAinvestmentAinAequityAsecuritiesAaloA
ngAwithAaAfairAvalueAoption.
A. FairA valueA method:A appliedA byA anA investorA whenA onlyA aA smallA percentageA
oAfAaAcompany’sAvotingAstockAisAheld.
1. TheA investorA recognizesA incomeA whenA theA investeeA declaresA aA dividend.
2. PortfoliosAareAreportedAatAfairAvalue.AIfAfairAvaluesAareAunavailable,AinvestmentA
isAreportedAatAcost.
B. CostAMethod:AappliedAtoAinvestmentsAwithoutAaAreadilyAdeterminableAfairAvalue.AWhA
enAtheAfairAvalueAofAanAinvestmentAinAequityAsecuritiesAisAnotAreadilyAdeterminable,AaA
ndAtheAinvestmentAprovidesAneitherAsignificantAinfluenceAnorAcontrol,AtheAinvestmentA
mayAbeAmeasuredA atA cost.ATheAinvestmentA remainsAatA costA unless
1. AA demonstrableA impairmentA occursAforA theA investment,A or
2. AnAobservableApriceAchangeAoccursAforAidenticalAorAsimilarAinvestmentsAofAtheAsaA
meAissuer.
TheAinvestorAtypicallyArecognizesAitsAshareAofAinvesteeAdividendsAdeclaredAasAdividendAinA
come.
C. Consolidation:A whenA oneA firmA controlsA anotherA (e.g.,A whenA aA parentA hasA aA majori
tAyAinterestAinAtheAvotingAstockAofAaAsubsidiaryAorAcontrolAthroughAvariableAinterests,A
theirAfinancialAstatementsAareAconsolidatedAandAreportedAforAtheAcombinedAentity.
D. EquityAmethod:AappliedAwhenAtheAinvestorAhasAtheAabilityAtoAexerciseAsignificA
antAinfluenceAoverAoperatingAandAfinancialApoliciesAofAtheAinvestee.
1. AbilityAtoAsignificantlyAinfluenceAinvesteeAisAindicatedAbyAseveralAfactorsAincludiA
ngArepresentationAonAtheAboardAofAdirectors,AparticipationAinApolicy-
making,A etc.
2. GAAPAguidelinesApresumeAtheAequityAmethodAisAapplicableAifA20AtoA50ApercentAofAt
heA outstandingA votingA stockA ofA theA investeeA isA heldA byA theA investor.
CurrentAfinancialAreportingAstandardsAallowAfirmsAtoAelectAtoAuseAfairAvalueAforAanyAnewAiAn
vestmentAinAequityAsharesAincludingAthoseAwhereAtheAequityAmethodAwouldAotherwiseAaAp
ply.AHowever,AtheAoption,AonceAtaken,AisAirrevocable.ATheAinvestorArecognizesAbothAinvAes
teeAdividendsAandAchangesAinAfairAvalueAoverAtimeAasAincome.
1-1
©A McGrawA HillA LLC.A AllA rightsA reserved.MNoMreproductionMorMdistributionA withoutA theA priorA writtenA consentA ofA McG
rawAHillA LLC.
,ACCESSTestBankforAdvancedAccounting15thEditionHoyle
A A A A A A A A
ChapterA01A-ATheAEquityAMethodAofAAccountingAforAInvestmentsA–
AHoyle,ASchaefer,ADoupnik, A AdvancedAAccounting,A15e
II. AccountingA forA anA investment:A theA equityA method
A. TheAinvestorAadjustsAtheAinvestmentAaccountAtoAreflectAallAchangesAinAtheAequityAofAt
heAinvesteeAcompany.
B. TheAinvestorAaccruesAinvesteeAincomeAwhenAitAisAreportedAinAtheAinvestee’sAfinancAi
alAstatements.
C. DividendsA declaredA byA theA investeeA createA aA reductionA inA theA carryingA amountA ofA t
hAeAInvestmentAaccount.AThisAbookAassumesAallAinvesteeAdividendsAareAdeclaredAand
ApaidAinAtheAsameAreportingAperiod.
III. SpecialAaccountingA proceduresA usedA inA theA applicationA ofA theA equityA method
A. ReportingAaAchangeAtoAtheAequityAmethodAwhenAtheAabilityAtoAsignificantlyAinfluenceA
anAinvesteeAisAachievedAthroughAaAseriesAofAacquisitions.
1. InitialA purchase(s)A willA beA accountedA forA byA meansA ofA theA fairA valueA methodA (
oArAatAcost)A untilAtheAabilityAtoAsignificantlyAinfluenceAisAattained.
2. WhenAtheAabilityAtoAexerciseAsignificantAinfluenceAoccursAfollowingAaAseriesAofAstoA
ckA purchases,A theA investorA appliesA theA equityA methodA prospectively.A TheA totalA f
aAirA valueA atA theA dateA significantA influenceA isA attainedA isA comparedA toA theA invest
ee’AsAbookAvalueAtoAdetermineAfutureAexcessAfairAvalueAamortizations.
B. InvesteeA incomeAfromA otherA thanA continuingA operations
1. TheAinvestorArecognizesAitsAshareAofAinvesteeAreportedAotherAcomprehensiA
veAincomeA(OCI)AthroughAtheAinvestmentAaccountAandAtheAinvestor’sAownAO
CI.
2. IncomeAitemsAsuchAasAdiscontinuedAoperationsAthatAareAreportedAseparatelyAbyAtA
heAinvesteeAshouldAbeAshownAinAtheAsameAmannerAbyAtheAinvestor.ATheAmateriaA li
tyA ofA theseA otherA investeeAincomeA elementsA (asAitA affectsA theA investor)A continueA
sAtoAbeAaAcriterionAforAseparateAdisclosure.
C. InvesteeA losses
1. LossesAreportedA byA theA investeeA createA correspondingA lossesA forA theA investor.
2. AApermanentAdeclineAinAtheAfairAvalueAofAanAinvestee’sAstockAshouldAbeArecognizA
edAimmediatelyAbyAtheAinvestorAasAanAimpairmentAloss.
3. InvesteeAlossesAcanApossiblyAreduceAtheAcarryingAvalueAofAtheAinvestmentAaccouA
ntAtoAaAzeroAbalance.AAtMthatApoint,AtheAequityAmethodAceasesAtoAbeAapplicableAaA
ndAtheAfair-valueAmethodAisAsubsequentlyAused.
D. ReportingA theA saleA ofA anA equityA investment
1. TheAinvestorAappliesAtheAequityAmethodAuntilAtheAdisposalAdateAtoAestablishAaAproA
perAbookAvalue.
2. FollowingAtheAsale,AtheAequityAmethodAcontinuesAtoAbeAappropriateAifAenoughAsharA
esAareAstillAheldAtoAmaintainAtheAinvestor’sAabilityAtoAsignificantlyAinfluenceAtheAinvA e
stee.A IfA thatA abilityA hasAbeenA lost,A theA fair-valueA methodA isA subsequentlyA used.
IV. ExcessA investmentA costA overA bookA valueA acquired
A. TheApriceAanAinvestorApaysAforAequityAsecuritiesAoftenAdiffersAsignificantlyAfromAtA
heAinvestee’sA underlyingAbookAvalueAprimarilyA becauseAtheAhistoricalAcostAbase
A dA accountingA modelA doesA notA keepA trackA ofA changesA inA aA firm’sA fairA value.
B. PaymentsAmadeAinAexcessAofAunderlyingAbookAvalueAcanAsometimesAbeAidentifiedAwAi
thAspecificAinvesteeAaccountsAsuchAasAinventoryAorAequipment.
C. AnAextraAacquisitionApriceAcanAalsoAbeAassignedAtoAanticipatedAbenefitsAthatAareAexA p
ectedAtoAbeAderivedAfromAtheAinvestment.AInAaccounting,AtheseAamountsAareApresuA m
edAtoAreflectAanAintangibleAassetAreferredAtoAasAgoodwill.AGoodwillAisAcalculated
1-2
©A McGrawA HillA LLC.A AllA rightsA reserved.MNoMreproductionMorMdistributionA withoutA theA priorA writtenA consentA ofA McG
rawAHillA LLC.
, ACCESSTestBankforAdvancedAccounting15thEditionHoyle
A A A A A A A A
ChapterA 01A -A TheA EquityA MethodA ofA AccountingA forA InvestmentsA –
Hoyle,A Schaefer,A Doupnik,A AdvancedA Accounting,A 15e
asAanyAexcessApaymentAthatAisAnotAattributableAtoAspecificAidentifiableAassetsAandAliaAb
ilitiesAofAtheAinvestee.ABecauseAgoodwillAisAanAindefinite-
livedA asset,A itA isA notA amortized.
V. DeferralA ofA intra-entityA grossA profitA inA inventory
A. TheA investor’sA shareA ofA intra-
entityAprofitsAinAendingAinventoryAareAnotArecognizedAuntilAtheAtransferredAgoodsAareA
eitherAconsumedAorAuntilAtheyAareAresoldAtoAunrelatedAparties.
B. DownstreamA salesA ofA inventory
1. “Downstream”A refersA toA transfersA madeA byA theA investorA toA theA investee.
2. Intra-
entityAgrossAprofitsAfromAsalesAareAinitiallyAdeferredAunderAtheAequityAmethodA aA
ndA thenA recognizedA asA incomeA atA theA timeA ofA theA inventory’sA eventualA disposa
l
.
3. TheAamountAofAgrossAprofitAtoAbeAdeferredAisAtheAinvestor’sAownershipApercentaA
geAmultipliedAbyAtheAmarkupAonAtheAmerchandiseAremainingAatAtheAendAofAtheA ye
ar.
C. UpstreamA salesA ofA inventory
1. “Upstream”A refersA toA transfersA madeA byA theA investeeA toA theA investor.
2. UnderA theA equityA method,A theA deferralA processA forA intra-
entityAgrossAprofitsAisAidenticalAforAupstreamAandAdownstreamAtransfers.ATheAproAc
eduresAareAseparatelyAidentifiedAinAChapterAOneAbecauseAtheAhandlingAdoesAvaA r
yAwithinAtheAconsolidationAprocess.
AnswersA toA DiscussionA Questions
TheA textbookA includesA discussionA questionsA toA stimulateA studentA thoughtA andA discussion.A Thes
AeA questionsA areA alsoA designedA toA allowA studentsAtoA considerA relevantA issuesA thatA mightA otherw
iAseAbeA overlooked.A SomeA ofA theseA questionsAmayAbeA addressedAbyAtheA instructorA inA classAtoA m
AotivateAstudentAdiscussion.AStudentsAshouldAbeAencouragedAtoAbeginAbyAdefiningAtheAissue(s)AinA
eachA case.A Next,A authoritativeA accountingA literatureA (FASBA ASC)A orA otherA relevantA literatureA ca
AnAbeAconsultedAasAaApreliminaryAstepAinAarrivingAatAlogicalAactions.AFrequently,AtheAFASBAAccouA
ntingAStandardsACodificationAwillAprovideAtheAnecessaryAsupport.
Unfortunately,A inA accounting,A definitiveA resolutionsA toA financialA reportingA questionsA areA notA alwa
yAsA available.A StudentsA oftenA seemA toA believeA thatA allA accountingA issuesA haveA beenA resolvedA in
A thAeApastAsoAthatAaccountingAeducationAisAonlyAaAmatterAofAlearningAtoAapplyAhistoricallyAprescribe
dA procedures.A However,A inA actualA practice,A theA onlyA realA answerA isA oftenA theA oneA thatA provide
sA tAheAfairestArepresentationAofAtheAfirm’sAtransactions.AIfAanAauthoritativeAsolutionAisAnotAavailable,
A studentsAshouldAbeAdirectedAtoAlistAallAofAtheAissuesAinvolvedAandAtheAconsequencesAofApossibleA
alternativeA actions.A TheA variousA factorsA presentedA canA beA weighedA toA produceA aA viableA solutio
An.
TheAdiscussionAquestionsAareAdesignedAtoAhelpAstudentsAdevelopAresearchAandAcriticalAthinking
AskillsA inA addressingA issuesA thatA goA beyondAtheApurelyA mechanicalA elementsA ofA accounting.
DidA theA CostA MethodA InviteA Manipulation?
TheAcostAmethodAofAaccountingAforAinvestmentsAoftenAcausedAaAlackMofAobjectivityAinAreportedAinAc
omeA figures.A WithA aA largeA blockA ofA theA investee’sA votingA shares,A anA investorA couldA influenceA thA
eAamountAandAtimingAofAtheAinvestee’sAdividendAdeclarations.AThus,AwhenAenjoyingAaAgoodAearnAin
gsA year,A anA investorA mightA influenceA theA investeeA toA withholdA declaringA aA dividendA untilA needeA
1-3
©A McGrawA HillA LLC.A AllA rightsA reserved.MNoMreproductionMorMdistributionA withoutA theA priorA writtenA consentA ofA McG
rawAHillA LLC.
A A A A A A A A
ChapterA01A-ATheAEquityAMethodAofAAccountingAforAInvestmentsA–
AHoyle,ASchaefer,ADoupnik, A AdvancedAAccounting,A15e
CHAPTER 1 T A A
HE EQUITY METHOD OF ACCOUNTING FOR INVESTMENTS
A A A A A A A
ChapterAOutline
I. FourAmethodsAareAprincipallyAusedAtoAaccountAforAanAinvestmentAinAequityAsecuritiesAaloA
ngAwithAaAfairAvalueAoption.
A. FairA valueA method:A appliedA byA anA investorA whenA onlyA aA smallA percentageA
oAfAaAcompany’sAvotingAstockAisAheld.
1. TheA investorA recognizesA incomeA whenA theA investeeA declaresA aA dividend.
2. PortfoliosAareAreportedAatAfairAvalue.AIfAfairAvaluesAareAunavailable,AinvestmentA
isAreportedAatAcost.
B. CostAMethod:AappliedAtoAinvestmentsAwithoutAaAreadilyAdeterminableAfairAvalue.AWhA
enAtheAfairAvalueAofAanAinvestmentAinAequityAsecuritiesAisAnotAreadilyAdeterminable,AaA
ndAtheAinvestmentAprovidesAneitherAsignificantAinfluenceAnorAcontrol,AtheAinvestmentA
mayAbeAmeasuredA atA cost.ATheAinvestmentA remainsAatA costA unless
1. AA demonstrableA impairmentA occursAforA theA investment,A or
2. AnAobservableApriceAchangeAoccursAforAidenticalAorAsimilarAinvestmentsAofAtheAsaA
meAissuer.
TheAinvestorAtypicallyArecognizesAitsAshareAofAinvesteeAdividendsAdeclaredAasAdividendAinA
come.
C. Consolidation:A whenA oneA firmA controlsA anotherA (e.g.,A whenA aA parentA hasA aA majori
tAyAinterestAinAtheAvotingAstockAofAaAsubsidiaryAorAcontrolAthroughAvariableAinterests,A
theirAfinancialAstatementsAareAconsolidatedAandAreportedAforAtheAcombinedAentity.
D. EquityAmethod:AappliedAwhenAtheAinvestorAhasAtheAabilityAtoAexerciseAsignificA
antAinfluenceAoverAoperatingAandAfinancialApoliciesAofAtheAinvestee.
1. AbilityAtoAsignificantlyAinfluenceAinvesteeAisAindicatedAbyAseveralAfactorsAincludiA
ngArepresentationAonAtheAboardAofAdirectors,AparticipationAinApolicy-
making,A etc.
2. GAAPAguidelinesApresumeAtheAequityAmethodAisAapplicableAifA20AtoA50ApercentAofAt
heA outstandingA votingA stockA ofA theA investeeA isA heldA byA theA investor.
CurrentAfinancialAreportingAstandardsAallowAfirmsAtoAelectAtoAuseAfairAvalueAforAanyAnewAiAn
vestmentAinAequityAsharesAincludingAthoseAwhereAtheAequityAmethodAwouldAotherwiseAaAp
ply.AHowever,AtheAoption,AonceAtaken,AisAirrevocable.ATheAinvestorArecognizesAbothAinvAes
teeAdividendsAandAchangesAinAfairAvalueAoverAtimeAasAincome.
1-1
©A McGrawA HillA LLC.A AllA rightsA reserved.MNoMreproductionMorMdistributionA withoutA theA priorA writtenA consentA ofA McG
rawAHillA LLC.
,ACCESSTestBankforAdvancedAccounting15thEditionHoyle
A A A A A A A A
ChapterA01A-ATheAEquityAMethodAofAAccountingAforAInvestmentsA–
AHoyle,ASchaefer,ADoupnik, A AdvancedAAccounting,A15e
II. AccountingA forA anA investment:A theA equityA method
A. TheAinvestorAadjustsAtheAinvestmentAaccountAtoAreflectAallAchangesAinAtheAequityAofAt
heAinvesteeAcompany.
B. TheAinvestorAaccruesAinvesteeAincomeAwhenAitAisAreportedAinAtheAinvestee’sAfinancAi
alAstatements.
C. DividendsA declaredA byA theA investeeA createA aA reductionA inA theA carryingA amountA ofA t
hAeAInvestmentAaccount.AThisAbookAassumesAallAinvesteeAdividendsAareAdeclaredAand
ApaidAinAtheAsameAreportingAperiod.
III. SpecialAaccountingA proceduresA usedA inA theA applicationA ofA theA equityA method
A. ReportingAaAchangeAtoAtheAequityAmethodAwhenAtheAabilityAtoAsignificantlyAinfluenceA
anAinvesteeAisAachievedAthroughAaAseriesAofAacquisitions.
1. InitialA purchase(s)A willA beA accountedA forA byA meansA ofA theA fairA valueA methodA (
oArAatAcost)A untilAtheAabilityAtoAsignificantlyAinfluenceAisAattained.
2. WhenAtheAabilityAtoAexerciseAsignificantAinfluenceAoccursAfollowingAaAseriesAofAstoA
ckA purchases,A theA investorA appliesA theA equityA methodA prospectively.A TheA totalA f
aAirA valueA atA theA dateA significantA influenceA isA attainedA isA comparedA toA theA invest
ee’AsAbookAvalueAtoAdetermineAfutureAexcessAfairAvalueAamortizations.
B. InvesteeA incomeAfromA otherA thanA continuingA operations
1. TheAinvestorArecognizesAitsAshareAofAinvesteeAreportedAotherAcomprehensiA
veAincomeA(OCI)AthroughAtheAinvestmentAaccountAandAtheAinvestor’sAownAO
CI.
2. IncomeAitemsAsuchAasAdiscontinuedAoperationsAthatAareAreportedAseparatelyAbyAtA
heAinvesteeAshouldAbeAshownAinAtheAsameAmannerAbyAtheAinvestor.ATheAmateriaA li
tyA ofA theseA otherA investeeAincomeA elementsA (asAitA affectsA theA investor)A continueA
sAtoAbeAaAcriterionAforAseparateAdisclosure.
C. InvesteeA losses
1. LossesAreportedA byA theA investeeA createA correspondingA lossesA forA theA investor.
2. AApermanentAdeclineAinAtheAfairAvalueAofAanAinvestee’sAstockAshouldAbeArecognizA
edAimmediatelyAbyAtheAinvestorAasAanAimpairmentAloss.
3. InvesteeAlossesAcanApossiblyAreduceAtheAcarryingAvalueAofAtheAinvestmentAaccouA
ntAtoAaAzeroAbalance.AAtMthatApoint,AtheAequityAmethodAceasesAtoAbeAapplicableAaA
ndAtheAfair-valueAmethodAisAsubsequentlyAused.
D. ReportingA theA saleA ofA anA equityA investment
1. TheAinvestorAappliesAtheAequityAmethodAuntilAtheAdisposalAdateAtoAestablishAaAproA
perAbookAvalue.
2. FollowingAtheAsale,AtheAequityAmethodAcontinuesAtoAbeAappropriateAifAenoughAsharA
esAareAstillAheldAtoAmaintainAtheAinvestor’sAabilityAtoAsignificantlyAinfluenceAtheAinvA e
stee.A IfA thatA abilityA hasAbeenA lost,A theA fair-valueA methodA isA subsequentlyA used.
IV. ExcessA investmentA costA overA bookA valueA acquired
A. TheApriceAanAinvestorApaysAforAequityAsecuritiesAoftenAdiffersAsignificantlyAfromAtA
heAinvestee’sA underlyingAbookAvalueAprimarilyA becauseAtheAhistoricalAcostAbase
A dA accountingA modelA doesA notA keepA trackA ofA changesA inA aA firm’sA fairA value.
B. PaymentsAmadeAinAexcessAofAunderlyingAbookAvalueAcanAsometimesAbeAidentifiedAwAi
thAspecificAinvesteeAaccountsAsuchAasAinventoryAorAequipment.
C. AnAextraAacquisitionApriceAcanAalsoAbeAassignedAtoAanticipatedAbenefitsAthatAareAexA p
ectedAtoAbeAderivedAfromAtheAinvestment.AInAaccounting,AtheseAamountsAareApresuA m
edAtoAreflectAanAintangibleAassetAreferredAtoAasAgoodwill.AGoodwillAisAcalculated
1-2
©A McGrawA HillA LLC.A AllA rightsA reserved.MNoMreproductionMorMdistributionA withoutA theA priorA writtenA consentA ofA McG
rawAHillA LLC.
, ACCESSTestBankforAdvancedAccounting15thEditionHoyle
A A A A A A A A
ChapterA 01A -A TheA EquityA MethodA ofA AccountingA forA InvestmentsA –
Hoyle,A Schaefer,A Doupnik,A AdvancedA Accounting,A 15e
asAanyAexcessApaymentAthatAisAnotAattributableAtoAspecificAidentifiableAassetsAandAliaAb
ilitiesAofAtheAinvestee.ABecauseAgoodwillAisAanAindefinite-
livedA asset,A itA isA notA amortized.
V. DeferralA ofA intra-entityA grossA profitA inA inventory
A. TheA investor’sA shareA ofA intra-
entityAprofitsAinAendingAinventoryAareAnotArecognizedAuntilAtheAtransferredAgoodsAareA
eitherAconsumedAorAuntilAtheyAareAresoldAtoAunrelatedAparties.
B. DownstreamA salesA ofA inventory
1. “Downstream”A refersA toA transfersA madeA byA theA investorA toA theA investee.
2. Intra-
entityAgrossAprofitsAfromAsalesAareAinitiallyAdeferredAunderAtheAequityAmethodA aA
ndA thenA recognizedA asA incomeA atA theA timeA ofA theA inventory’sA eventualA disposa
l
.
3. TheAamountAofAgrossAprofitAtoAbeAdeferredAisAtheAinvestor’sAownershipApercentaA
geAmultipliedAbyAtheAmarkupAonAtheAmerchandiseAremainingAatAtheAendAofAtheA ye
ar.
C. UpstreamA salesA ofA inventory
1. “Upstream”A refersA toA transfersA madeA byA theA investeeA toA theA investor.
2. UnderA theA equityA method,A theA deferralA processA forA intra-
entityAgrossAprofitsAisAidenticalAforAupstreamAandAdownstreamAtransfers.ATheAproAc
eduresAareAseparatelyAidentifiedAinAChapterAOneAbecauseAtheAhandlingAdoesAvaA r
yAwithinAtheAconsolidationAprocess.
AnswersA toA DiscussionA Questions
TheA textbookA includesA discussionA questionsA toA stimulateA studentA thoughtA andA discussion.A Thes
AeA questionsA areA alsoA designedA toA allowA studentsAtoA considerA relevantA issuesA thatA mightA otherw
iAseAbeA overlooked.A SomeA ofA theseA questionsAmayAbeA addressedAbyAtheA instructorA inA classAtoA m
AotivateAstudentAdiscussion.AStudentsAshouldAbeAencouragedAtoAbeginAbyAdefiningAtheAissue(s)AinA
eachA case.A Next,A authoritativeA accountingA literatureA (FASBA ASC)A orA otherA relevantA literatureA ca
AnAbeAconsultedAasAaApreliminaryAstepAinAarrivingAatAlogicalAactions.AFrequently,AtheAFASBAAccouA
ntingAStandardsACodificationAwillAprovideAtheAnecessaryAsupport.
Unfortunately,A inA accounting,A definitiveA resolutionsA toA financialA reportingA questionsA areA notA alwa
yAsA available.A StudentsA oftenA seemA toA believeA thatA allA accountingA issuesA haveA beenA resolvedA in
A thAeApastAsoAthatAaccountingAeducationAisAonlyAaAmatterAofAlearningAtoAapplyAhistoricallyAprescribe
dA procedures.A However,A inA actualA practice,A theA onlyA realA answerA isA oftenA theA oneA thatA provide
sA tAheAfairestArepresentationAofAtheAfirm’sAtransactions.AIfAanAauthoritativeAsolutionAisAnotAavailable,
A studentsAshouldAbeAdirectedAtoAlistAallAofAtheAissuesAinvolvedAandAtheAconsequencesAofApossibleA
alternativeA actions.A TheA variousA factorsA presentedA canA beA weighedA toA produceA aA viableA solutio
An.
TheAdiscussionAquestionsAareAdesignedAtoAhelpAstudentsAdevelopAresearchAandAcriticalAthinking
AskillsA inA addressingA issuesA thatA goA beyondAtheApurelyA mechanicalA elementsA ofA accounting.
DidA theA CostA MethodA InviteA Manipulation?
TheAcostAmethodAofAaccountingAforAinvestmentsAoftenAcausedAaAlackMofAobjectivityAinAreportedAinAc
omeA figures.A WithA aA largeA blockA ofA theA investee’sA votingA shares,A anA investorA couldA influenceA thA
eAamountAandAtimingAofAtheAinvestee’sAdividendAdeclarations.AThus,AwhenAenjoyingAaAgoodAearnAin
gsA year,A anA investorA mightA influenceA theA investeeA toA withholdA declaringA aA dividendA untilA needeA
1-3
©A McGrawA HillA LLC.A AllA rightsA reserved.MNoMreproductionMorMdistributionA withoutA theA priorA writtenA consentA ofA McG
rawAHillA LLC.
